FITBIT

C A S E A N A LY S I S

Brought to you by: KPJG’s - a subsidiary of KPMG

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K P J G s
Keecha Carroll Jessica Riccio Susan Legge McKinney

Prateek Patel Gordon Fields

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Table of Contents:

Summary........................................................................................ Page 2

Tabular Presentation...................................................................... Page 4

Comparison of Key Business Ratio.............................................. Page 5

News You Need to Know.............................................................. Page 8

Summary....................................................................................... Page 10

The California-based fitness-wear technology Fitbit company, incorporated in 2007 by

James Park and Eric Friedman, focuses on delivering modernized health solutions by enhancing

wearable devices that add a flavor of modern technology to improve health outcomes.1 The

company retains a globally dominant and enticing presence within the industry. In 2015, Fitbit

released its IPO on the NYSE trading under the ticker, FIT. Fitbit’s consumer electronic roots

allowed the company to engage in a smooth transition to a digital health-service provider in

2016, resulting from its use of sensors and technology in the products.

In terms of their business model described on their Form 10K, Fitbit discusses how their

consumer devices have added software and services that drive their clients to meet health and

fitness goals. All their company’s products, including wearable devices, have features that enable

their users to track their daily steps, different fitness activities, and the amount of time allocated

for both exercise and sleep in real-time. The focus of the company revolves around customizing

fitness plans to meet the individual needs of different customers. In addition, they want to drive
user engagement by having general-purpose features in their products that can help promote

more personalized insights to improve your daily fitness journey.

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 The company has countless opportunities for growth to entice the eyes of present and

potential investors. Fitbit believes their state-of-the-art software allows them to effectively

display three competitive strengths: brand recognition of being sold in 39,000 stores and through

their online marketplace, global presence in over 100 countries, and the diversity inspired by

combining health and fitness outcomes.

Fitbit’s inventory portfolio includes three smartwatches: Versa, Sense, and Sense 2, four

trackers: Luxe, Ace, Inspire and Charge, along with services, accessories, and gear to provide

a unique touch to its seven leading products. This limited portfolio acts as both an opportunity

and a risk because the lack of diversity allows them to put increased focus on their few products

while allowing them to engage in product specialization. Product specialization gears innovation

specifically to their few unique products to stand out in the crowded market. In 2019, they

sold 15,988 (in thousands) devices and amassed 29,566 (in thousands) active users around the

globe. The company launched and have grown three services: Fitbit Premium, Fitbit Care, and

have increased free access to its mobile apps and online dashboard compatible on all mobile

devices including iOS Apple Store, Google Play, and Windows Store. With their heavy focus on

research and development, Fitbit believes the uniqueness of their product separates them from its

competitors in Apple-Watch, LG, Samsung, Huawei, and traditional watch companies like Fossil.

Fitbit has various risk factors that may worry present and potential investors. The company

faces cybersecurity risks such as viruses and risks associated with personal data, forcing

them to improve the data and privacy security within their device. First, Fitbit’s three primary

sources of revenue on paper come from consumer devices, Fitbit Health Solutions revenue,

and consumer non-device revenue. The biggest risk derives from a majority of all their income

derives from Fitbit having few wearable devices, and less than 2% of their revenue comes from

their subscription-based premium services. The company has experienced consistent reductions

in revenue each year since 2017 and has seen a constant rise in the cost of revenue for the three

previously reported years. This has led Fitbit to report a gross-profit decline from 603,579 (in

thousands) in 2018 to $427,672 (in thousands) because of the rising costs and declining revenue.

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And although the company has boosted its international expansion, where the company’s

total sales abroad represent 44% of their sales in 2019, they show a net loss on their income

statement of ($320,711) in thousands. Second, many of these financial concerns are coupled

with the lack of product diversity and the limited items, they sell. This tunnel vision reflects both

an opportunity as much as it does a risk. The increased focus on solely product specialization

prevents the company from reaching out to other customers and closely related markets. The

various competitors that provide smart-watches and fitness trackers means Fitbit needs to be

able to differentiate its products while establishing a more extensive product portfolio to attract

more markets and increase their profit potential. Third, the company relies upon limited suppliers

that provide them inventory, which consistently hinders the company from having easy access

to supply during the Covid pandemic. Lastly, the company has been in talks with Google that

potentially wants to purchase the company since the latter half of the reported period in the Form

10K. This acquisition will mean Fitbit Inc. will have shared autonomy under a new parent in

Fitbit, which for investors will allow them to own shares in a stronger IPO in Google but will

mean Google will be the ultimate decision-makers for the Fitbit brand.

The table above provides an overview of how Fitbit compares against twelve benchmarked

companies that are classified under SIC group 3571, Electronic Computers. The Key Business

Ratio’s (KBR) for Fitbit were calculated utilizing solvency, efficiency, and profitability metrics

as published by Dun & Bradstreet and Fitbit’s 2019 10K financial statements. Graphs follow to

provide insights on the nine KBR’s that were measured to examine key financial indicators of

performance.

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 Solvency Ratios

Solvency ratios compare different elements found in the financial statements to quantify the

efficiency of financial business operation and a company’s ability to meet present and future

obligations.
Fitbit’s Quick Ratio is 1.01. This graph shows the

company’s relative position as compared to industry

standards. The company closely resembles the median

value. Fitbit seems dependent on inventory and

receivables to show in the current assets’ section of the

balance sheet.

The Current Ratio of Fitbit at 1.46 represents the

company’s relative position with respect to the overall

industry. This ratio makes Fitbit fall between the lower

and the median value. This means that the

company has a lower capacity to pay off the short-

term debts if they all become due simultaneously.

The Total Liabilities to Net Worth Ratio portrays the

relative position of Fitbit with respect to the industry

in terms of Liabilities to Net Worth Ratio. The ratio

is 180%. Unfortunately, a higher number does not

represent a positive performance. The exceedingly

high amount of liabilities compared to the net worth

signifies the company as a poor performer. Net worth

is calculated by taking the difference between current assets and current liabilities for the

company. A higher value in the numerator will mean that the company has higher debts and

will need a higher net worth to cover these debts.

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 Efficiency Ratios

Efficiency ratios quantify company use and control of assets and quality of receivables, level of

effectiveness, paying suppliers, and determining proper trading of equity.

The Collection Period graph The Assets to Sales ratio of

shows Fitbit’s ratio of 110.73 95.4 provides a comparison

compared to the relative between sales produced

position of the company with and assets owned by Fitbit.

The Sales to Inventory ratio
its industry. Fitbit has a much The ratio indicates that
is 10.49 and puts Fitbit at the
higher collection period which Fitbit performs amongst the
higher end of the industry’s
does not provide a positive companies that rank in the
upper quartile. This shows that
outlook. This ratio shows lower quartile of the industry.
Fitbit has outperformed the
the time taken by Fitbit to This is an indication that
industry in terms of sales to
convert its receivables to cash. the assets of the Fitbit are
inventory. The ratio of Fitbit
A higher ratio means Fitbit potentially underutilized, or
displays a smaller inventory
is taking a large amount of the assets of the company are
compared to higher sales num-
time to collect the accounts not performing efficiently to
bers. With the limited product
receivables. This affects the contribute to more favorable
portfolio and the high sales of
overall cash cycle of the revenues.
these limited products, shows
increase company along
why Fitbit holds a limited
with its ability to pay off the
amount of inventory.
expenses.

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 Profitability Ratios

Profitability ratios measure company performance by evaluating how profit was generated in

comparison to sales, assets, and total net worth. Fitbit is not performing as an efficient, profitable

company as evidenced in the three profitability ratio charts below.

• The Return on Sales (ROS) formula in this case computes an unfavorable ratio of -22%.

Inquiring investors can assume that adverse conditions such as: economic downturns, extreme

exchange rate fluctuations, or other uncontrollable events could negatively impact the company’s

operating profit margin and Fitbit’s ability to recover from unfavorable events. Based on the ROS

metric, Fitbit is losing .22 cent of every $1.00 of revenue and underperforming benchmarked

industry companies that ranked in the lower quartile.

• Fitbits Return on Assets (ROA) ratio computes an unfavorable metric of -23%. The

unfavorable metric suggest that underutilized assets or asset inefficiencies have negatively

impacted the generation of income. Based on the ROA metric, Fitbit is losing .23 cents of

earnings on every $1.00 of capital underperforming benchmarked industry companies that

ranked in the lower quartile.

• Fitbits Return on Net Worth (RONW) ratio returns an unfavorable metric of -66%.

The unfavorable metric suggest that Fitbit’s equity management practices have deficiencies,

and the company would not be a good investment choice. Based on the RONW metric, Fitbit

is losing .66 cents of investments on every $1.00 of shareholders money and underperforming

benchmarked industry companies that ranked in the lower quartile.

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 Considering the challenges and financial information, Fitbit has moved forward with several

initiatives to continue generating revenue and promoting growth. For example, as recently as

March 2021, Fitbit announced a partnership with Tile (a company that makes location-tracking

Bluetooth devices), which directly promotes the Fitbit Inspire 2 product. With Fitbit’s primary

source of revenue being generated by their wearable devices, this partnership with Tile further

targets making their wearable devices more attractive to consumers by having the ability to

locate your wearable device when it gets lost.2

Collaborating with the Tile application allows Fitbit to have advanced

support features including its highly esteemed location services, thus allowing

Tile’s master system to track lost Fitbit devices. Staying focused on wearable

products that promote the bulk of revenue, Fitbit also announced in March

2021 their next generation of wearable devices targeted at kids and families.

Fitbit Ace 3 focuses on products that teach health and wellness to

kids with the slogan, “where the kids go, the parents will… pay.” The

product consists of easy-to-use features indicating when to move and be

active, and what’s need to develop healthy fitness and sleeping habits

Furthermore, these additional offerings contain customizable features

including the unique arm bands to generate increase appeal to kids.

A very intriguing offering by Fitbit specific to health and wellness was announced in

November 2020; Fitbit announced their OS 5.1 software which developed even further health

tracking metrics and options this time focusing on oxygen saturation levels. Briefly, this is

important to indicate how much oxygen is being carried by blood indicating optimal levels.

Fitbit went as far to mention the flu-season along with COVID-19 as further support of why

this offering is beneficial to personal health initiatives.3 While not applicable to the scope of

this review, with some investigatory work by the consumer, this can be identified as ‘broad

strokes’ specific to accuracy of claims. Nonetheless, it is ‘clever’ marketing considering the

state of health across the globe and the increased level of awareness related to health metrics

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including oxygen saturation levels. Fitbit stays consistent once again with their primary revenue

generators, wearable devices that track health and wellness expanding upon offerings to continue

growth.

Lastly, keeping consistent with the advancements in wearable devices monitoring wellness,

in April 2021 Fitbit announced a new device targeting ‘fashion-forward fitness’. 4 Reflectively,

it’s a wonder the company is just now releasing such a device targeted at the demographic

of consumers that want niceties bundled with wellness tracking

devices. Once again, Fitbit targets the impact of COVID-19 related

to stress and the products offerings for stress management and

‘holistic’ health; product offerings (for Fitbit Premium members)

have increased in-depth wellness metrics such as stress levels, sleep

patterns, in addition to a catalog of exercises and stress management techniques. The design is

promoted as sleek and innovated (at least in comparison with previous company offerings) and

deemed ‘elegant’ by marketing. They also offer a Fitbit Luxe Special Edition.

In consideration of recent press releases specific to product offerings, the company seems to

believe that the Ace 3 and Luxe offerings could benefit future growth in revenue. Fitbit is taking

their forumula for generating revenue through wearable devices that promote health, wellness,

and awareness of such while expounding their products. The Ace 3 assumedly will appeal to

those children whose parents (or other caretakers) are conscious and aware of the benefits of

health and wellness; similarly, they could theorize by targeting a younger demographic, this

would affect this demographic as they mature allowing Fitbit to generate repeat consumers albeit

at a younger age. Also, the Luxe product will appeal to consumers that prefer ‘show & go,’

appealing to design cues and flexibility in application of use outside of solely physical activities.

This will create product options for consumers that may currently utilize a smart-watch device as

their all-in-one for daily and wellness activity use.

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 Conclusion

After analyzing Fitbits 2019 10K, this is a high-risk company to invest in. Revenues have

decreased slightly from 2017-2019. The cost of goods sold has increased, causing a decrease

in gross margin. The net income for 2019 is ($320,711) thousands compared to ($185,829)

thousands in 2018. This is a 72.5% increase in net loss from 2018 to 2019. In the 10K it states

that the top customer “Wynit” filed for Chapter 11 bankruptcy. This has impacted revenue

since 2017 through 2019, Fitbit is also in multiple lawsuits and patent infringements. This will

be come costly for Fitbit and increase expenses and decrease net income over the years. Fitbit

should focus on cutting costs if possible and enhancing the product lines and existing products to

increase revenue. This will draw in new customers and allow existing customers to upgrade their

products.

Fitbit needs to improve its cash flow cycle. This will include quickly receiving the amounts

from the receivables. The company needs to focus primarily on increasing the sales and

collecting the cash thereof. This will gradually reduce the accounts receivable and improve

the cash cycle of the company. Using the most modern inventory and receivables management

systems will help the company in turning these aspects in its favor. Preparing the receivables’

schedule will also tell the company about the time passed on various receivables. The older

receivables can be written off as bad debt by the company. The company relies on external

financing to fund its operations. An investor will not be attracted to a company with a high

proportion of debt in the capital structure. Similarly, the financial institutions will not be willing

to forward any further loans to such companies. Therefore, the company should rely more on

equity financing. In 2019, cash flows from operating activities decreased from 2018 to 2019.

This shows that Fitbit needs financing to continue its operations. This is also seen throughout the

10K. Financing activities also decreased in 2019 from the previous cash flow numbers in 2018.

2018 was higher due to investments and the 2019 decrease was due to net repayments of external
debt. Investing activities increased from in 2019 from the previously reported year, showing that

additional money was incurred from liquidating capital assets. Through improving its cash flows,

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and increasing their net income, Fitbit could be considered a less risky investment that would

carry a significant appeal to potential investors.

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Endnotes
1 Form 10K. San-Francisco, CA. Fitbit Inc., 2019
2 Fitbit Inspire 2 Devices Now Findable with Tile. (2021, March 22). Cision. https://www.
prnewswire.com/news-releases/fitbit-inspire-2-devices-now-findable-with-tile-301251281.html
3 Fitbit OS 5.1 Update Delivers Enhanced Health Capabilities and Convenience Features for
Sense and Versa 3 Smartwatches. (2020, November 19). Business Wire. https://www.business-
wire.com/news/home/20201119005432/en/
4 Fitbit Announces Luxe, a Fashion-Forward Fitness and Wellness Tracker Designed to Support
Your Holistic Health. (2021, April 19). Business Wire.

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