(Bloomberg)—Fitbit Inc. isn’t starting off 2017 on a high note, according to a report by Cleveland Research.
The maker of wearable fitness trackers halted production in mid-December because the devices were piling up at retailers and suppliers amid disappointing sales, according to a report by the firm published Tuesday. Demand so far this year is “characterized as weak,” Cleveland Research said, suggesting analysts’ estimates for 2016 fourth-quarter earnings may be too high.
“The start of the year has been bad with Fitbit,” research analyst Ben Bollin wrote in the note. “There are some concerns partners may not get paid for all of the product they have built because demand is so weak,” he wrote, citing comments from a supplier. “Partners had to completely stop production for Fitbit because they are swimming in product.”
Fitbit, No. 311 in the Internet Retailer 2016 Top 500 Guide, had already slashed its sales forecast in November for the crucial holiday season when retail companies generate most of their sales. But a report just after Christmas that noted Fitbit’s app topped the list of free apps in Apple Inc.’s iOS store suggested the device was a popular present, sending its shares up the most in three months.
The Cleveland report only reaffirmed investors’ lingering concerns about Fitbit’s long-term outlook, which had driven its shares down about 43% since the third-quarter earnings report, when Fitbit cut its fiscal earnings outlook. Demand for wearables has been waning and Fitbit is getting squeezed by rivals like Apple Inc. (No. 2 in the Top 500) on the high end and China’s Xiaomi Corp. on the low end. Another supplier cited in Bollin’s note said that Fitbit is losing share within its business, while Xiaomi, No. 3 in the Internet Retailer 2016 China 500, is gaining.
Nick McKay, an analyst at Wedbush Securities, said he observed excess inventory of Fitbit devices before Black Friday and Christmas, and that weak demand likely continued through the fourth quarter.
Fitbit has also canceled several new product initiatives targeted for this year, according to the note. McKay said that investors had been expecting Fitbit to roll out a new product this year at CES, the consumer electronics industry’s annual showcase in early January. While the company unveiled a new smartwatch last year at the event, this year Fitbit announced partnerships and software updates.
“If demand for products is weak for the fourth quarter and you end up with inventory on shelves, what impact does that have on 2017 and moving forward?” McKay said. “We’re going to head into 2017 without an idea of what products are to come.”
Consumer hardware companies face the challenge of regularly creating new products or entering different product lines to juice demand. CEO James Park has been talking about turning Fitbit into a software and digital-health company for years, which would reduce its reliance on fickle consumer taste for revenue. But that vision has yet to fully pan out. The company also recently acquired smartwatch startups Pebble and Vector to add capabilities that may help Fitbit better compete with Apple’s Watch.