Financial Analysis Fitbit vs. Garmin

International Accounting

Hult International Business School, San Francisco

Financial Analysis Project

Fitbit, Inc. ready for competitive growth?

Date: November 19, 2015

Index of Abbreviations I

Index of Abbreviations

CAPEX Capital Expenditure

CES Consumer Electronic Show

CEO Chief Executive Officer

COGS Cost of Goods Sold

CTO Chief Technical Officer

EBIT Earnings before Income and Tax

EBITDA Earnings before Income, Tax, Deprecation and

Amortization

FIT Fitbit

FY Fiscal Year

GPS Global Positioning System

GRMN Garmin

Inc. Incorporation

IPO Initial Public Offering

Ltd. Limited

Mio. Million

NNEP Net Non-Operating Expenses Percent

NOA Net Operating Asset

NOAT Net Operating Asset Turnover

NOPAT Net Operating Profit

NOPM Net Operating Profit Margin

NYSE New York Stock Exchange

PPE Property, Plant and Equipment

PY Previous Year

RNOA Return On Net Operating Assets

ROA Return on Asset

ROE Return on Equity

R&D Research and Development

YOY Year-on-Year

10K Financial Statement

Index II

Index

Index of Abbreviations ....................................................................................... I

Index ................................................................................................................... II

Figure Index ..................................................................................................... IV

1 Executive Summary ....................................................................................... 1

2 Fitbit, Inc.: Introduction ................................................................................. 3

3 Fitbit, Inc.: Financial Position Analysis ........................................................ 5

3.1 Revenue and Gross Profit .......................................................................... 5

3.2 Cost of Goods Sold (COGS) ...................................................................... 6

3.3 Cash asset: Accounts receivable ............................................................... 6

3.4 Non-cash assets ........................................................................................ 7

3.4.1 Property, Plant and Equipment (PPE) .................................................... 7

3.4.2 Inventory ................................................................................................. 8

3.5 Liabilities .................................................................................................... 8

3.6 Operating Margins ..................................................................................... 9

3.7 Net Income ............................................................................................... 10

4 Benchmark: Garmin Ltd. ............................................................................. 11

4.1 Portfolio Mix ............................................................................................. 11

4.2 Garmin Portfolio Revenue Growth ........................................................... 12

4.3 Net Sales ................................................................................................. 13

4.4 Cost of goods sold (COGS) ..................................................................... 14

4.5 Research & Development ........................................................................ 14

4.6 Other Observations .................................................................................. 15

5 Performance Analysis .................................................................................. 16

5.1 Profitability Ratios .................................................................................... 16

5.2 Growth Ratios .......................................................................................... 18

5.3 Cash Ratios ............................................................................................. 19

5.4 Efficiency Ratios ...................................................................................... 19

5.5 Financial Ratios ....................................................................................... 20

Index III

6 Final Observation / Forecast ....................................................................... 22

6.1 Short-term forecast .................................................................................. 22

6.2 Long-term forecast ................................................................................... 23

6.3 Fitbit’s Risks ............................................................................................. 24

6.4 FIT´s Competitive Advantages ................................................................. 24

References ....................................................................................................... 25

Exhibits............................................................................................................. 27

Exhibit 1 ............................................................................................................. 27

Exhibit 2 ............................................................................................................. 28

Exhibit 3 ............................................................................................................. 29

Exhibit 4 ............................................................................................................. 30

Exhibit 5 ............................................................................................................. 32

Exhibit 6 ............................................................................................................. 32

Exhibit 7 ............................................................................................................. 33

Exhibit 8 ............................................................................................................. 34

Exhibit 6 ............................................................................................................. 35

Figure Index IV

Figure Index

Figure 1 - Fitbit revenue & gross profit ................................................................ 5

Figure 2 - Fitbit COGS ......................................................................................... 6

Figure 3 - Fitbit accounts receivable ................................................................... 6

Figure 4 - Fitbit assets ......................................................................................... 7

Figure 5 - Fitbit liabilities ...................................................................................... 8

Figure 6 - Fitbit liabilities ...................................................................................... 9

Figure 7 - Fitbit operating margins ...................................................................... 9

Figure 8 - Fitbit net income ................................................................................ 10

Figure 9 - Garmin Portfolio Mix ......................................................................... 11

Figure 10 - Portfolio Revenue Growth ............................................................... 12

Figure 11 - Net Sales Analysis .......................................................................... 13

Figure 12 - COGS Analysis ............................................................................... 14

Figure 13 - R&D Analysis .................................................................................. 14

Figure 14 - Profitability ...................................................................................... 16

Figure 15 - Profitability ...................................................................................... 17

Figure 16 - Growth ratios ................................................................................... 18

Figure 17 - Cash flow ratios .............................................................................. 19

Figure 18 - Efficiency ratios ............................................................................... 20

Figure 19 - Balance sheet ratios ....................................................................... 21

Figure 20 - Wearable device market ................................................................ 22

Figure 21 - Fitbit forecast .................................................................................. 23

Hult International Business School: Team 11 1

1 Executive Summary

The purpose of this report is to present a financial analysis and evaluation of

one of the key players and current market leader of the newly developed

category in Wearable Technology, Fitbit (FIT). The goal is to understand how

it’s rapid growth in revenue (254% in 2013 and 175% in 2014 according to FIT’s

2013 / 2014 10K) is managed and the implications of acquiring more debt in

order to keep up with the industry's demand for innovation and an increase of

competitive threats. This is a closer look into the company's current and

potential profitability, liquidity and performance facilitates a studied point of view

of FIT's standing point.

The methods selected for developing this report includes Trends, Financial

Ratios, Vertical and Horizontal analysis. Calculations range from Liquidity

observations, to Debt and Equity calculations. Other measurements include

R&D analysis and Inventory. Garmin (GRMN), a key player in this segment, is

used as a benchmark to give an example of the different strategies used by the

players (calculations / ratios see Exhibit 3 and 4).

The highlights of the analysis found that FIT's sales during 2014 helped the

company achieve higher ROA with respect to previous years with the current

2014 ratio of 7.8% compared to -44.72% in 2013. Further observations show

that FIT's NOPM went from negative to a double digit percentage by increasing

sales and leveraging from it’s retail sales and online services, while keeping

costs low. 2014’s NOPM shows positive returns because of it’s attractive

product line and network services.

As the category grows, competitors join and attract more consumers to their

platforms. The challenge for FIT will be to keep a healthy finance in order to

meet international expansion. The introduction of both Apple watch and

Xiaomi’s Mi Band has caused FIT’s worldwide market share to dwindle (see

Exhibit 2). For GRMN (our benchmark), this category is gaining importance as


it’s grown from representing 14% to 20% revenue contribution in the product

portfolio. FIT can be a viable competitive leader in the future if it can manage a

business strategy that looks to keep R&D innovative yet expenses comparable

low.

One of the biggest benefits that FIT has is sales have grown, it is still to

attractive to investors in terms of profitability. This is in part due to increased

financial pressure, rapid growth and taxes. Return on Equity is low with respect

to its competitors due to high debt. The market requiring constant innovation,

high R&D investments is causing FIT not to be as liquid as other competitors.

The company must pay special attention to this in order to avoid losing its

leadership.

This report shows that as the category of wearable technology grows,

competitors join to attract more consumers. The challenge for FIT will be to

keep its agility towards innovation along with the ability to keep healthy finances

in order to meet demand to cover international expansion. We believe that FIT

can be a viable competitive leader in the future.


2 Fitbit, Inc.: Introduction

Fitbit, Inc. - a company headquartered in San Francisco, California - was

founded by James Park (CEO, President) and Eric Friedman (CTO). The

company is known for its development of wireless, wearable technology which

is tracking person’s activities like for example calories burned, sleep quality,

steps and distance. Based on the data collected the users are able to monitor

their performances and progresses over a certain time.1

"Wearable technology has the potential to be a powerful solution to societal

challenges.” 2

Wearable technology is an industry that is making a huge impact on everyday

lives both for fitness novice to fashionistas in Paris. As Statista states, this type

of technologies have been around for decades for military forces and medical

professionals, however the private consumer market has only recently started to

feature items such as smart glasses, smart watches, fitness and health trackers

or even smart jewelry and smart fashion.

As a large proportion of people in the United States of America and Canada are

tech-savvy, health conscious and affluent enough to purchase and use

wearable technology devices, North America expected to dominate the global

wearable technology market, with an estimated 43% market share by 2019 (see

Exhibit 1). However, the lack of such consumers is hampering the growth of the

wearable technology market in Asia Pacific, Latin America and Africa.

As this industry grows at dramatic rates with the customer-driven culture Smart

Wearables in the technology industry for 2015 is one that is looking to be a big

and profitable market. The technology that these new devices are employing is

innovative to say at the least.

1 FactSet Research Systems Inc., 2015, website

2 Wearable technology AG, 2015, website


Smart technology is certainly something that will be the key to the optimal

operating of our future society, especially when it comes to healthcare.

We, Team 11 Golden Gate, are concentrating our research within the

wearable’s industry. Our focus is to analyze the fitness tracking monitor niche of

the industry in order to understand the performance of two of the top players

towards the consumer’s preferences. Within our research, we are looking at FIT

for our financial analysis and using GRMN as the benchmark.

Since wearable fitness components become readily available to consumers, the

wearable fitness tracker market is becoming increasingly crowded. FIT may see

more competitive pressure in the future. Other key players that are having a

strong presence include Samsung, Apple, Jawbone and Chinese based Xiaomi

brand which introduced itself by pricing its devices as low as $20 US dollars

(see Exhibit 2).

FIT has hold on to the market’s leadership by combining a powerful tracker with

smart watch functionality in their most-recent flagship product. This helped

against the introduction of Apple’s smart watch in 2015, but will it be able to

keep up with the consumer’s demand and trends? (see Exhibit 2).

Apple managed to sell 3.6 million Apple Watches in its first quarter on the

market. Remarkably, the Apple Watch with its steep starting price even outsold

Xiaomi's ultra-cheap Mi Band. FIT has seen its shares take a nice climb post

IPO (NYSE:FIT). FIT is trading at nearly 10x sales, it could be though that the

company is looking pretty overvalued right now.

FIT sold 4.8 million new devices during the quarter, nearly tripling revenue

compared to last year. Shares pulled back following the announcement of a

secondary stock offering. This is a normal transaction for a growth company like

FIT. FIT's domestic growth is quite impressive. This company's international

sales should lead the company to continue to post strong revenue growth for

years to come.


3 Fitbit, Inc.: Financial Position Analysis

In order to get a sense of how FIT is performing financially the following

financial position analysis is executed by the use of their financial statements.

3.1 Revenue and Gross Profit

Figure 1 - Fitbit revenue & gross profit

The revenue amounted to $409.26 million during the last quarter. Between 2014

and 2015, it found that there was a marked growth in the average quarterly

revenue of $195.76 million, or of 105%, in addition, the increase tendency is

also proven by a linear trend. During the period the revenue was mainly

increasing. The revenue depends also on the season (time of year). The

highest values of the revenue were accounted for October to December and the

lowest values were accounted for January to March. The chart above

demonstrates the change in revenue and a comprehensive income for FIT.

During the last quarter (6/1/2015 to 9/30/2015), the gross profit was equal to

$196.01 million. The gross profit increases by $151.24, or by 338% during the

whole period reviewed.

196.01

187.54

169.21

170.89

83.61

58.39

44.77

409.26

400.41

336.75370.18

152.86

113.57

108.81

2 015 - 092015 - 062015 - 032014 - 122014 - 092014 - 062014 - 03

MIO. USD

REVENUE VS. GROSS PROFITGross Profit Revenue


FIT has generated brand awareness and engaged new sales methods to get

large corporate clients in their folds becoming a market leader in the Fitness

wearable consumer durable segment (68% Market Share).

3.2 Cost of Goods Sold (COGS)

(all figures are in US$ millions) 2014 2013 2012

Cost Of Goods Sold 387.78 210.84 49.73

Revenue Growth (Total Company) 52.02% 77.77% 65.12%

Figure 2 - Fitbit COGS

COGS has increased decreased in 2014 from pick of 78% in the 2013 thus

contributing to the margin growth. Although, in the following section the

increased investment in sales and general expenses as well as R&D expenses

will be highlighted. This surely has bearings on the overall profit margins.

3.3 Cash asset: Accounts receivable

Figure 3 - Fitbit accounts receivable

In the chart below, you will see a correlation of the basic groups of the

company's assets.

238.86

80.62

0

50

100

150

200

250

300

2014-122013-12

ACCOUNTS RECEIVABLE


Figure 4 - Fitbit assets

The inventories equaled $276.08 million at the end of the period analyzed;; it is

$161.01 million higher than the level of the inventories at the beginning of the

period (12/31/2014).

During the period analyzed (from 12/31/2014 to 9/30/2015), the current

receivables were found to alter more or less.

3.4 Non-cash assets

Non-cash assets are assets that add value to the company but cannot be easily

turned into cash.

3.4.1 Property, Plant and Equipment (PPE)

FIT is investing into building their PPE assets by increasing from $6.5 Mio. to

$26 Mio. in 2014. They have increased the investment 4 times into the PPE.

FIT is increasing their non-cash assets and that is showing in their ROA.

Accounts Receivable39%

Inventories45%

Other Current Assets2%

Non-current asset14%

Fitbit's assets structure on 31 September, 2015

Accounts Receivable Inventories Other Current Assets Non-current asset


3.4.2 Inventory

In order to meet the growing sales demand FIT increased their inventories from

$56 Mio. in 2013 to $115 Mio. That shows FIT’s preparedness and investment

into meeting their aggressive sales push.

3.5 Liabilities

In order to assess the liabilities that the company should repay for the use of

borrowed capital, an interest coverage ratio was calculated.

Figure 5 - Fitbit liabilities

The acceptable value is deemed to be no less than 1.5. In this case, the interest

coverage ratios are high above the threshold which is evidence of FIT capability

to pay interest on borrowed asset.

312

212193

107

645739

0

50

100

150

200

250

300

350

2015-092015-062015-032014-122014-092014-062014-03

INTEREST COVERAGE RATIO


2014 2013 2012

Current Liabilities 461.31 209.83 ---

Current Liabilities % of Revenue 61.88% 77.4% ---

Total Liabilities including non-current

liabilities 557.79 294.24 ---

Total Liabilities % of Revenue 74.83% 108.54% ---

Total Assets 633.05 230.77 ---

Liabilities to Assets Ratio 0.73 0.91 ---

Short-term + Long Term Debts 132.69 3.99 ---

Debt Ratio (not in millions) 0.21 0.02 ---

Figure 6 - Fitbit liabilities

FIT’s debt ratio has remained around 0.2.

3.6 Operating Margins

The operating margins have improved over the period of last year from negative

to positive.

2014 2013 2012

Operating Expenses – Sales, General &

Admin (In US$ million) 146 41 14

Operating Expenses – Sales, General &

Admin (In % of sales) 19.53% 15.25% 18.6%

Operating Expenses – R & D (In US$

million) 54 28 16

Operating Expenses – R & D (In % of sales) 7.27% 10.28% 21.22%

Total Operating Profit (In US$ million) 158 -9 -4

Total Operating Margin (In % of sales) 21.19% -3.3% -4.9%

Figure 7 - Fitbit operating margins

While the percentage change from 2012 to 2013 differs slightly in the negative

range, FIT increased the total operating margin from 2013 to 2014 up to a

positive 21%.


3.7 Net Income

The net income has increased from negative $52 Mio. in 2013 to positive $132

Mio. in 2014. The growth has been due to sales growth while sales expenses

remaining constant and while the R&D costs have reduced in last year.

2014 2013 2012

Net Income (In US$ million) 132 -52 -4

Net Income (In % of sales) 3.8 -19.04 -5.52

Figure 8 - Fitbit net income


4 Benchmark: Garmin Ltd.

Garmin Ltd. is a company that creates and manufactures navigation products

for the automobile, aviation, marine and outdoor industry. In recent years, the

firm has also explored and developed in the fitness industry. The Swiss

company pioneered with Global Positioning System (GPS) navigation applied

for people that live an active lifestyle. These products, originally created for the

military, have been a widely spread in the Automobile and Outdoor industry.

During 2010, GRMN entered the fitness sector with the Forerunner line. Finally,

in 2014, it developed the GRMN Vivo series as part of their wearable

technology segment. The latter has become fastest growing sector, increasing

revenue growth +60% vs. Last Year ($ 212.16 Million) and now represents 20%

of GRMN’s total revenue.

4.1 Portfolio Mix

Figure 9 - Garmin Portfolio Mix

GRMN's ability to leverage GPS technology and in-house manufacturing

(vertically integrated) has helped the company rapidly adapt to shifts in

consumer preferences towards wearable technology and, thus, create trendy

and useful products for high market growth. Moreover, the company provides

efficient sales services and superior customer support in areas like repairs,

11% 12% 14% 20%13% 15% 16%

15%

12% 16% 21%9% 8%

10% 10% 11% 13%13%

6% 6%7% 8% 8% 8%

9%73% 70% 62% 58% 55% 49% 43%

0%

20%

40%

60%

80%

100%

120%

Dec '08 Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Dec '14

Portfolio Mix (% of Net Sales)

Fitness Outdoor Historical Segments Aviation Marine Auto/Mobile


technical support and warranty services that have given their products good

reputation across all their portfolio.

4.2 Garmin Portfolio Revenue Growth

Figure 10 - Portfolio Revenue Growth

It is important to note that the Automobile sector still represents the majority of

GRMN’s sales (43% of total revenue). However, changes in proprietary GPS

navigation devices in this industry has shifted the company’s strategy towards

the development of outdoor / fitness devices. GRMN’s competitive advantage in

this segment comes from the ease of use of their products, proven GPS

reliability, and the ability to work with third party software such as Strava (Strava

is a free or paid online service that allows final users track their activities,

analyze results and share activities in their network).

2,632

2,871

2013 Automotive/Mobile Fitness Outdoor Aviation Marine 2014

Garmin Portfolio Revenue Growth (millions $)

9%

-‐5%

60% 4% 14%

11%


4.3 Net Sales

Portfolio Comparison

2014/2013

2014 Net Sales in $

% of revenue

2013 Net Sales in $

% of revenue

Vs. PY $ change

% change

Outdoor 428 15% 411 16% 16.57 4%

Fitness 568 20% 356 14% 212.16 60%

Marine 248 9% 223 8% 25.44 11%

Automotive Mobile 1,240 43% 1,302 49% (61.94) -‐5%

Aviation 386 13% 339 13% 46.58 14%

Total $ 2,871 100% $ 2,632 100% $ 238.81 9%

Figure 11 - Net Sales Analysis

By segment, the automotive / mobile segment revenues decreased -5% vs. PY

2013, in part, due to a -10% volume decrease, as well as, reduced prices. As

previously mentioned, results affected by increased proprietary Built-in GPS

systems in the auto industry, as well as by unearned income (deferred revenue)

from future payments of products yet to be delivered.

The Fitness segment shows the biggest increase in revenue (+60% vs. 2013)

due to growing demand of fitness products, as well as GRMN’s efforts to

develop this sector (R&D expense in sector grew +41% vs. 2013). On the other

hand, outdoor sector revenues increased +4% vs. 2013 primarily due to strong

sales of their watch, Fēnix 2 (A new version of this watch came out this year).

For the coming year, GRMN estimates revenue growth at a conservative $2.9

billion in 2015 (+1.02%) driven by the fitness sector, but partially affected by the

continuous downfall of the automotive sector.


4.4 Cost of goods sold (COGS)


2014/2013

2014 Gross Profit in $

% of total 2013 Gross

Profit in $

% of total

Vs. PY $ change

% change Gross Margin

Outdoor 267 17 263 19 4.02 2% 62%

Fitness 358 22 223 16 135.36 61% 63%

Marine 130 8 115 8 14.62 13% 52%

Automotive

Mobile

569 35 565 40 4.37 1% 46%

Aviation 280 17 242 17 38.74 16% 73%

Total $ 1,604 100% $ 1,407 100% $ 197.11 14% 56%

Figure 12 - COGS Analysis

Despite declining revenues from the Auto industry, GRMN has been able to

increase profit margin thanks to growing sales from the fitness sector. Due to

growing trend, the firm is able to generate higher revenues, capturing value

from this sector (Fitness Gross Margin 63% of Sales vs. 46% in the Auto sector)

while keeping COGS relatively stable across its portfolio.

4.5 Research & Development


2014/2013

2014 R&D in $

% of total 2013 R&D in $

% of total Vs. PY $ change

% change % of Sales

Outdoor 30 8% 24 7% 5.28 22% 7%

Fitness 39 10% 28 8% 11.5 41% 7%

Marine 48 12% 47 13% 1.57 3% 19%

Automotive

Mobile

135 34% 137 37% (1.87) -‐1% 11%

Aviation 143 36% 129 35% 13.73 11% 37%

Total $ 395 100% $ 365 100% $ 30.2 8% 14%

Figure 13 - R&D Analysis


GRMN’s increase in R&D demonstrate its commitment to the fitness and

outdoor segments. During 2014, the company increased R&D expenses +40%

vs. previous year. However, the aviation and automotive sector still represent

over 71% of their R&D expenses. GRMN has increased its headcount with over

200 engineers and increased R&D costs by $30.2 million (+8% vs. 2013).

4.6 Other Observations

Overall, the company shows solid financial performance, with sales growing

+14% vs. 2013 reaching $1,604 Million after a downturn in 2013 (-2% vs. 2012).

EBITDA reached $768 Million (+18% vs. 2013) showing good management in

operating expenses despite increases in research and development costs. It is

important to note that, as per financial statement footnotes, taxes during 2014

increased to $359 Million from $41 Million in 2013 in part because of inter-

company restructuring ($307.6 Million) and 2012 R&D credit tax recognition

($6.2 Million). These taxes add to taxes associated to normal operations.

In terms of Asset management, GRMN is liquid with a current ratio of 2.38 and

a quick ratio of 1.71. This gives GRMN a competitive advantage as working with

relatively low debt can help the company react against price fluctuations or

reduce prices to gain market share. Moreover, GRMN is attractive to investors

as their ROE has been stable and growing since PY from 51.63% to 53.51%.

This shows the firms’ ability to use its resources efficiently in the production of

income.

It is important to note that GRMN’s inventory turnover is on average 3.14x per

year. This reflects the company’s seasonality, especially in the fitness sector,

were most of their sales take place during the holiday season as gifting.

GRMN’s competitive advantage comes from its reputation, vertical integration

and product quality. The company is liquid, therefore, can react against price

fluctuations and is able to make aggressive moves to gain market share. During

the last years, GRMN has been diversifying its portfolio betting for a growing

more profitable market in the fitness sector. The company should now focus in


reducing risks associated to market seasonality in order to avoid stock-outs and

increased liabilities due to shortage in sales in the low.

5 Performance Analysis

The performance ratios for the analysis are based on different data taken out

from the 10K report. They measure FIT’s ability to meet overall performance

and give more information about the decisions made by its management. For

example, “is the company managed efficiently and profitably? Does it use

assets effectively”3 or how quick is FIT in converting its assets into cash. All

these ratios will be used for the company´s credibility and for planning purposes

the coming fiscal period.

5.1 Profitability Ratios

Profitability is the capacity to make a profit, and a profit is what is left over from

income earned after you have deducted all costs and expenses related to

earning the income.

Figure 14 - Profitability

3 Easton, P.D., Halsey, R.F., McAnally, M.L. [2015]: p. 4-2

48%47%50%

46%

55%51%

41%

16%20%

27%20%

28%23%

15%11%

4%

14%11%

45%

13%8%

0%

10%

20%

30%

40%

50%

60%

2015-092015-062015-032014-122014-092014-062014-03

Dynamics of the profit ratios

Gross margin Return on sales (operating margin) Profit margin


During the last quarter (6/1/2015 to 9/30/2015), the gross margin was equal to

48%. The gross margin decreased by -7% for the last quarter in comparison

with the same period of the prior financial year. In addition, the decrease in the

gross margin during the period is demonstrated with an average (linear) trend.

Profitability calculated by net income (profit margin) deserves more attention.

During the reviewed period, multidirectional changes in the profit (both growth

and reduction) was observed;; the maximum value was 45%, the minimum one

was 4%. For the period from 7/1/2014 to 9/31/2014, the return on sales was

28% per annum, and profitability calculated by net profit was 45% per annum.

2012-12 2013-12 2014-12 2012-12 2013-12 2014-12TaxRate% — — 5.72 13.15 6.3 49.68

NetMargin% -5.52 -19.04 3.8 19.97 23.27 12.69

AssetTurnover(Average) — 1.17 1.73 0.58 0.54 0.6

ReturnonAssets% — -22.37 6.56 11.68 12.63 7.61

FinancialLeverage(Average) — — 8.41 1.36 1.33 1.38

ReturnonEquity% — — 480.64 15.98 17.03 10.31

ReturnonInvestedCapital% — — 36.56 15.08 16.11 9.66

InterestCoverage — — — — — —

FITBIT GARMINProfitability

Figure 15 - Profitability

FIT is in the growth trajectory giving good returns on equity in 2014. However,

their financial leverage has been higher in 2014 as they are aggressively

pursuing the markets. Their net margin while growing year on year;; has been

meagre 3.8 % in 2014. This is a sign of a worry. If they pursue the aggressive

path and with increasing competition;; FIT may find itself incurring more debt as

the current operations are not generating enough to finance this drive.


5.2 Growth Ratios

FIT is new on the stock market. The data on many Growth ratios are not

available. On revenue front, they have been showing impressive growth year

on year. GRMN on the other hand;; has been seeing a stagnant growth. While

most of the figures given above are for all the segments, GRMN is present in

including the Fitness business. The Fitness business contributes 20 % of their

total revenue so far.

2012-12 2013-12 2014-12 LatestQtr 2012-12 2013-12 2014-12 LatestQtrRevenue%YearoverYear — 254.95 174.98 167.73 -1.55 -3.09 9.07 -3.77

3-YearAverage — — — — -2.68 -0.72 1.34 —

5-YearAverage — — — — -3.11 -5.51 -0.52 —

10-YearAverage — — — — 19.3 16.47 14.18 —

OperatingIncome%

YearoverYear — — — 55.55 9.1 -4.99 20.31 -28.52

3-YearAverage — — — — -8.4 -3.39 7.64 —

5-YearAverage — — — — -7.81 -7.81 -2.55 —

10-YearAverage — — — — 13.03 9.72 9.82 —

NetIncome%

YearoverYear — — — — 4.13 12.91 -40.53 —

3-YearAverage — — — — -8.32 1.56 -11.24 —

5-YearAverage — — — — -8.7 -3.53 -12.35 —

10-YearAverage — — — — 14.28 13.11 5.88 —

EPS%

YearoverYear — — — — 3.37 13.04 -39.74 -182.89

3-YearAverage — — — — -7.61 1.89 -11.04 —

5-YearAverage — — — — -6.63 -2.16 -11.69 —

10-YearAverage — — — — 15.38 14.3 7.12 —

GARMINFITBITGrowthRatios:

Figure 16 - Growth ratios


5.3 Cash Ratios

The overall analysis based on cash flow ratios is that FIT has been spending

more on CAPEX in comparison to GRMN. This explains their increasing asset

base. Cash flow has seen negative growth suggesting that FIT is borrowing

more to run operations as well as expand the business.

Cash Flow Ratios FITBIT GARMIN

2012-‐12 2013-‐12 2014-‐12 2012-‐12 2013-‐12 2014-‐12

Operating Cash Flow

Growth % YOY — — -‐43.4 -‐16.73 -‐7.98 -‐17.04

Free Cash Flow Growth %

YOY — — — -‐18.13 -‐10.42 -‐22.38

Cap Ex as a % of Sales 3.28 2.78 3.55 1.67 2.17 2.72

Free Cash Flow/Sales % -‐12.29 9.46 -‐1.04 23.55 21.77 15.49

Free Cash Flow/Net Income 2.23 -‐0.5 -‐0.06 1.18 0.94 1.22

Figure 17 - Cash flow ratios

5.4 Efficiency Ratios

Key takeaways from the Efficiency ratios are that FIT manages comfortable

outstanding collection to payment to vendor cycle. Their cash conversion cycle

has improved from 84 days to 33 days, thus improving their cash flow. They

have maintained good receivables turnover ratio and inventory turnover ratio.

GRMN has a better position here. FIT in comparison to GRMN has been able

to generate better revenues per fixed asset investments.


Efficiency FITBIT GARMIN

2012-‐12 2013-‐12 2014-‐12 2012-‐12 2013-‐12 2014-‐12

Days Sales Outstanding — 108.55 78.22 81.39 81.01 72.14

Days Inventory — 97.71 80.72 112.55 115.08 115.69

Payables Period — 122.74 125.45 42.19 41.41 42.61

Cash Conversion Cycle — 83.53 33.48 151.75 154.68 145.22

Receivables Turnover — 3.36 4.67 4.48 4.51 5.06

Inventory Turnover — 3.74 4.52 3.24 3.17 3.16

Fixed Assets Turnover — 41.8 45.29 6.57 6.38 6.79

Asset Turnover — 1.17 1.73 0.58 0.54 0.6

Figure 18 - Efficiency ratios

5.5 Financial Ratios

Due to increased sales revenues and better market share FIT has been able to

improve its liquidity year on year. They have also been able to contribute more

towards Shareholder’s equity and have reduced their long-term debts

considerably.


2012-‐122013-‐122014-‐12Latest Qtr2012-‐122013-‐122014-‐12Latest Qtr

Cash & Short-‐Term Investments — 35.41 30.9 45.58 28.72 27.24 29.07 25.68

Accounts Receivable — 34.94 37.73 19.4 12.53 14.39 12.15 9.84

Inventory — 24.46 18.18 21.87 8.09 7.83 8.96 11.47

Other Current Assets — 2.38 7.45 6.18 3.28 3.74 3.33 3.88

Total Current Assets — 97.19 94.26 93.04 52.63 53.19 53.5 50.86

Net PP&E — 2.81 4.18 2.83 8.5 8.5 9.18 10.01

Intangibles — — — 2.76 4.83 4.5 4.65 5.03

Other Long-‐Term Assets — — 1.56 1.37 34.04 33.81 32.67 34.1

Total Assets — 100 100 100 100 100 100 100

Accounts Payable — 30.72 30.91 25.36 2.72 3 3.18 3.62

Short-‐Term Debt — 1.73 20.94 — — — — —

Taxes Payable — 8.5 5.2 0.46 0.66 0.78 3.88 0.42

Accrued Liabil ities — 11.25 9.83 7.41 6.58 5.88 6.29 3.93

Other Short-‐Term Liabil ities — 38.73 5.98 3.18 8.89 8.89 8.66 12.42

Total Current Liabil ities — 90.92 72.87 36.41 18.86 18.55 22.02 20.39

Long-‐Term Debt — 2.91 — — — — — —

Other Long-‐Term Liabil ities — 33.66 15.24 1.48 7.85 6.45 5.47 5.9

Total Liabil ities — 127.5 88.11 37.89 26.71 25 27.48 26.29

Total Stockholders' Equity — -‐27.5 11.89 62.11 73.29 75 72.52 73.71

Total Liabil ities & Equity 100 100 100 100 100 100 100 100

Liquidity/Financial Health 2012-‐122013-‐122014-‐12Latest Qtr 2012-‐122013-‐122014-‐12Latest Qtr

Current Ratio — 1.07 1.29 2.56 2.79 2.87 2.43 2.49

Quick Ratio — 0.77 0.94 1.78 2.19 2.24 1.87 1.74

Financial Leverage — — 8.41 1.61 1.36 1.33 1.38 1.36

Debt/Equity — — — — — — — —

Balance Sheet Items (in %)FITBIT GARMIN

Figure 19 - Balance sheet ratios


6 Final Observation / Forecast

The Wearable device market is a vast growing market and is expected to grow

at high rates the coming 3 years. As shown in the chart “Wearable device

market value 2010 to 2018” below, the market is going to almost double its

market value in 2018. At the moment, FIT is one of the key player on this

market but will be faced with some challenges in short-term respectively mid-

term perspective. Therefore, in order to increase the market share or even to

keep it at the same percentage FIT’s competitive advantages have to be

evolved further.

Figure 20 - Wearable device market 4

6.1 Short-term forecast

Based on the last seven quarters from FY 2014 and FY 2015 and assuming that

the rate is constant the short-term revenue will grow by 18% and expected to be

approximately $507 Mio. in the last quarter of 2015 and $567 Mio. for the first

quarter in 2016.

4 Statista, Inc. (2015), website

6.3 630 1,260 2,520

5,166

7,140 8,862

10,920 12,642

0

2000

4000

6000

8000

10000

12000

14000

SALES

Wearable device market value from 2010 to 2018

Y 2010 Y 2011 Y 2012 Y 2013 Y 2014 Y 2015 Y 2016 Y 2017 Y 2018


However, since FIT's revenue is highly influenced by its seasonal business it

expected to be higher for quarter 2015 ($507 Mio.) and lower for the first quarter

of 2016 ($461 Mio.).

Figure 21 - Fitbit forecast

6.2 Long-term forecast

FIT is experiencing a high rivalry power since existing competitors are

defending their market share with comparable technology and new competitors

are entering the market including newcomer as well as established corporations

like Apple and Google. While for example Xiaomi, a Chinese competitor, is

penetrating the market with low prices, FIT is losing a significant market share.

Based on the gained knowledge out of the analysis and the market insights it is

difficult to predict the long-term forecast because it is depending on several

factors: Portfolio diversity, price, network, and consumer preference.

y = 52.245x + 56.614R² = 0.87384

0

100

200

300

400

500

600

Q1 - 2014 Q2 - 2014 Q3 - 2014 Q4 - 2014 Q1 - 2015 Q2 - 2015 Q3 - 2015 Q4 - 2015 Q1 - 2016

Fitbit: Short-term Revenue Forecast


6.3 Fitbit’s Risks

• Decreasing market share from 45% (Q1 2014) to 35% (Q1 2015) – most

of it captured by Xiaomi (25%)

• Highly competitive wearable market

• Material disruption of FIT information technology (customer information)

might give company bad reputation

• Highly seasonality – 50% of full-year revenue in last Q4

• Ability to create new products and adapt to changing consumer tastes

and preferences

• Firms like Google and Apple with financial power are entering the market

6.4 FIT´s Competitive Advantages

• Leading market position and global brand

• Broad range of connected health / fitness devices

• Broad and differentiated go-to-go market strategy

• Breadth and depth of established sales selling channels / prominent

presence in retail stores is difficult for competitors to replicate

• Large and growing community

• Direct relationship and continuous communication with FIT users

References 25

References

Bibliography Session 1 - 6: International Accounting, Prof. Larry Louie

Easton, P.D., Halsey, R.F., McAnally, M.L., Hartgraves, A.L., & Wayne, J.M.,

[2015] Financial & Managerial Accounting for MBA’s (4th), ISBN 978-

1618531025

Inspection: 11/18/15

Internet Sources Fitbit, Inc. https://www.fitbit.com 11/15/15

FactSet Research

Systems, Inc.

http://www.factset.com/ 11/16/15

Garmin Ltd. http://www.garmin.com/en-US 11/17/15

http://sites.garmin.com/en-US/annualreport/ 11/18/15

http://www8.garmin.com/aboutGarmin/invRela

tions/reports/10-K_2013.pdf

11/18/15

Investopia, LLC. http://www.investopedia.com/ 11/15/15

Morningstar http://www.morningstar.com/ 11/14/15

Seeking Alpha http://seekingalpha.com/ 11/15/15

http://seekingalpha.com/article/3368955-fitbit-

the-market-for-wearable-fitness-trackers-is-

getting-crowded

Statista, Inc. http://www.statista.com/ 11/15/15

http://www.statista.com/topics/1556/wearable-

technology/

11/18/15

Wearable

Technologies AG

https://www.wearable-technologies.com/ 11/15/15

References 26

https://www.wearable-

technologies.com/2015/04/wearables-in-

healthcare/

11/16/15

http://www.wearabletechnology-

news.com/news/2015/oct/23/review-putting-fitbit-

surge-through-its-paces/

11/15/15

Zensorium https://www.zensorium.com/ 11/15/15

http://blog.zensorium.com/latest-trends-in-the-

wearable-technology-industry/

11/15/15

Figures

Figure – Cover page

URL: https://www.fitbit.com


Figure 20 – Wearable device market

URL: http://www.statista.com/statistics/259372/wearable-device-market-value/


Exhibits 27

Exhibits

Exhibit 1

URL: http://www.statista.com/statistics/413265/health-and-fitness-tracker-

worldwide-unit-sales-region/ (11/15/15)

Exhibit 2 28

Exhibit 2

URL: http://www.statista.com/chart/3762/wearable-device-shipments/ (11/15/15)

Exhibit 3 29

Exhibit 3

URL: -

Ratios (2014)

2014 2013 2012

Sales Volume (Total Company) 2,870.66 2,631.85 2,715.68 Sales Volume (Fitness Sector) 568.44 356.28 321.79

Market Share (w/I Fitness)

Revenue Growth (Total Company) 9.07% -‐3.09% 0.34%Revenue Growth (Fitness Sector) 60.72% 11.04% N/A

Gross Profit (Total Company) 1,604.41 1,407.30 1,438.48 Gross Profit (Fitness Sector) 358.29 222.93 204.62

Gross Margin (Total Company) 55.89% 53.47% 52.97%Gross Margin (Fitness Sector) 63.03% 62.57% 63.59%% Sales R&D (Total Company) 13.76% 13.87% 12.00%% Sales R&D (Fitness Sector) 6.91% 7.79% 7.32%

Return on Assets (ROA) 7.61% 12.63% 11.68%Profitability 12.69% 23.27% 19.97%Productivity (Asset Turnover) 59.97% 54.27% 58.46%

Net Working Capital 1,426 1,633 1,573 Net Income 364.21 612.41 542.40 Prepaid Expenses N/A N/A N/AUnearned Revenues N/A N/A N/AAccrued Expenses 62.76 59.79 55.97

Return On Equity (ROE) 53.51% 51.63% 57.55%Return On Operating Assets (RNOA) 34.10% 44.39% 44.23%Net Operating Profit (NOPAT) 352.62 584.58 535.27 Tax On Operating Profit 371.13 68.98 89.25 Net Operating Assets (NOA) 1,033.96 1,316.85 1,210.15 Net Operating Profit Margin (NOPM) 12.28% 22.21% 19.71%Net Operating Asset Turnover (NOAT) 2.78 2.00 2.24 Net Nonoperating Expenses Percent (NNEP) N/A N/A N/ANonoperating Return N/A N/A N/ANoncontrolling Interest Ratio N/A N/A N/AReturn On Capital Employed (ROCE) N/A N/A N/ACurrent Ratio 2.38 2.80 2.73 Quick Ratio 1.71 1.93 2.02 Net Operating Working Capital N/A N/A N/ALiabilities to Equity Ratio 37.90% 33.33% 36.45%Return On Asset 7.61% 12.63% 11.68%

Earnings Per Share 2.78 1.88 3.12

Accounts Receivable Turnover 4.89 4.32 4.27 Inventory Turnover 3.15 3.17 3.24

Garmin

Exhibit 4 30

Exhibit 4

Exhibit 4 31

URL: -

Exhibit 5 32

Exhibit 5

URL: -

Exhibit 6

URL: -

Exhibit 7 33

Exhibit 7

URL: -

Exhibit 8 34

Exhibit 8

URL: -

Exhibit 6 35

Exhibit 6

URL: -

Financial Analysis Fitbit vs. Garmin

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