Charge 2 family. Image source: Fitbit.

Shares of Fitbit (NYSE: FIT) woke up on the wrong side of the bed this morning, and opted not to go for that morning jog. Instead, shares have lost a third of their value in the wake of third-quarter earnings. The real culprit for the plunge is Fitbit’s dreadful guidance for the fourth quarter. Analysts and investors were expecting a robust holiday shopping season for a seemingly nascent product category on the rise, but it turns out that quite a few people have already adopted fitness trackers, meaning there is less growth potential in certain developed markets.

Let’s break down Fitbit’s guidance even further.

Lacking leverage hurts

For starters, here’s the change in Fitbit’s guidance from last quarter’s results, which were released in August.

Full-Year 2016	August	November	Reduction at Midpoint
Revenue	$2.5 billion to $2.6 billion	$2.32 billion to $2.35 billion	(8%)
Non-GAAP EPS	$1.12 to $1.24	$0.55 to $0.59	(52%)

Data source: SEC filings.

As troubling as the reduced sales forecast is, the bottom-line reduction is downright gut-wrenching. Since consumer electronics companies often see sales heavily weighted in the critical holiday quarter, any shortfalls in execution are particularly punishing, especially when you consider that most companies expect operating leverage to translate into higher margins while revenue ramps. If revenue fails to ramp as much as expected, the lack of leverage hurts.

Sales in the fourth quarter are now expected to be in the range of $725 million to $750 million, significantly below the consensus estimate of $983.3 million that the Street was modeling for. The company now expects only $0.14 to $0.18 per share in adjusted earnings, while analysts thought $0.75 per share in adjusted profit was incoming.

Management primarily attributed the shortfall to three factors. Here’s CFO Bill Zerella:

We expect Q4 revenue in the range of $725 million to $750 million. This shortfall versus our previous outlook is driven by a few factors. First, softness in overall demand. We expected higher sales growth based upon a robust product portfolio. Second, following the favorable production ramp of Charge 2, a pull-forward of revenue to Q3. And third, Flex 2 supply constraints, which we expect will result in approximately $50 million of unfilled demand. While we feel good about our product portfolio in this holiday season, we are taking a cautious view.

Flex 2 and Charge 2 are Fitbit’s most recent products, announced at the end of August. Fitbit is essentially saying that production of one product is so good that it sold more than expected in Q3, while production of the other is behind schedule so those sales will miss Q4. Zerella says that the Flex 2 constraints are expected to be resolved by the end of December. As such, Fitbit is unlikely to have sufficient channel inventory to fulfill all demand. The challenge will be whether or not those customers wait it out, or if they just pick up another product in the meantime.

There was also weakness in Asia-Pacific, where Fitbit acknowledges that it needs to work harder on localization and better marketing. Sales in Asia Pacific fell 45% in the third quarter to $35.7 million.

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Evan Niu, CFA has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Fitbit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.