Global Courant 2023-05-05 01:02:34
A person walks past a Peloton store on January 20, 2022 in Coral Gables, Florida.
Joe Raedle | Getty Images
PlatoonShares of the company plummeted Thursday after the company reported a larger-than-expected loss for its fiscal third quarter, predicting its first-ever subscriber decline and acknowledging an uncertain economic backdrop.
Shares of the company fell 13% on Thursday.
Still, Peloton pointed to signs of progress with its turnaround plan. It said affiliate fitness subscriptions grew and free cash flow losses decreased. Subscriptions have become an increasingly large part of revenue – accounting for 60% of total revenue in the quarter – as hardware sales continue to lag.
CEO Barry McCarthy said in a letter to shareholders that new initiatives are catching on with customers. Those include a push to sell cheaper second-hand bikes and a rent-to-buy program for fitness equipment.
Despite the harsh reaction to Peloton’s results and guidance, the company and some analysts said the quarter showed positive signs for the company’s future.
Here’s how the affiliated fitness equipment company fared in the three months ended March 31 compared to what Wall Street expected, based on an analyst survey by Refinitiv:
Loss per share: 79 cents versus 46 cents expected Revenue: $749 million versus $708 million expected
Peloton’s net loss for the period was $275.9 million, or 79 cents per share, compared to a loss of $757.1 million, or $2.27 per share, a year earlier. It was the ninth quarter in a row in which the company reported losses.
Revenue was down 22% from a year ago, falling from $964.3 million.
The fitness company has been trying to stabilize its business and regain a path to profitability after seeing a sharp turnaround. Sales of its bicycles and treadmills slowed dramatically after a pandemic-related coronavirus surge, forcing Peloton to tap into other sources of revenue, such as subscriptions.
The company ended the third quarter with approximately 3.1 million connected fitness subscriptions, up 5% from the same period last year. Connected fitness subscribers are people who own a Peloton product, such as Bike or Tread, and pay a monthly fee for access to live and on-demand workout classes.
A ‘challenging’ quarter ahead
Still, McCarthy warned of obstacles ahead. He said the company typically experiences a seasonal decline in subscriber growth in the fourth quarter, which coincides with warmer weather and vacations during the summer months. He said he expects one this year as well.
Peloton expects to close the fourth quarter with 3.08 million to 3.09 million subscribers. It was the first time that the company caused a decrease in the number of subscribers.
In the shareholder letter, he said the quarter “will be one of our most challenging from a growth perspective.”
Peloton also predicted a sales decline in the quarter. It said it expects revenue to fall about 6% year over year to a range of between $630 million and $650 million, compared to $678.7 million last year.
McCarthy urged investors to take a long-term view in his remarks on an earnings call and in the letter. Later this month, the company will relaunch the brand and introduce a new version of the Peloton app with a tiered membership structure, he said.
He added that the relaunch is meant to shake up the way people look at Peloton so they think of the wide variety of fitness offerings — not just the well-known bikes.
Separately, Peloton announced Thursday that it had reached an agreement with Dish Technologies over a patent dispute. The company said it will pay Dish $75 million to settle a complaint from the US International Trade Commission.
The company had previously said it aimed to reach break-even cash flow on a quarterly basis in the second half of fiscal 2023. McCarthy said in the letter Thursday that the settlement will significantly squeeze free cash flow in the current fiscal quarter.
He added that the temporary hit is worth it because it removes “a cloud of uncertainty and a huge distraction to the day-to-day running of our business.”
New initiatives are promising
McCarthy’s turnaround focus follows a tumultuous trajectory following the company’s post-pandemic surge.
As fitness equipment sales continue to lag, Peloton has focused on other ways to drive growth and attract new customers. Under McCarthy, a former Spotify and Netflix executive, the company has focused on growing subscriptions.
The fiscal third quarter was the fourth quarter in a row in which subscription revenue exceeded hardware revenue.
The company has been trying to boost equipment sales by tinkering with prices, offering a rental option and adding rowing machines to the lineup. It came wholesale by permitting Amazon And Dick’s Sporting Goods to carry his equipment. Peloton also made a deal with Hilton to place bicycles in all of its US hotels.
In Thursday’s shareholder letter, McCarthy said those efforts are working.
Since the company began testing its rent-to-buy program in March 2022, it has grown to 47,000 subscribers, he said. It has an average monthly cancellation rate of 5%, which is higher than Peloton’s overall cancellation rate.
Still, McCarthy said the option, which allows customers to make rental payments and pay the purchase price of the equipment, reduces the sign-up barrier. He cited an internal survey that found that 62% of respondents would not have signed up if it weren’t for the flexibility of the rental program.
Peloton’s used bike sales have also resonated, he said. The company launched that offering in December and is considering adding its treadmills and rowers to the program later this year.
Together, the two programs accounted for 24% of connected fitness hardware sales in the fiscal third quarter, he said.
He said third-party sales have also gained popularity and the company plans to expand its range with Amazon and participate in promotional events such as Prime Day.
Customers have largely stayed with the brand. Average net monthly user churn was 1.1% for the quarter, in line with the prior quarter, and slightly above the year-ago churn level of 0.8%.
On the earnings call, McCarthy said consumers have continued to spend, but added that it is difficult to predict their behavior as economists debate the likelihood of a recession or a “soft landing.” He said the debate in Congress over whether to raise the debt ceiling, or risk a first-ever default on US debt, is adding to uncertainty.
Aneesha Sherman, an analyst for Bernstein, said shares of Peloton fell because Wall Street is nervous about consumers, especially when it comes to discretionary spending. She said the prospects for subscribers also scared the hell out of investors.
But she said the reaction is overblown. She said Peloton is “fundamentally changing what the business is all about” and is on a firmer footing as it pivots away from consumer direct sales and reaches customers through Amazon, Dick’s and easier-to-pay options like the rental program.
“The progress is really significant,” she said. “In a cover story like this, you’re not going to see linearity. It’s going to be bumpy from quarter to quarter.”
Peloton’s stock was up about 11% year-to-date from Wednesday’s close — but Thursday’s drop erased those gains. The shares are less than half of their 52-week high of $18.86 — and only a small fraction of their high of more than $100 during the early years of the pandemic.
Peloton’s market cap is $2.63 billion, after reaching nearly $50 billion in early 2021.
Simeon Siegel, a retail analyst for BMO Capital Markets, said Peloton often refers to the huge market for its products. It has outlined its goal to one day reach 100 million members around the world.
The latest outlook casts doubt on that view.
“The fact that Peloton is now driving subscribers down — even due to seasonality — is likely to raise questions about its ultimate size,” he said. “Historically, people wondered how big it was going to get. This raises the question of whether the company is going to give back now.”
