- Peloton posted a bigger loss in its fourth fiscal quarter as sales fell and costs rose.
- The company, led by CEO Barry McCarthy, is implementing an aggressive turnaround plan.
- Peloton did not offer any outlook for its new fiscal year.
Peloton reported rising losses and plummeting sales for its fiscal fourth quarter on Thursday as the connected fitness equipment maker tries to win back investors with cost cuts and strategic changes.
The company’s shares fell more than 20% – a day after the stock jumped more than 20% on news of its partnership with Amazon.
This is the sixth straight quarter of reported losses for Peloton. The company said it aims to break even in cash flow on a quarterly basis in the second half of its 2023 fiscal year.
Still, Peloton CEO Barry McCarthy said he expects the connected fitness market to remain challenging for the foreseeable future as consumer demand for home workout machines declines compared to Covid pandemic highs.
Since McCarthy took over as chief executive from Peloton founder John Foley in February, the company has pursued sweeping changes that have yet to fully bear fruit. Peloton raised membership fees, raised prices for some equipment, laid off thousands of workers, tested a leasing option, dropped last-mile delivery, and shifted all production to third parties. On Wednesday, Peloton also began selling some of its products on Amazon in the United States, its first such deal with another retailer.
“Opponents will look at our [fourth-quarter] financial performance and see a crucible of declining revenue, negative gross margin and higher operating losses,” McCarthy wrote in a letter to Peloton shareholders.
“But what I see is meaningful progress that drives our return and Peloton’s long-term resilience,” he said. “We still have work to do.”
Peloton did not offer an outlook for its upcoming fiscal year 2023. For the first quarter ending Sept. 30, it said it sees subscribers remaining stable and revenue between $625 million and $650 million, which is below analysts’ estimates. Peloton said this took into account weak near-term demand and seasonal fluctuations in the business.
There was a silver lining for the business: This was Peloton’s first reported quarter where higher-margin subscription revenue accounted for the majority of total sales.
On a call with analysts, McCarthy also touted a number of things Peloton is still testing to boost sales. These include selling used bikes, renting bikes for a monthly fee, and adding new tiers to Peloton’s digital app, including a premium tier where people would pay more for expanded content and better features.
“It’s not enough to cut spending, we need to increase revenue,” he said.
Using the example of the movie rental wars, McCarthy said Netflix had managed to get the better of Blockbuster, a movie rental company that filed for bankruptcy in 2010, because it offered its customers personalized content and many choices.
Peloton’s net loss widened in the three months ended June 30 to $1.24 billion, or $3.68 per share, from a loss of $313.2 million, or $1.05 per share, a year earlier.
McCarthy said the losses stemmed from Peloton’s efforts to avoid an inventory glut, reduce fixed costs and address other supply chain issues. Earlier this year, the company embarked on an $800 million restructuring plan. Peloton ended the fourth quarter with inventory of $1.1 billion, up from $937.1 million a year earlier.
Revenue fell 28% to $678.7 million from $936.9 million a year earlier. That was below the $718.2 million analysts were looking for, according to Refinitiv estimates.
Within that figure, connected fitness revenue that includes the contribution from Peloton’s Precor business fell 55% to $295.6 million.
Another dark spot was Peloton’s connected fitness gross margin, at less than 98.1% versus a positive 11.7% a year earlier. Peloton said it experienced higher logistics expenses per delivery, increased shipping and storage costs, and costs related to the recall of its Tread+ treadmill.
Peloton recorded $383.1 million in subscription revenue, up 36% from a year earlier and representing 56.4% of the company’s total sales. Subscription gross margin increased from 63.3% to 67.9%.
McCarthy, who previously worked at Netflix and Spotify, made it clear that he was more interested in continuing growth on the subscription side of Peloton’s business, rather than placing such a heavy emphasis on hardware. He believes Peloton’s digital app will be central to the company’s future success.
Peloton spent $412 million in cash in the fourth quarter, after averaging negative cash flow of $650 million in each of the previous two quarters. It ended in June with $1.25 billion in cash reserves and a $500 million revolving credit facility.
BMO Capital Markets analyst Simeon Siegel praised McCarthy for taking “very constructive decisions” to stem a loss of cash in recent months. But, he said, Peloton may face a bigger issue of brand saturation.
The number of members is decreasing
Peloton ended its latest quarter with 2.97 million connected fitness subscriptions, roughly flat with previous quarter levels and up 27% from a year ago. Connected Fitness subscribers are people who own a Peloton product, such as its original bike, and also pay a monthly fee to access live and on-demand workout classes.
Its total membership, however, was down about 143,000 from the previous quarter to 6.9 million. McCarthy, following Foley’s original vision, said the company hopes to amass 100 million members one day.
Peloton’s average net monthly churn levels for connected fitness users reached 1.41% from 0.73% a year ago.
The company said this was ahead of its internal expectations in part due to a consumer protection ruling in Canada that required all customers in the country to approve subscription price increases that took effect in June. , and about 85% of them have done so to date. . Peloton said it expected some people to drop their memberships after the price hike.
But investors might be wary of the jump. Lower churn would be better news for Peloton because it means people stick around and keep paying for their membership.
McCarthy said in the letter to shareholders that the fourth quarter should prove to be the “high point” for write-offs and restructuring charges related to inventory and supply chain issues. It should also mark the beginning of Peloton’s comeback story, he said.
Shares of Peloton have fallen about 60% year-to-date, as of Wednesday’s market close. Its market capitalization has fallen below $5 billion, having hit nearly $50 billion at the start of 2021.