The business of Peloton Interactive took a wild ride that will undoubtedly alter the leading connected fitness brand’s course in the months ahead, possibly resulting in a change of ownership, as previously reported. Under fire from investors such as Blackwells Capital, which issued a detailed 65-page report on the company’s metrics and shortcomings, Peloton announced numerous important changes on the same day as it reported a meager 6 percent increase in second-quarter revenues to $1.13 billion that missed Wall Street projections by $10 million. Saddled by heavy extraordinary charges, the overall business generated a net loss of $439.4 million for the quarter against a profit of $63.6 million a year earlier.
To help accomplish its much-needed turnaround, Peloton announced a slashing of its workforce by 2,800 or 31 percent from last June 30; the winding down of plans for a North American manufacturing operation and a move to third-party contractors; a cut in the number of its warehouses; and a reorganization of its executive suite. The company said these moves would result in at least $800 million in annualized expense savings and help improve its gross margin. Besides the job cuts, Peloton’s cost trimming will include changes in the marketing spend, the real estate strategy and a “more tightly controlled outside services spend.”
In the boardroom, Barry McCarthy, a former chief financial officer for Netflix and Spotify, is taking over as Peloton’s CEO to replace the company’s founder, John Foley, who will transition to executive chairman. Foley’s wife, Jill, will lose her position as head of apparel, following a recent change in the related sales forecast. Joining McCarthy on the board of directors will be Angel Mendez, a reputed supply chain expert who is currently executive chairman at a supply chain management firm, LevaData, and Jonathan Mildenhall, a co-founder of the TwentyFirstCenturyBrand and a former chief marketing officer for Airbnb. William Lynch will resign as president of Peloton and become a non-executive director. One of the current directors, Erik Blachford, will leave the Peloton board.
Published reports suggest that McCarthy and his team will be charged with shoring up Peloton’s business elements for an eventual sale. Blackwells, which named 19 potential Peloton suitors that included Adidas, Nike, Lululemon and Amazon, believes that a fair price for the company would be at least $65 a share, representing a valuation of $19.59 billion, but noted that a strategic partner could easily fork over $75 a share, indicating a $22.6 billion valuation. An analyst, Wedbush Securities, sees Apple as a more realistic potential suitor for the company.
Following its dismal financial release, accompanied by its strategic announcements, the stock market value of Peloton’s shares closed 26 percent higher than the day before at $37.47, some 29 percent above the stock’s IPO price of $29.
The company is currently guiding for revenues of $3.7-3.8 billion and an adjusted Ebitda loss of $625-675 million in the fiscal year ending June 30, compared with previous projections for an adjusted Ebitda loss of $425-475 million on sales of $4.4-4.8 billion. The growth in the number of subscriptions will slow down markedly, setting a year-end target of 3.0 million.
In its second quarter ended Dec. 31, Peloton’s Connected Fitness subscriptions rose by 66 percent year-on-year to 2.77 million, leading to 73 percent higher segment revenues of $337.5 million, with an improvement in the gross margin of 7.6 percentage points to 67.9 percent. The number of paid digital subscriptions for those not using Peloton’s Bike and Treadmill products increased by 38 percent to 862,000. Total memberships for its various workout regiments surpassed 6.6 million. Still, the actual number of workouts tumbled to a monthly average of 15.5 from 21.1 a year ago, as more users have preferred going more frequently to the gym.
Product revenues fell by 8 percent to $796.4 million in the quarter, with the gross margin plunging to only 6.4 percent from 35.3 percent a year earlier due to price reductions, combined with rising material, parts and shipping costs.
Peloton is still planning to go ahead with the launch on April 5 of its new $495 Peloton Guide, a strength training system with dumbbells incorporating a camera-based movement tracker to monitor the user’s workout form, as well as a new heart rate tracking band.
Blackwells did not mince its words in its examination of Peloton’s issues, most notably pointing out that the company’s negative 76 percent return on investment was the worst of any company in the Nasdaq 300 Index in 2021. It also cited Peloton’s failed execution on its $431-million acquisition of Precor to expand into the commercial fitness sector and its lagging apparel business, spearheaded by Foley’s spouse. A slide citing a presentation made last month by BMO Equity Research says, “We’ve been discussing the fact that management has been pitching long-term excitement while selling over $700 million in shares since September 2020.”
Still, the activist investor added its belief that the company’s disruptive business model — particularly in terms of convenience and cost — would be extremely attractive to technology, streaming, media, metaverse and sportswear companies that are interested in the rapidly growing health and wellness category. As for the executive changes made by Peloton, Blackwells said, “a new competent management team will need 6-12 months to assess problems and another 1-2 years to fix them.”