Peloton Interactive’s CEO Barry McCarthy, in his quarterly shareholder letter, compared the interactive fitness company to a cargo ship like one he worked on as a high schooler, but perhaps he should have considered a cruise ship comparison given the company’s needs to attract more younger, female and value-oriented customers to steer into “breakeven” cash flow waters by the second half of FY23. “We need to right-size our business run rate,” McCarthy told analysts. “It’s not enough to cut expenses, we must grow revenue, and we’ve taken a number of steps to make that happen.”
Expecting to only yield a $6 million benefit on a net basis from ongoing inventory liquidations, Peloton is taking additional measures to bolster its free cash flow, improve annual gross margin to about 35.0 percent, and bring new customers into the brand’s fold. The latter will be partially accomplished through the adoption of a good, better, best strategy with products and digital connected fitness content. The company is also working to redeploy $50 million in spending to marketing endeavors, which it hopes will raise unaided brand awareness for Peloton that in the U.S. currently stands at 53 percent for bikes, 21 percent for its treadmill and 4 percent for its digital app.
“The challenge for us […] is to reach market segments that we currently don’t reach,” commented McCarthy, later adding, “We have a big opportunity in the value-consumer segment of the [fitness] market, so we’re going for it.”
A new test offering a certified pre-owned original bike, its Fitness-as-a-Service (FaaS) rental program and digital app subscription captured 5,000 consumers paying $89 for the month of June and only a 3 percent FaaS churn rate after the trial months. In September, marketing dollars will be increased to support the program nationally. And earlier this month, the company launched a limited, 10-day test of certified pre-owned bike sales in the U.S. and Germany to test the waters for a possible wider effort. The company, which currently sells about 40,000 units annually, said 125,000-150,000 yearly would be a “winning run-rate.”
But despite recent actions taken to cut expenses by $45 million annually, including 760 layoffs in supply chain and member support and a shift to third-party providers for last-mile deliveries in the U.S. and in some international markets, FY22 will not be a good year to remember for Peloton Interactive after the robust Covid-19 years.
In Q4, with the company focused on lowering inventory commitments and outsourcing all manufacturing for connected fitness hardware that included shuttering an owned factory in Taiwan, the net loss widened to $1,244.4 million from a loss of $313.2 million in the year-ago period. Period revenues declined 30 percent to $678.7 million from $936.9 million, with connected fitness segment sales down 55 percent to $295.6 million. Subscription sales increased 36 percent to $383.1 million from $281.6 million. Period-end inventory stood at $1.1 billion, including a $182.3 million increase in reserves taken against a broad range of assets, and up 17.9 percent year-over-year from $937.1 million.
For the FY ended June 30, the annual net loss was $2,816.9 million against a loss of $189.0 million, including $379.7 million in impairment expenses and a $224.9 million reserve adjustment for excess and obsolete inventory. The operating loss was $2,723.2 million against a loss of $187.8 million. Total revenues fell 11 percent to $3,582.1 million from $4,021.8 million. Connected fitness product sales declined 30 percent to $2.19 billion, while higher-margin subscription revenues rose 60 percent to $1.39 billion. App subscriptions stood at 980,000 at year-end, up 12 percent year-over-year, with the gain driven by better than anticipated retention.
Citing broader macroeconomic uncertainties and the pace and number of changes it’s making to its business, Peloton is not providing annual guidance for FY23. The Q1 outlook is currently calling for an adjusted Ebitda loss range of $90-$115 million versus a loss of $234 million in Q1/FY22 with an approximate gross margin of 35 percent. The period’s forecast sales range of $625-$650 million is 19.3%-22.4% below the $805 million in Q1/FY22 revenues.
“Our Q1 outlook reflects near-term demand weakness associated with our recent hardware price increases as well as typical seasonal demand softness,” the company said. “We expect an improving gross margin, primarily due to the price increases for Bike+ and Tread that were implemented in mid-August.”
