Peloton Interactive continues to make progress in its turnaround under CEO Barry McCarthy but must achieve numerous objectives in the year ahead if it wants to stay the course.
The connected fitness company is seeking to reach breakeven cash flow, return to year-on-year revenue growth, restore its growth outside the U.S., and attract at least 1 million prospective members to its fitness app. Western Europe will likely be the company’s first targeted region outside the U.S., but McCarthy told analysts that Peloton is reviewing its international growth strategy and how much it is willing to spend.
In the second quarter, the group reduced its year-over-year net loss to $335.4 million from a loss of $439.4 million. This was helped by a 20 percent reduction in total operating expenses to $566.4 million. Adjusted Ebitda improved by 54 percent to a loss of $122.4 million, versus a loss of $266.5 million.
Total revenues fell by 30 percent to $792.7 million from $1,133.9 million, but subscriptions increased by 22 percent to $411.3 million from $337.5 million. Connected Fitness product sales declined 52 percent year-over-year to $381.4 million. The higher-margin subscription business, which grew its base by 10 percent to more than 3 million, contributed to a 490-basis-point improvement in gross margin to 29.7 percent from 24.8 percent. Free cash flow, meanwhile, came in at negative $94.4 million, versus negative $546.7 million.
Peloton’s go-to-market strategy via partnerships with Amazon, Dick’s Sporting Goods and Hilton hotels accounted for an estimated 19 percent of Q2 Connected Fitness Unit (CFU) orders. The segment’s quarterly results exceeded internal expectations, but the company is still acquiring knowledge about the segment before deciding any next steps. Consumer awareness of the third-party retail segment remains low.
As the company moves forward in H2 and into FY24, McCarthy said there will be further expense reductions at Peloton in the areas of ERP, warehouses, the order management system and storage costs as inventory levels come down, but there will be no further headcount reductions. Senior management, which is promising to remain vigilant over operating expenses, confirms that inventory will be a tailwind heading into FY24.
Plans to divest an Ohio manufacturing plant have been delayed beyond an initial deadline of Dec. 31, with the transaction now forecast to be completed by the end of the fiscal year. But the strategy to sell-off the Precor commercial fitness business is on hold after a prospective buyer dropped its proposed acquisition price significantly. Peloton pulled back from the transaction and will now operate Precor as a freestanding subsidiary, but with a plan to divest the business at some point.
