Boosted by the home fitness trend spurred by the coronavirus pandemic, Peloton Interactive, the American online-driven supplier of stationary bikes and treadmills founded in 2012, recorded its first profit in the fourth quarter of its latest financial year, ended on June 30, as its revenues jumped by 172 percent to $607.1 million from the year-ago period.
The company reported net income of $89.1 million for the quarter, compared with a loss of $47.4 million. It generated a gross margin of 47.6 percent, 2.75 percentage points better than in the same period of 2019. With adjusted Ebitda of $143.6 million, it posted an excellent Ebitda margin of 23.7 percent, compared with a negative margin of 10.6 percent, thanks largely to a reduction in sales and marketing expenses to a ratio of 14 percent of revenues from 35 percent.
The stock market has responded to this exceptional performance more favorably than it did to Lululemon’s good results, sending Peloton’s already high share price up by a further 5 percent. With a market capitalization of $26 billion, Peloton is now the most valuable sports equipment company in the world, although it’s still trailing the older Lululemon ($42 bn) and other softgoods giants like Nike ($179 bn) and Adidas ($61 bn).
Analysts were probably encouraged by the very optimistic guidance provided by Peloton’s management, which expects its strong momentum to continue, and by the brand’s enormous potential internationally.
Peloton launched its services in the U.K. two years ago, stating that the U.K. ranks second, after the U.S., in the global $100 billion fitness market. It made its launch in Germany last year, overcoming a language problem for the first time. However, out of the 108 Lululemon-type “showrooms” that it operates at the moment to let consumers test its digital workouts and equipment, it has only nine of them in the U.K. and eight in Germany.
In releasing its quarterly and annual results, Peloton indicated that it was unable to produce enough bikes to fill the unexpected demand in the last quarter, resulting in a backlog of $230 million in undelivered bike orders. We could not determine whether the capacity constraints led it to give priority to its solid consumer base in North America and back-pedal on its international development for a while. The company predicts that the supply chain will not normalize in the U.S. before the end of the 2020 calendar year.
Anyhow, while its turnover is expected to continue to grow, Peloton will have to cope with lower profit margins in the short term. It sees revenues rising further to $720 to $730 million in the first quarter of the current fiscal year, or more than 200 percent above the level of a year ago. On the other hand, the gross margin and the adjusted Ebitda margin should ease down to middle-of-the-range levels of around 41 percent and 11.7 percent, respectively.
For the full financial year through next June, Peloton is budgeting adjusted gross and Ebitda margins of roughly 41 percent and 6.6 percent on revenues of $3.5 to $3.6 billion. This means that its revenues will more or less double from the level attained in the past financial year, with the number of subscriptions to its Connect Fitness rising by around 90 percent to between 2.05 and 2.10 million.
The company’s turnover nearly doubled in the past financial year to $1.82 billion, with the gross margin improving by 3.9 percentage points to 45.8 percent, which led it to post a net loss of $71.6 million, way below the loss of $245.7 million of the prior year.
It ended the financial year with 1.09 million connected subscribers, 113 percent more than a year earlier, with a 12-month member retention rate of 92 percent. A further 316,800 subscribers were using its digital programs for workouts without owning Peloton’s bikes or treadmills.
Interestingly, Covid-19 has led to a surge in consumer engagement, as many people have decided to work out at home rather than at the gym. Subscribers are now averaging 24.7 workouts per month, more than double last year’s pace of 12.0.
Meanwhile, Peloton is segmenting its product offer. It has cut the price on the original Peloton Bike to $1,895 from $2,245, making room for a more expensive alternative, the Bike+, which carries a price tag of $2,495. Aside from enhanced technology and integration features, it adds a larger rotating screen that can be viewed during other types of workouts. Customers who upgrade to the new model will get a reduction of $350 to $700.
Peloton will also introduce early next year a cheaper $2,495 version of its treadmill, called the Tread, that uses a continuous belt. The existing $4,295 model with a segmented belt will be renamed Belt+.