Just after announcing a recall of its connected home treadmills, Peloton Interactive reported better-than-expected sales and a smaller net loss for the third quarter ended March 31 as the demand for its stationary bikes, which represent the bulk of its business, remained strong and the company was successful in speeding up shipping and reducing waiting times for its products.
Connected fitness subscriptions and revenues spiked as the number of customers who pay a monthly fee to access the company’s digital workout content increased sharply.
Total revenues rose by 141 percent to $1.26 billion from $524.6 million a year earlier, topping a Wall Street forecast for $1.1 billion, partly driven by the accelerated deliveries for its original Bike product. Thanks to recent investments, they are now back to pre-Covid levels. The management said that additional work will be needed to reduce delivery times across the remainder of Peloton’s product portfolio and in all the regions.
Connected fitness revenues went up by 140 percent to $1.02 billion, representing 81 percent of total sales, while subscription revenue increased by 144 percent to $239.4 million, making up 19 percent of the total.
The total number of members grew to over 5.4 million. Subscriptions made by owners of Peloton equipment went up by 135 percent to 2,080,860, while digital subscriptions signed up by others jumped by 404 percent to 891,000.
Customer engagement levels reached new highs. Connected fitness subscription workouts grew by 239 percent in the quarter to over 149.5 million, averaging 26.0 monthly workouts per subscription, compared with 17.7 a year ago.
Peloton’s net loss shrank to $8.6 million from a loss of $55.6 million, which was much better than expected. The gross margin actually shrank to just 28.4 percent from 44.3 percent a year ago due to a series of factors: higher spending to expedite shipping products from Taiwan, the reduction in the price of bikes implemented last September and a shift to less profitable treadmills. On the other hand, R&D expenses more than trebled to $69.8 million.
The latest on the treadmill recall
Although the company made progress in easing delivery bottlenecks - after struggling for months to keep up with the rapidly growing demand during the pandemic - the financial results were overshadowed by the voluntary recall of up to 125,000 of its Tread+ and Tread treadmills, announced on the eve of the financial release, after one child died and dozens were injured in accidents involving the more advance Tread+.
Peloton is now targeting the end of June for the availability of new passcode safety software for the Tred+, which will have to be approved by the CPSC. The company is also developing a physical barrier that can be installed at the back of the treadmill to prevent injuries for children and pets. Furthermore, the launch of a lower-priced Tread with a conventional belt, which was scheduled for later this month in the U.S., has been suspended.
In a conference call after reporting its results for the third quarter, Peloton said it expects fourth-quarter sales to take a $165 million hit overall due to the treadmill recall. The amount would include $105 million in lost sales, $50 million for returned treadmills and $10 million to waive three months of subscription fees. However, the management reassured investors that the financial impact would be “short term.”
Peloton lowers guidance, sees potential abroad
The company now expects fourth-quarter sales of $915 million, lower than the $1.12 billion previously forecast, in spite of a positive contribution of $60 million from the recently completed acquisition of Precor. It is also anticipating an Ebitda loss of $60 million for the quarter, due in part to a drop of nine percentage points due to the product recall. For the full fiscal year, the company’s revenues should be in a range around $4 billion, down from an earlier forecast of $4.075 billion.
Peloton still has a major upside in international markets, partly no doubt because of capacity constraints that should be alleviated by its recently completed acquisition of Precor. Its presence in Europe remains minimal,
The company already announced on March 8 its intention to expand to Australia. It has now provided further details, indicating that it will initially offer its Bike and Bike+ products in that market through its e-commerce platform and three retail locations in Sydney and Melbourne. The Peloton Digital program will also be available to Australian members, who will have access to its full library of content, including new classes taught by Australian instructors.
“Looking ahead, we see significant growth opportunities in a broad range of international markets, though we have no additional launch announcements to make at this time,” the management said.