Roadblocks, namely costs associated with a bike seat recall and a separate legal settlement, detracted from Peloton Interactive’s financial recovery in Q4 under CEO Barry McCarthy. But the company is continuing to implement new initiatives aimed at sales and profitability growth and attracting a wider base of younger, fitness-focused consumers in the months ahead.
“In February 2023, I said the focus of the prior 12 months had been on stabilizing Peloton’s financial performance and that the next 12 months would focus on restoring Peloton’s growth by leaning into the future of tech-enabled fitness,” McCarthy wrote in his quarterly letter to shareholders.
Peloton reported a net loss of $241.8 million against a loss of $1,255.3 million in Q4 ended June 30, as total revenues fell by 5 percent to $642.1 million, below forecasts, from $678.1 million in the year-ago period. Adjusted Ebitda improved to a loss of $34.7 million from a loss of $288.7 million in Q4/22. Subscription sales rose by 10 percent to $421.7 million, but product revenue declined by 25 percent to $220.4 million. Subscription gross margin contracted by 60 basis points to 67.3 percent from 67.9 percent, but subscription contribution margin was flat year-over-year at 72.1 percent. The group ended the period with 828,000 app subscribers, more than its projection due to better legacy app subscriber retention after announcing five new app subscription tiers in late May.
Peloton shares tumbled 25 percent when it was learned that final period revenues were below analyst expectations of $641 million, prompted by a seasonal slowdown in hardware sales, but McCarthy remained resolute in his optimism about the company’s prospects in the quarters ahead. The company envisions reaching a positive cash flow in H2 and perhaps 40 percent higher revenues in Q4.
‘We’re excited about the future of the business, and there is this enormous disconnect between the stock price and the energy and the building around all of the partnerships and co-development things that are cooking,” McCarthy told analysts, adding, “So, if I’m right about that and we are, in fact, less dependent on price promotions in order to drive growth, then that should have positive implications for hardware margins.”
Two recent Peloton deals include one with Liverpool FC and another with the University of Michigan, the likely starting point for additional partnerships with NCAA Division colleges in the U.S. via co-branded bikes that figure to help the company grow awareness for its brand and platform. Earlier this month, the group launched a rental program in Germany.
The group was forced to take an additional accrual of $40 million in Q4 for costs and future expenses related to a Peloton bicycle seat recall that was announced on May 11. To date, Peloton has only fulfilled 340,000 of 750,000 requests for a replacement seat but is aiming to send out the remainder to impacted customers by Sep. 30. Also, on the recall front, Peloton will retrofit existing Tread+ products with a rear guard shortly and resume pre-sales of the $6,000 product in the U.S. during the holiday season.
Inventory will continue to be a source of cash for Peloton in FY24, although the amount of goods on hand today is “much more normalized” than a year ago, and the company began purchasing bikes and treadmills in Q4.
For the full year, Peloton reported a net loss of $1,261.7 million against a loss of $2,827.7 million in FY22 as 12-month revenues declined by 48 percent to $1,130.2 million from $2,187.5 million. The annual operating loss improved by 56 percent to a loss of $1,197.1 million.
