Peloton Interactive’s bumpy ride to a turnaround that includes generating positive free cash flow in financial year 2023 is underway, but many paths remain to be taken before any destination is reached. CEO Barry McCarthy, a former Netflix CFO, has been on the job for exactly three months, and he’s both frank and optimistic about the work to be done and some positive factors he’s uncovered during his short tenure. In a letter to Peloton shareholders, he pointed out that the company’s systems-related challenges have hurt its productivity, speed of decision making, and speed of execution.
“We’re here to double down on things that made us great,” proclaimed McCarthy during Peloton’s third-quarter earnings call earlier today, later adding that his biggest surprises since taking the job were the cash flow and supply chain situations from a negative perspective and depth of talent and the discussion of fitness as a service from a positive point-of-view. Thinly capitalized at $879 million at the end of the third quarter, the company this week signed a five-year, $750 million term loan commitment letter with JP Morgan and Goldman Sachs to shore up its balance sheet.
As period operating expenses rose more than 100 percent to $920.0 million, Peloton’s total revenue slid 23.6 percent to $964.3 million from $1,262.3 million in the third quarter ended March 31. The OPEX included $181.9 million in goodwill and $158.5 million in restructuring costs. The company reported an operating loss of $735.8 million compared to a $13.7 million operating loss in the year-ago period. The net loss was $757.1 million against a loss of $8.6 million. The number of monthly digital subscriptions rose 9.5 percent year-over-year to 976,000 as the number of quarterly Connected Fitness workouts increased 10.1 percent to 164.5 million. Period end Connected Fitness subscriptions were up 42 percent y-o-y at 2.96 million.
The company said it would generate $165 million in OPEX savings during the second half of FY23 and $450 million in FY23. Ultimately, Peloton wants to generate at least $800 million in annual savings by financial year 2024, which will include at least $300 million in lower Connected Fitness COGS (cost of goods sold) and the proceeds from selling land and a facility that had been earmarked for domestic manufacturing.
Under the leadership of its new supply chain lead executive Andy Rendich for the last six weeks, Peloton has emerged with greater visibility on how its supply chain issues are impacting its overall business. Problem areas include high storage costs related to a higher-than-needed inventory position that stood at $1.41 billion at period end, up 50.5 percent from $937.1 million last June 30. In mid-April, Peloton implemented hardware price cuts that it estimates will deliver $40 million in incremental monthly revenues. Already, the price action has delivered a 69 percent increase in daily unit sales, the company said. Also, on June 1, Peloton is raising the monthly cost of its All-Access subscription to $44.95, a move forecast to raise $14 million monthly at the current churn rate.
Peloton, which has already negotiated better freight rates for FY24, also intends to have lower procurement and sourcing costs in place. And there is work underway to lower the cost of product warranties.
On the sales growth side, the company confirmed that it is in active discussions with several potential retail partners as it begins to map out its further growth strategy outside the U.S. and grapples with how to best create a digital experience for its fitness-minded customers that it would eventually like split evenly between women and men versus the current 80 percent women to 20 percent men ratio.
Citing the brand’s unaided awareness of four percent, McCarthy added, “We’ve got the greatest app hat no one has ever heard of,” stressing the importance of Peloton developing and implementing a successful digital strategy going forward if it is to eventually reach 100 million members on its global connected fitness platform. While international sales rose 92 percent in the third quarter versus 53 percent in the U.S., McCarthy admits a full strategy for markets outside the U.S. has not yet been crafted. One possibility that would open additional markets without impacting costs or margins involves developing and selling a Peloton bike that could be delivered by a third party and requires no installation services.
