Peloton Interactive, considerably slimmer following a recent headcount reduction of 500, continues navigating a new course of viability, delivery efficiency and overall profitability under CEO Barry McCarthy. Some progress has been made in recent months, but the company is admittedly not close to any celebratory victory laps or positive free cash flow, for that matter.
First-quarter results were impacted by $199 million in expenses related to recalls, restructuring and impairment. The net loss widened by 8.6 percent to $408.5 million, but operating costs declined by 5 percent to $591.1 million. The adjusted Ebitda margin came in at negative 5.4 percent, better than negative 29.0 percent in the year-ago quarter. Period gross margin improved by 250 basis points to 35.2 percent versus 32.7 percent in Q1/FY22.
Total revenues declined by 9 percent to $616.5, below its forecast range of $625-650 million and $805.2 million in the year-ago period. Connected Fitness product sales rolled backward by 59 percent to $204.2 million as subscription-related revenues improved by 35.6 percent to $412.3 million.
In his regular quarterly shareholder letter, McCarthy wrote, “I believe our 1Q23 results make a strong case that we will beat the one-year timeline and deliver on our turnaround goal.”
The CEO is bullish about the cost structure changes he has been able to orchestrate in recent months, coupled with a low monthly subscriber churn rate and the brand’s pivot to a go-to-market strategy that has included third-party distribution deals with Amazon, Dick’s Sporting Goods and the Hilton hotel group; the launch of a program to sell certified pre-owned bikes and the introduction of a “Fitness as a Service” (FaaS) bike rental service. But the company possesses research that indicates the economy will be a headwind on near-term connected hardware demand.
Over the last two weeks, Peloton has averaged approximately 175 FaaS sign-ups daily. While the company has yet to determine if the program will be financially viable long-term, McCarthy said that must occur given its popularity with users to date and estimates an “attractive payback” is a year to 18 months away. The company must determine what percentage of the bike renters will exercise their option to buy the bike. Meanwhile, Peloton’s new rowing machine is currently inventory-constrained due to more demand than units available for sale.
Within its emerging retail strategy, Peloton has developed separate business models for Amazon and Dick’s. In Amazon’s case, inventory is sold to the online behemoth and is immediately recognized as revenue to the company. Amazon has the responsibility to sell the product to Peloton subscribers. The Dick’s retail model focuses on drop ship with Peloton recognizing the sale once the bike or treadmill is delivered to the customer.
On the digital front, Peloton is miles away from its stated goal of 100 million app subscribers, given the current offering has surpassed a million. While admitting approximately half of Peloton digital users have utilized it on another company’s hardware, McCarthy said the company intends to relaunch its app in 2023 with a premium offer.
Peloton is planning for an overall gross margin of 36 percent in Q2 as it continues improvement in middle mile, logistics and final mile delivery costs and lower storage expenses as inventories continue to be reduced. Another eventual expense reduction will be the elimination of first-party retail showrooms, a process that may stretch into FY24.
“We are managing our business towards generating an improvement in gross margin, generating positive cash flow and positive adjusted Ebitda,” McCarthy confirmed.
Having already hired new chief supply chain financial and legal officers, Peloton is currently searching for a new head of its marketing effort. The brand launched a campaign in mid-September, fueling purchase intent slightly nearly everywhere except in Germany.
