Peloton Struggles To Implement Its Turnaround Strategy As It Posts A Significant Loss And Revenue Decline

In its fiscal fourth quarter, Peloton, a maker of connected fitness equipment, reported widening losses and declining sales on Thursday. The company is attempting to win back investors by making cost reductions and strategic changes. A day after the stock soared more than 20% on news of its partnership with Amazon, shares fell more than 14% in premarket trading.

This is the sixth quarter in a row that Peloton has reported losses. In the second half of its fiscal year 2023, the company stated that it aims to achieve breakeven cash flow on a quarterly basis.

Barry McCarthy, CEO of Peloton, stated that despite this, he anticipates that the market for connected fitness will remain difficult for the foreseeable future as consumer demand for at-home exercise equipment declines from pandemic highs.

Since John Foley, the founder of Peloton, handed over the reins to McCarthy in February, the company has pursued significant changes that have not yet paid off in full. Peloton increased its membership fees, increased the cost of some equipment, fired thousands of employees, experimented with a rental option, stopped offering last-mile delivery, and outsourced all production. As part of its first partnership with another retailer, Peloton also began selling some of its merchandise on Amazon in the United States on Wednesday.

“The naysayers will look at our [fourth quarter] financial performance and see a melting pot of declining revenue, negative gross margin, and deeper operating losses,” McCarthy wrote in a letter to Peloton shareholders.

“But what I see is significant progress driving our comeback and Peloton’s long-term resilience,” he said. “We still have work to do.”

The outlook for Peloton’s upcoming fiscal year 2023 was not provided. According to the company, it expects subscribers to remain flat and revenue between $625 million and $650 million for the first quarter, which ends on September 30. According to Peloton, this accounts for seasonal fluctuations in the business as well as short-term weakness in demand.

A bright spot for the business was that this was the first reported quarter for Peloton in which higher-margin subscription revenue made up the majority of total sales.

Peloton’s net loss increased from $313.2 million, or $1.05 per share, a year earlier to $1.24 billion, or $3.68 per share, in the three months that ended on June 30.

McCarthy claimed that Peloton’s efforts to prevent an inventory glut, reduce fixed costs, and address other supply chain issues were to blame for the losses. The company started a $800 million restructuring plan earlier this year. Inventory at Peloton stood at $1.1 billion at the end of the fourth quarter, up from $937.1 million a year earlier.

From $936.9 million a year earlier to $678.7 million, revenue decreased by 28%. According to Refinitiv estimates, that fell short of the $718.2 million analysts had anticipated.

The connected fitness revenue included in that amount, which also includes the contribution from Peloton’s Precor business, fell by 55 per cent to $295.6 million.

Another worrying statistic was Peloton’s connected fitness gross margin, which was negative 98.1 per cent as opposed to positive 11.7 per cent per cent a year earlier.

Peloton reported higher logistics costs per delivery, higher port and storage costs, as well as expenses related to the Tread+ treadmill’s recall. A subscription revenue of $383.1 million was generated by Peloton, up 36 per cent from the previous year and accounting for 56.4 per cent of all sales. The subscription gross margin increased slightly from 63.3 per cent to 67.9 per cent.

McCarthy, who has held positions at Spotify and Netflix before, has stated that he is more interested in pursuing growth on the subscription side of Peloton’s business than placing such a strong emphasis on hardware. According to him, the success of Peloton’s digital app will be crucial.

After having an average negative cash flow of $650 million over the previous two quarters, Peloton burned through $412 million in cash in the fourth quarter. It had a $500 million revolving credit line and $1.25 billion in cash reserves at the end of June.

McCarthy received praise from BMO Capital Markets analyst Simeon Siegel for recent “very constructive decisions” he made to stop a cash leak. But he added that brand saturation might be a bigger problem for Peloton.

(Adapted from CNBC.com)

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