Peloton (PTON) third quarter 2021 losses widen

A Peloton exercise bike for sale at the company’s showroom in Dedham, Massachusetts, on Wednesday, February 3, 2021.

Adam Glanzmann | Bloomberg | Getty Images

Peloton on Tuesday reported a larger-than-expected quarterly loss and a sharp drop in sales as inventories piled up in warehouses and drained the company’s cash.

The connected fitness equipment maker also offered a weak sales outlook for the fiscal fourth quarter, citing weaker demand. The company reckons that planned subscription price increases could prompt some users to cancel their monthly subscriptions.

Shares of Peloton closed up nearly 9% at $12.90 on Tuesday, a new low for the stock. Its market valuation is more than $4 billion after hitting $50 billion early last year.

Peloton’s excess inventories forced the company to reconsider its capital structure, Chief Executive Officer Barry McCarthy said in a letter to shareholders. Peloton ended the quarter “thinly capitalized” with $879 million in unrestricted cash and cash equivalents, he said.

To address this, earlier this week the company signed a letter of commitment with JPMorgan and Goldman Sachs to raise $750 million in five-year debt, the CEO said. The two banks led Peloton’s 2019 IPO.

With the fresh capital injection from the term loan, McCarthy said he’s confident the company can return to positive free cash flow by fiscal 2023. “We have plenty of capital for this,” he said in a conference call after the result. “No matter what happens in the economy. Period.”

McCarthy said in the letter he is focused on stabilizing Peloton’s cash flow, putting the right people in the right roles and growing the business again. Growing subscription revenue is a core part of McCarthy’s strategy, something he draws from his previous experiences at Spotify and Netflix. He also said Peloton will soon be selling its products through third-party vendors, a move the company hasn’t taken before.

Here’s how Peloton has performed for the three months ended March 31, compared to Wall Street expectations, based on a poll of analysts by Refinitiv:

  • Loss per share: $2.27 versus 83 cents expected
  • Revenue: $964.3 million versus $972.9 million expected

Peloton’s losses widened to $757.1 million, or $2.27 a share, in the fiscal third quarter, up from a net loss of $8.6 million, or 3 cents a share, a year earlier. That was bigger than the 83 cent loss per share that analysts had been expecting.

Revenue fell to $964.3 million from $1.26 billion last year. That fell short of expectations at $972.9 million and was the company’s first year-over-year revenue decline since its IPO in 2019.

Peloton said the decline was primarily due to a sharp drop in consumer demand following the peak of the Covid-19 pandemic. That was partially offset by higher treadmill sales, it said.

But Peloton also noted that it faced higher-than-expected returns from its Tread+ machine, which was recalled last May, totaling about $18 million and hurt the company’s results for the quarter.

Peloton generated $594 million in revenue from its connected fitness products and $370 million from subscriptions last period.

The company ended the quarter with 2.96 million connected fitness subscribers, a net increase of 195,000. Connected Fitness subscribers are people who own one of the company’s devices and also pay a fee to access live and on-demand exercise classes ranging from cycling to yoga to meditation.

Connected Fitness’ average monthly churn, which Peloton uses to measure Connected Fitness subscriber retention, improved to 0.75% during the period, compared to 0.79% in the second quarter.

A lower churn rate is good news for Peloton, as it means people are staying and continuing to pay for their memberships. However, the risk Peloton faces, especially if it increases subscription prices, is that the churn rate will start to increase.

“Our users are highly engaged and our subscriber churn rate is less than 1%, which is the best I’ve seen,” McCarthy said in his letter. “The challenge and the opportunity today is to maintain and build on this success.”

“Turnarounds are hard work”

Perhaps most disappointing for investors was Peloton’s bleak outlook for the current quarter, which ends June 30 and marks the end of Peloton’s fiscal year.

McCarthy noted in his letter to shareholders that “turnarounds are hard work.” When he first arrived at Peloton, the company’s supply chain was much weaker than expected, McCarthy told analysts on a post-earnings conference call.

However, McCarthy said in the letter that the company is working as quickly as possible to correct any errors, including properly sizing production batches. He noted that Peloton’s free cash flow should be “materially better” in the fiscal fourth quarter compared to the third.

Peloton is calling for fourth-quarter revenue of between $675 million and $700 million. Analysts had been looking for $821.7 million, according to estimates from Refinitiv.

The company expects a total of 2.98 million connected fitness subscribers, up just 1% from the third quarter.

Peloton said it has seen weaker demand since February, partially offset by accelerated sales as the company recently reduced prices on its Bike, Bike+ and Tread machines.

Meanwhile, the soft subscriber forecast accounts for a “modest negative impact” from subscription price increases set to go into effect next month, it said.

Peloton noted that there has been a “small spike” in subscription cancellations since the price increases were announced in mid-April, but expects the impact to wear off in fiscal 2023.

In the coming months, McCarthy said, Peloton will look to spread awareness about its digital app, which allows people to pay to access the company’s workout content without owning a bike or tread.

“We are still mainly known as a stationary bike company. The app has never been a focus of our marketing campaigns or growth strategy,” he said in the letter. “The digital app must become the spearhead.”

He also said Peloton plans to expand a recent trial where customers can pay a combined flat rate for one of the company’s stationary bikes and access to its fitness membership. It allows people to return the bike if they have decided to cancel.

The CEO also emphasized that Peloton needs to expand into more international markets to one day reach its goal of 100 million members.

Peloton shares are down more than 60% this year, not counting Tuesday’s losses. The stock closed Monday’s trading at $14.13 a share, well below its IPO price of $29. Peloton (PTON) third quarter 2021 losses widen

Gary B. Graves

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