Peloton’s earnings are even worse than expected

Market watchers were anticipating a rough quarter for Peloton, but not quite this bad. The beleaguered connected fitness company missed revenue estimates by $6 million, reporting $964.3 million — that’s down from $1.26 billion from this time last year. Losses for the quarter hit $757.1 million.

All eyes are on new CEO Barry McCarthy, who took over for embattled co-founder John Foley back in February. “Turnarounds are hard work,” McCarthy wrote, opening the company’s shareholder letter on a suitably somber note. “It’s intellectually challenging, emotionally draining, physically exhausting, and all consuming. It’s a full contact sport.”

McCarthy acknowledged the company’s difficulties following pandemic-fueled explosive growth. It was an issue Foley had largely shaken off as overstated during his time at the company, but after Peloton ramped up production to meet new demand, gym re-openings have contributed to inventory stock piles. That includes, in part, returns that cannot be refurbished and resold.

“The balance sheet challenge has been managing inventory,” the CEO noted. “We have too much for the current run rate of the business, and that inventory has consumed an enormous amount of cash, more than we expected, which has caused us to rethink our capital structure (more on this in a moment). Fortunately, the obsolescence risk is negligible, and we believe the inventory will sell eventually, so this is primarily a cash flow timing issue, not a structural issue.”

The company is also facing down a price increase in its monthly subscription fee on June 1. The executive noted a “modest” churn rate this far, suggesting that if things remain at their current levels, the company will increase revenue by $14 million a month. It remains to be seen whether additional subscribers will jump ship when those price hikes go into effect. “We’re still a little bit uncertain when the dust settles what the churn will be,” McCarthy said on this morning’s earnings call.

He cites three primary goals: “1. Stabilizing the cash flow 2. Getting the right people in the right roles and 3. Growing again.” He notes that the company has hired former Grove Collaborative COO Andy Rendich to manage the company’s supply chain and help get inventory more inline with demand. The company, long known for its treadmills and bikes, is set to shift its “focus from being hardware to software centric.”

Peloton says it’s focused on international expansion and addressed additional demographics. The company’s user base is currently 80% female and 20% male, and McCarthy notes that it’s attempting to get the number at around 50/50, which could make a shift in its advertising. It’s also seeking more third-party sales, a shift from the company’s longstanding focus in online sales and first-party stores. On the call, McCarthy noted he wasn’t “sure yet” with regards to additional markets, noting that the company is still finalizing its plans.

He also implied that the company is exploring a method where its exercise systems could be sent through parcel services like FedEx and set up by users, rather than the current model, which requires a Peloton technician — though it’s far too early to say anything else on that front.

Last week, the company was reported to be courting investors to take a 15-20% stake in a bid to bring in additional cash amid continued struggles to right the ship. Earlier reports suggested that it was exploring an outright sale to bidders, including Amazon. It’s since been suggested that the service is looking to increase revenue prior to executing an outright sale.

In the face of this quarter’s rough numbers, McCarthy is suggesting that a righted Peloton could still see big growth going forward. “My goal for Peloton is to become a global connected fitness platform with 100 million members,” he writes. “That’s equivalent to roughly half the world’s global gym memberships. It’s a long, long way from where we sit today. But we sit at the epicenter of technology-enabled fitness, a long-term secular growth trend. Who doesn’t want to live a healthier, happier, longer life? We will share more about how we plan to participate in that growth in the months and years ahead.”

Between gym re-openings, supply chain issues, some clear missteps and increased competition from other home fitness machines and apps, that’s going to be an extremely heavy lift. “These are not unsolvable problems,” McCarthy said on the call, implying that, while growth is slower than expected, the company believes it will have seen a major turnaround within the next 12 months.