Peloton (PTON) fiscal Q3 2021 losses mount

A Peloton stationary bike for sale at the company’s showroom in Dedham, Massachusetts, U.S., on Wednesday, Feb. 3, 2021.

Adam Glanzman | Bloomberg | Getty Images

Peloton on Tuesday reported a wider-than-expected quarterly loss and a steep decline in sales, as inventory piled up in warehouses and ate away at the company’s cash. 

The connected fitness equipment maker also offered up a weak sales outlook for the fiscal fourth quarter, citing softer demand. The company anticipates planned subscription price hikes may lead some users to cancel their monthly memberships. 

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

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

With the fresh capital infusion from the term loan, McCarthy said he’s confident the company can return to free cash flow positive by fiscal 2023. “We’ve got plenty of capital to do that,” he said on a post-earnings conference call. “Regardless of what happens in the economy. Full stop.”

McCarthy said in the letter he is focused on stabilizing Peloton’s cash flow, getting the right people in the right roles and growing the business again. Expanding subscription revenue is a centerpiece of McCarthy’s strategy, something he takes from his prior experiences at Spotify and Netflix. He also said Peloton will soon be selling its products through third-party retailers, a step the company has not taken before. 

Here’s how Peloton did in the three-month period ended March 31 compared with what Wall Street was expecting, based on a survey of analysts by Refinitiv: 

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

Peloton’s losses widened in the fiscal third quarter to $757.1 million, or $2.27 per share, from a net loss of $8.6 million, or 3 cents a share, a year earlier. That came in larger than the per-share loss of 83 cents that analysts had been looking for. 

Revenue dropped to $964.3 million from $1.26 billion a year earlier. That was short of expectations for $972.9 million and marked the company’s first year-over-year decline in sales since it went public in 2019.

Peloton said the drop was primarily driven by a steep reduction in consumer demand coming off of the Covid-19 pandemic‘s peak. That was partially offset by higher treadmill sales, it said. 

But Peloton also noted that it faced higher-than-anticipated returns of its Tread+ machine, which was recalled last May, that totaled about $18 million and weighed on the company’s results in the quarter. 

Peloton generated $594 million in sales from its connected fitness products and $370 million from subscriptions in the latest period. 

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

Average net monthly connected fitness churn, which Peloton uses to measure its retention of connected fitness subscribers, improved to 0.75% during the period, compared with 0.79% in the second quarter.

A lower churn rate is good news for Peloton, as it means people are sticking around and continuing to pay for their memberships. The risk that Peloton faces, however, particularly as it hikes subscription prices, is that the churn rate will begin to rise.

“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 sustain and extend this success.”

‘Turnarounds are hard work’

Most disappointing to investors was likely Peloton’s bleak outlook for its current quarter, which ends on June 30 and marks the end of Peloton’s fiscal year.

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

However, McCarthy said in the letter that the business is working as quickly as possible to right any wrongs, including by right-sizing production levels. He noted that Peloton’s free cash flow should be “meaningfully better” in the fiscal fourth quarter compared with the third.

Shares of the company were down more than 15% in early trading Tuesday after earlier hitting a fresh all-time low, dragging its market cap under $4 billion.

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

The company expects connected fitness subscribers to total 2.98 million, which would represent just a 1% increase from the third quarter. 

Peloton said it has seen softer demand since February that has been partially offset by accelerated sales since it recently cut the prices of its Bike, Bike+ and Tread machines.

Meanwhile, the soft subscriber forecast takes into account a “modest negative impact” from subscription price hikes that are set to go into effect next month, it said.

Peloton noted it has seen a “small increase” to date of subscription cancellations since it announced the price increases in mid-April, but it expects the impact to subside in fiscal 2023. 

In the coming months, McCarthy said Peloton will seek to raise awareness around its digital app, which allows people to pay for access to the company’s workout content without owning a Bike or Tread.

“We’re still known primarily as a stationary bike company. The app has never been a focal point of our marketing campaigns or growth strategy,” he said in the letter. “The digital app needs to become the tip of the spear.”

He also said Peloton plans to expand a recent test 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 when they chose to cancel.

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

Peloton shares have tumbled more than 60% this year, not including Tuesday’s losses. The stock closed trading Monday at $14.13 a share, well below its IPO price of $29.

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