Peloton Interactive (PTON 8.28%), the leading maker of connected home-exercise equipment, reported powerful fiscal first-quarter 2021 results (for the period ended Sept. 30) on Thursday, Nov. 5.
Its revenue soared 232% year over year to $757.9 million. Bottom-line performance was also impressive with net income landing at $69.3 million, or $0.20 per share, versus a net loss of $49.8 million, or $1.29 per share, in the year-ago period. Both results sprinted by Wall Street's expectations.
Despite the fantastic results, shares edged down 0.9% following the release. Investors were disappointed with management's profitability guidance for fiscal Q2, as we'll explore further in a moment. Nonetheless, in 2020, shares of Peloton -- which held its initial public offering (IPO) in September 2019 -- have gained a whopping 255% through Friday, Nov. 13. The S&P 500 has returned 12.8% over this period.
Below are three key things management discussed on the fiscal Q1 2021 earnings call that investors should know.
Additional shipping expenses will hurt fiscal Q2's profitability
CEO John Foley discussed the key steps the company is taking to decrease its backlog and order-to-delivery (OTD) times for its exercise bikes. One of them is as follows:
We are investing in expedited shipping from our Taiwanese factories into the U.S. by adding air shipments of Bike+ and also utilizing expedited ocean shipping and ground truck logistics, all with the goal of improving our delivery times. While these actions result in higher-than-typical logistics costs, we feel that incurring these incremental expenses in the short term is the right trade-off to improve our member experience.
Peloton has a huge backlog due primarily to the phenomenal demand for its products driven by the COVID-19 pandemic. Congestion at the Port of Los Angeles, periodic warehouse closures associated with the pandemic, and West Coast forest fires are contributing to delivery delays. Moreover, the company's launch in fiscal Q1 of its upgraded exercise bike, Bike+, has compounded its backlog and delivery issues.
Long-term investors shouldn't be concerned about a temporary drop in profitability. Temporarily incurring extra shipping charges to help better satisfy customers is the smart thing to do. This is especially true for a company selling higher-end products, where customer service is even more important.
As to the numbers, management expects fiscal Q2 gross margin to be about 39%, down from 43.4% in fiscal Q1, and fiscal Q2 adjusted EBITDA [earnings before interest, taxes, depreciation, and amortization] margin to be about 7%, down from 15.7% in fiscal Q1.
Management's target dates to get delivery times back to pre-pandemic levels
From President William Lynch's remarks:
We think the [Port of Los Angeles] delays will persist for a period of time [...]. But as we get through those, we feel good about continuing to draw down our core Bike OTDs [order-to-delivery times] back to where we want them to be, which is inside of two weeks, as we get through [fiscal] Q2. And then Bike+, we're quickly reacting with all the actions we mentioned to get that product line into that same two-week window, but that's going to take a while into [fiscal] Q3.
For context, Lynch said that on the day before the earnings release, the company dropped its Bike OTD time in all its sales channels to four-to-six weeks, which is its shortest lead time since April.
We now know that management's goal is to get its delivery times for both Bike and Bike+ to within two weeks of order. And we know that the aim is to get Bike to within this OTD time by the end of fiscal Q2 2021 (which corresponds to calendar Q4 2020, so we're talking December) and Bike+ by sometime in fiscal Q3 (which corresponds to calendar Q1 2021).
When fiscal Q2 results are released, investors will be able to judge how well management has performed with respect to its goal for Bike and perhaps also for Bike+.
Another new innovative partnership was recently announced
From Foley's remarks:
I'd like to highlight our new partnership with Chase announced last week. This is a first-of-its-kind arrangement for Peloton. Chase will offer up to $60 in statement credits toward Peloton subscriptions for Chase Sapphire Preferred Card holders and $120 in statement credits for Chase Sapphire Reserve Card members through December 2021.
Investors should be pleased that Peloton is pursuing various innovative partnerships to "drive awareness of the Peloton app," as Foley put it. Ultimately, increased awareness should lead to an increase in connected-fitness product sales and subscribers.
Another interesting partnership is the one forged in August with UK-based John Lewis & Partners, which owns the upscale John Lewis department stores. Peloton is testing the store-in-store concept within nine John Lewis stores across the UK. "Customers will have the opportunity to experience the Peloton Bike, with a personalised walkthrough," according to John Lewis' press release.