Peloton Interactive (NASDAQ:PTON) is pedaling as fast as it can, but it still can't catch up. The high-end fitness equipment maker is swamped with orders for its exercise bikes and treadmills, but it's still way behind on delivering orders.
As a result of the COVID-19 pandemic, fitness-obsessed consumers unable to visit their local fitness centers are now working out at home en masse. In large part, they've turned to Peloton for their fitness equipment.
Yet the company has a narrow window of opportunity to lock in new customers before a semblance of normalcy returns and people head back to the gym. Its backorder problem, though, could cause the exercise equipment maker to leave significant sums of money on the table for years to come.
High cost of rising expectations
It's a problem many businesses would like to have: so many consumers wanting to buy your products that you can't fulfill orders in a timely fashion. The issue here is that Peloton's persistent demand is exacerbating the situation.
While it blames congestion at U.S. ports for holding up deliveries some five times longer than usual, the fitness equipment maker continues taking new orders, which pushes delivery dates further back. Even though it has increased production capacity sixfold over the past year and bought a company that will give it additional domestic capacity, Peloton is still well behind the curve and knows it.
In its recent quarterly earnings report announcing it was spending $100 million in new air freight and ocean freight investments, the fitness equipment company admitted that "we remain inventory constrained with longer than acceptable wait times for delivery of our products."
Orders that were placed in Peloton's fiscal second quarter have had to be carried over into Q3, and the additional expense for using more inefficient air cargo delivery means it's going to hurt profits. CEO John Foley says the company will incur transportation and delivery costs that exceed 10 times the amount it typically pays per bike and treadmill.
The wedge its rivals need
Peloton needs to resolve this quickly. Although it's counting on the distribution and administration of a COVID-19 vaccine to help open up its supply chain, widespread vaccine availability will also mean that gyms and workout facilities like Planet Fitness (NYSE:PLNT) and SoulCycle will return to full capacity, too.
Planet Fitness' fourth-quarter results showed revenue fell 30% as same-store sales declined 10% from the year-ago period after the "no judgment gym" first closed locations during the pandemic and then only gradually reopened with limited capacity in many areas.
At the end of the quarter, 90% of its gyms are open, though most in California remain closed. Because the state has the largest concentration of gyms, their closure is having an outsize impact. Yet data from location analytics firm Placer.ai indicates Planet Fitness is actually bouncing back far faster than should be expected.
January is obviously an important month for gyms because of all the New Year's resolutions folks make to get into shape. Because of the pandemic, however, Planet Fitness saw a 34% drop in visits this past January compared to a year ago, though if you compare it to 2019, the decline is just 19%.
Furthermore, the gym saw a December-to-January visit increase of 47% last month, which -- while well below the 61% jump it witnessed in 2020 -- indicates it's really only the pandemic holding it back.
A vaccine, coupled with all of its locations reopening, could see Planet Fitness come back very strong, which could undermine Peloton's ability to gain more customers.
A disconnect from growth
Connected fitness subscriptions more than doubled last quarter to 1.67 million, but Peloton expects them to grow less than 19% this quarter and to decelerate further, with just a near-15% rise in its fiscal fourth quarter. It forecasts ending 2021 with 2.275 million connected fitness subscriptions.
That's partly a result of not being able to maintain the torrid growth rates of the pandemic, which no one expects. However, it's also because people will return to gyms while others are dismayed by the delays in getting their equipment delivered.
All Peloton is doing right now is playing catch-up. The $100 million it will spend over the next six months on air cargo and other shipment methods is a short-term salve, not an actual solution to its supply chain problem.
Consumers waiting months for its fitness equipment risks damaging Peloton's reputation. Customers may cancel an order, buy a competitor's equipment, or soon enough, go back to the gym. The fitness equipment maker can't afford to waste time capitalizing on its opportunity because it reduces the long-term value it realizes from each customer.
Peloton Interactive is in high demand now, but it could quickly become a low-energy company in short order if it can't get its own operations in better shape.