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Can Peloton Finally Overcome Supply Constraints?

By Parkev Tatevosian - Apr 8, 2021 at 9:26AM

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A pandemic-induced surge in demand combined with shipping container shortages led to longer delivery times for customers.

Demand for the fitness equipment that Peloton Interactive (PTON -5.57%) produces has been surging. So much so that the company is having a hard time filling orders in a timely manner. At one point this past year, customer wait times from order to delivery got as high as 10 weeks.

The demand spike was of course related to the ongoing coronavirus pandemic and people's reluctance to engage in public activities at the moment. With restrictions on activity outside of the home, consumers shifted their interests and spending. Peloton's difficulty in fulfilling demand is twofold: One part is the increase in demand for its products, and the other is the increase in demand for shipping services to the U.S.

The good news for shareholders is that the company has adjusted to changing economic conditions and is now better at meeting the demand. 

a man exercises on a Peloton stationary bike in his home as a woman walks by

Image source: Peloton.

Paying for premium shipping

Order backlogs and delivery delays were beginning to generate negative publicity for Peloton in recent months. Customers were complaining about long wait times and canceling orders in response to changes in shipping dates. Management acknowledged that this was an important issue and prioritized action.

"We are investing over $100 million, and [using] expedited shipping to reduce the wait times for our products," CEO John Foley explained in Peloton's most recent conference call, on Feb. 5. "This expense will include air shipments, expedited ocean freight, and incremental cost to get containers to other ports that are less congested."

The investment appears to be working. As of this writing, delivery time for most bikes is now down to one to three weeks. Progress on this front is perhaps one reason management felt confident enough to expand its product availability to Australia starting in the second half of 2021. 

Peloton management is also hoping the closing of its acquisition of Precor, a manufacturer of exercise equipment with two factories in the U.S., will allow it to increase production capacity. 

What this could mean for shareholders

Demand for Peloton's products and subscription services is still growing and there is still plenty of room for expansion. It's easy to forget that its product sales were surging even before the pandemic. Peloton revenue has increased by over 100% for six consecutive years.

Even as over 150 million people have received at least one dose of a coronavirus vaccine in the U.S., and gyms are reopening at a higher capacity, sales for Peloton are not expected to slow much at all. In fact, management has guided for revenue of $4.1 billion in the fiscal year 2021, which would be yet another year of over 100% growth.  

Moreover, it appears that Peloton is reaching a more favorable supply-and-demand balance. The increase in domestic production capacity should help alleviate elevated shipping expenses. Investors looking for a fast-growing stock with good long-run prospects should consider adding Peloton to their list of stocks to buy. 

 

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