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Peloton Earnings: Recall of the Tread+ Will Cost $165 Million

By Parkev Tatevosian - May 11, 2021 at 7:34AM

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The third-quarter numbers were better than expected across the board, but much of the focus at Peloton lately is on the recall.

Peloton Interactive (PTON -2.16%) reported its fiscal year 2021 third-quarter results last week and the No. 1 question shareholders had on their minds was: How much is the Tread+ recall going to cost? 

In March, the U.S. Consumer Safety Protection Commission informed Peloton (CPSC) it had concerns over the safety of its Tread+ product after tragic injuries (and at least one death) were reported involving children. After hesitating initially, Peloton issued a recall of all Tread+ products on May 5 and offered full refunds. Management also apologized for its initial hesitation and acknowledged that it should have moved quicker to issue the recall.

During the earnings conference call, management anticipated this would be top of mind and was prepared to answer questions. In short, the company said the recall will cost $165 million, but there is more to the story.

a runner eworks out on a Peloton Tread+ treadmill in a home

Image source: Peloton.

The recall was not as bad as expected

The $165 million can be broken down into three components: lost sales ($105 million), an increase in return costs ($50 million), and three months of waived subscription fees ($10 million) for the affected users. Not so bad, considering Peloton is guiding investors to expect it to report revenue of $915 million in the fourth quarter. 

Even though the recall was the most important issue to investors, it was not the only focus of interest. Peloton reported impressive revenue growth of 141% from the same quarter last year. Demand for its products continues to soar, giving shareholders a bit of relief after some worries that orders for its products could fall as fitness centers are allowed to reopen.

Still, the revenue growth news wasn't enough to grab the spotlight from concerns about the product recall. On the earnings conference call the first question from analysts regarded the recall and concerns with how long it would take to fix the issue. The questioner also asked about how the Tread recalls might affect the sales of the Bike products that Peloton is better known for.

CFO Jill Woodworth's response on the Bike part of the question was upbeat: "...We have baked in some modest impact to Bike and Bike+ sales, but we think that will be temporary, and we don't think there will be any long-lasting impact."

Beyond the recall 

As already mentioned, revenue grew 141% in the quarter, ahead of estimates, and continues the trend of triple-digit percentage revenue growth. It's easy to forget that Peloton has been growing revenue by triple-digit percentages annually for six years in a row. Sure, the pandemic added fuel to the fire, but sales were white-hot even before.

Moreover, Peloton is nearing a resolution of another problem it has been grappling with for several quarters: the backlog of orders and longer-than-usual delivery times. In fact, the acceleration of shipping times through the increased use of (somewhat more expensive) air freight rather than ship freight and some increase in production levels has helped pull forward revenue from the next quarter into the third quarter.

Peloton is trading at a forward price-to-sales ratio of 6, which is about half of what it was trading for earlier in the year. Share prices of the interactive exercise equipment maker are down about 49% from 52-week highs set in mid-January. About 9.5 percentage points of that drop came since the recall was officially announced on May 5. That opens the window of opportunity for investors who are looking for a fast-growing company at a reasonable price and who understand the short-term volatility that comes with owning a strong growth stock like Peloton.

Parkev Tatevosian owns shares of Peloton Interactive. The Motley Fool owns shares of and recommends Peloton Interactive. The Motley Fool has a disclosure policy.

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