How the mighty have fallen. The once high-flying face of the booming at-home fitness market, Peloton Interactive (PTON -4.12%), has come back down to earth.
The economic reopening and increase in consumer mobility have combined to be a major headwind for the business. Fiscal 2022 first-quarter sales of $805.2 million and a loss per share of $1.25 in the most recent quarter both disappointed Wall Street. Weak guidance made matters worse.
Peloton's stock has crashed more than 40% since the earnings announcement on Nov. 4, and in 2021, the consumer discretionary company has shed nearly 70% of its value. Shareholders need to know what's going on.
Overpromising and under-delivering
With everyone stuck at home and the options for workouts limited, the pandemic was clearly a boon for Peloton. Revenue growth in excess of 100% was the norm for four straight quarters. But the tables have turned.
In the last quarter, sales increased just 6% year over year, dropping sequentially for the second straight time. Peloton did add 161,000 connected-fitness subscribers (those who purchased a piece of equipment and pay the $39 monthly fee) in the three-month period. But compared to the first quarter of 2021, revenue from the sale of its products, which include the Bike, Bike+, and Tread, fell 17%.
Although the price of Peloton's Bike, its flagship product, was lowered by $400 in August, it has so far failed to meet the leadership team's expectations. The business is also seeing a bigger-than-anticipated mix of Bike sales as opposed to the more expensive Bike+, a trend that has negative consequences for the revenue and gross margin outlook.
And even Peloton's existing customers are using the service less. Average monthly workouts per connected-fitness subscriber dropped to 16.6, the lowest it's been since the pandemic started. "Summer months have traditionally seen lower engagement levels, and we expect our first quarter to represent the trough quarter for engagement for the fiscal year," CEO John Foley said during the first-quarter earnings call. Given how poorly he and his team have been at predicting the company's recent financial results, I don't know if I buy his justification.
Overall, it was a horrendous showing for Peloton. Management has substantially disappointed investors for two straight quarterly releases now. The market punishes companies that overpromise and under-deliver.
Missing Wall Street's expectations is one way to upset investors; significantly downgrading guidance is another.
For fiscal 2022, management lowered revenue guidance to a range of $4.4 billion to $4.8 billion, down from the prior estimate of $5.4 billion. And Peloton is expected to end fiscal 2022 with 3.4 million connected-fitness subscribers at the midpoint, 230,000 below what the company predicted less than three months ago.
CFO Jill Woodworth provided some color, saying, "Our revised guidance reflects a reduction in our expected bike portfolio sales and Tread sales versus our original forecast." Demand is softening in a big way, and the uncertain effects of the ongoing economic reopening on consumer behavior, mixed with supply chain problems and component shortages, are a real cause for concern.
If there was any positivity for Peloton's success coming out of the pandemic, I believe it's completely disappeared now. Management's pessimistic tone paints a negative picture.
Shareholders should skip this workout
During an investor day held in September 2020, Peloton leadership boldly claimed that its ultimate goal was to one day have 100 million members. The remarkable pace of growth the business was registering at the time probably made shareholders believe that this lofty target was possible. I don't think this is the case anymore.
The exercise industry has historically been characterized as a fickle market with constantly changing fads to encourage consumer purchases. Even if a company is successful at selling something, getting human beings to stay committed to their diet and workout routine is a more difficult challenge. It doesn't matter how beautiful Peloton's integrated software is or how awesome its instructors and classes are; people still need to be motivated enough to get off their couches, not to mention be comfortable forking over a four-figure sum for a piece of equipment.
Peloton is learning this tough lesson firsthand, and as a result, it's time for investors to part ways with the stock.