What happened
The news at Peloton Interactive (PTON +2.69%), a one-time darling of the pandemic trade, went from bad to worse on Thursday, as media reports described first a planned layoff of 41% of the company's sales and marketing staff -- and then a shutdown of production.
As of 1:15 p.m., Peloton stock is already down 20%.
Image source: Getty Images.
So what
Yesterday, reports from Business Insider of a Peloton plan to lay off 41% of its sales and marketing staff had no immediate impact on Peloton's stock price -- to the contrary, the shares gained more than 5%, presumably on hopes that layoffs would cut costs and boost profits at the exercise bike maker.
Today, however, the news is much worse. Citing internal documents it has obtained from Peloton, CNBC reports that demand for Peloton's bikes and treadmills is evaporating so quickly that the company has decided to "temporarily" halt production. Bike factories will be shut down for two months, and treadmill manufacturing for six weeks, as Peloton tries to bring supply into balance with a "significant reduction" in demand.
As CNBC explained, Peloton has "guessed wrong about how many people would be buying its products," and as a result has "thousands of cycles and treadmills sitting in warehouses or on cargo ships, and it needs to reset its inventory levels."
Now what
Bad as that sounds already, it gets worse.
Early this week Peloton floated plans to charge customers an extra $250 for delivery and setup of its exercise bikes, and an extra $350 for its treadmills. This is, in effect, a price hike -- and a big one. And as we all learned in Economics 101, rising prices tend to push down demand, with the result that Peloton may have an even harder time moving product at higher prices.
Potentially, this could mean that Peloton would need to shut down production even longer as it works through "thousands" of units of exercise equipment that become increasingly stale and obsolete over time.
Suffice it to say, things are looking pretty grim for Peloton right now -- and that's why its stock is falling.
