If there was ever a time for Peloton (PTON -2.24%) to get back on track, this month was it.
As a discretionary, luxury-priced item, Peloton bikes and treads are exactly the kinds of products that see a surge in demand during the holiday season. If a loved one loves to work out at home, a Peloton probably makes a great gift. Similarly, January is when gym sign-ups and interest in fitness spike as people make new year's resolutions and look to start the new year on a healthier footing.
Image source: Peloton.
While that would normally qualify as a significant tailwind for Peloton, there was a bonus element for Peloton this year: The omicron variant has swept the nation, with the seven-day average of daily COVID-19 cases in the U.S. temporarily jumping to nearly 1 million. There are already signs that omicron had zapped what looked to be a steady recovery for gyms, and many Americans are avoiding crowded spaces again.
Against that backdrop, in addition to the cold winter months, Peloton figured to be a winner. It offers a great alternative to going to the gym, and this time of year is seasonally its strongest.
So the timing of the news that Peloton had halted production of its bikes and treads, according to a CNBC report, seems especially problematic. It wildly overestimated demand for its products -- and if customer demand is underwhelming now, it will only be worse over the rest of the year as the weather warms, the omicron wave passes, and people return to gyms.
Management strikes back
After Peloton stock dropped as much as 27% on Jan. 20 in response to the CNBC report, the company issued a preliminary earnings report that seemed to quell the investor panic.
It said revenue for the fiscal second quarter, which ended Dec. 31, 2021, would be $1.14 billion, within its guidance of $1.1 billion-$1.2 billion, and up 7.1% from the year-ago quarter. It also continued to grow its Connected Fitness subscriber base, reaching 2.77 million -- which was below guidance of 2.8 million to 2.85 million but represented an increase of 280,000 subscribers from the previous quarter.
Adjusted EBITDA loss will be narrower than expected, at $260 million to $270 million, and its churn remained low at 0.8%.
Management also denied that it was halting production, though it did say it was considering job cuts and other ways of cutting costs.
What was left unsaid in the preliminary earnings report, though, seems to be another warning for investors. Peloton's equipment sales almost certainly fell for the second quarter in a row. The company doesn't necessarily need to grow sales of bikes and treads for the business to be successful if it can maintain its low churn rate, but declining equipment purchases seems to signal flagging enthusiasm for the overall brand and the connected fitness experience it's selling.
While it's too soon to call Peloton a pandemic fad, and that doesn't seem correct with its subscriber base still growing, management's expectations have been significantly disconnected from the reality of customer demand. Peloton can try to correct that with cost cuts, but it can't reverse the $420 million Precor acquisition it made, and it's already broken ground on its first dedicated factory, Peloton Output Park in Ohio, which is expected to begin production in 2023.
If equipment sales don't return to growth, the path to success for the company looks extremely narrow. Subscription growth alone isn't enough. Not only does the company face headwinds over the rest of the year due to seasonality and the passing of the omicron wave, but it's dealing with several of its own unforced errors that won't be easy to unwind.
