Peloton's (PTON 2.59%) pricey connected exercise bikes were a hit during the worst of the pandemic, driving massive growth and incredible gains for the stock in 2020. But the company made a critical error. Instead of viewing this demand for what it was -- a temporary increase likely to fade along with the pandemic -- Peloton went into investment mode. It poured resources into its logistics operations and drew up plans to build its own $400 million U.S. factory.
Those investments have been a disaster. Peloton is facing plunging demand for its products and rising costs to deliver those products. The company originally expected to generate $5.4 billion of revenue this year. That guidance has now been slashed multiple times to $3.8 billion at most. Revenue topped $4 billion in 2021.
Costs are out of control. Peloton's operating expenses nearly doubled in the second quarter, eating up more than 60% of flatlining revenue. That's a big problem for a company that sells its equipment nearly at cost. Gross margin for Peloton's bikes and other exercise products was just 6.4% in the second quarter.
Image source: Peloton.
Undoing its mistakes
It took longer than it should have, but Peloton has finally recognized that its growth story is dead for now. The company announced a series of moves on Tuesday that will help bring down its exploding costs.
Peloton is abandoning its plans to build a U.S. factory. Capital expenditures for the year will drop by $150 million from the previous plan as a result, and the company will spend around $60 million on the unwinding process.
On top of the manufacturing rollback, Peloton will cut its owned and operated network of warehouses and delivery infrastructure. The company will instead scale up relationships with third-party logistics providers.
Significant layoffs are part of the plan as well, and not just related to logistics and manufacturing. Peloton plans to cut around 2,800 jobs, reducing its corporate workforce by 20% in the process. The company is aiming to reduce annual costs by at least $800 million, partly through operating expense reductions, and partly by greatly improving the margins for its equipment.
Overseeing this process will be new President and CEO Barry McCarthy, who previously served as CFO at both Spotify and Netflix. Previous CEO and founder John Foley will become executive chair. McCarthy is nearly 70 years old, so he'll probably serve the role of a fixer CEO who hands off the reins once the mess has been cleaned up.
Don't bet on an acquisition
Shares of Peloton have surged recently as rumors of an acquisition from the likes of Amazon, Apple, or Nike have started circulating. While this is certainly possible, it seems unlikely. Peloton is still worth around $12 billion, or more than 3 times its sales guidance, and it's hemorrhaging cash. An acquisition premium would raise the price tag even further.
The brand and the subscriber base are certainly worth something, but future demand is highly uncertain. Peloton is ultimately a luxury brand that temporarily went mainstream during the pandemic. There are plenty of alternatives for people looking for a home workout, and exercisers are increasingly heading back to the . There's really nothing special about Peloton.
By slashing costs and pulling back on its growth ambitions, Peloton is capable of eventually turning itself into a sustainable and profitable business. My guess, though, is that version of Peloton isn't worth $12 billion.
