Peloton (PTON 4.76%) reported fiscal 2022 second-quarter results on Wednesday, Feb. 8. The company is reeling from an abrupt reversal in growth as economies reopen. The slowdown is sharper than management anticipated, forcing the company to rethink its strategy.
In that regard, the market was pleased with Peloton's plan in the Q2 report that calls for aggressive cost-cutting and rightsizing of its manufacturing capabilities. The stock was up sharply on the day of the announcement.
Peloton thought growth would continue despite reopening trends
It's understandable why management made significant investments in expansion over the last several quarters. Peloton was growing sales rapidly and having difficulty keeping up with demand. Early in the pandemic, customers were waiting up to 10 weeks to receive orders made with Peloton. Against that backdrop, management felt confident increasing capacity.
The variable Peloton miscalculated most prominently was the sharp reversal in customer demand when economies reopened. In the six months ended Dec. 31, connected fitness product sales decreased to $1.3 billion from $1.47 billion during the same time the year before. The total decrease may not appear significant, but it looks drastic when considering that Peloton grew overall revenue by 120% in 2021.
Meanwhile, Peloton made a $400 million acquisition, expanded existing manufacturing facilities, started construction on another manufacturing plant, and more. It seems that investments were made assuming that growth would remain high for several years. Regardless, the costs are weighing heavily now that growth has reversed.
In its most recent quarter, ended Dec. 31, Peloton lost $439 million on the bottom line. At the same time last year, it earned a net profit of $64 million. In the six months ended Dec. 31, the losses on the bottom line have reached $815 million.
Management realized this was unsustainable and made considerable changes to rightsize the business.
Perhaps reading the sentiment from shareholders and the market, Peloton started its changes at the top. Founder and CEO John Foley said he would be resigning as CEO and assuming the executive chair of the board of directors. Barry McCarthy, a former CFO of Netflix, will take over the CEO role at Peloton.
Further, Peloton announced a sweeping corporate restructuring aimed at, among other things, optimizing the supply chain and enforcing greater investment discipline. Management expects the changes to result in cost savings of $800 million annually. Peloton has already lost $815 million on the bottom line in six months in fiscal 2022, so it's uncertain if the changes will be enough to return it to positive net income, but it will help, to be sure.
The savings will come from laying off workers, reducing marketing spending, rethinking its brick-and-mortar locations, and tightening the budget in other areas. Maybe this means no more clap-back commercials when it doesn't like how its products are portrayed on TV.
Overall, the magnitude of the adjustments highlights that Peloton understands it overinvested and is now correcting the folly.