Peloton Interactive (PTON -3.70%) updated investors on Tuesday, Feb. 8, on its sales and operating results trajectory when it released its second-quarter report. Unfortunately for shareholders, management lowered estimates for sales in fiscal 2022 for the second straight quarter.
In 2020 and 2021, customer interest in Peloton's interactive exercise equipment surged in response to pandemic-related shutdowns. As fitness centers temporarily shut their doors to help slow the spread of COVID-19, exercisers scrambled to find alternative options. As 2021 progressed and economies reopened, connected fitness product sales growth abruptly slowed, disrupting Peloton's growth trajectory.
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Peloton management failed to anticipate the abrupt slowdown
The strong slowdown caught Peloton management off guard. Interestingly, Peloton had been quite popular before the pandemic. The company held a several-year-long streak of growing revenue by over 100% year over year. Stay-at-home orders and fitness center closures merely raised the high growth to an even higher level. The surge in demand was so drastic at one point that the company reduced the marketing of its products. Why spend money advertising when customers are searching you out? Heavy backlogs were forcing customers to wait up to 10 weeks for delivery. In the four quarters from June 2020 to March 2021, Peloton averaged a year-over-year sales growth of 168%.
But as the economic reopening gained momentum in mid-2021, sales growth fell to 54% in the quarter ended in June and 6% in September, and 6% again in December. Management expects this slowdown to continue throughout 2022 and forecast full-year revenue to decrease by 6.8% to a midpoint of $3.75 billion in 2022. That's a shockingly stark turnaround for a company that had grown revenue over 100% for seven years straight prior to 2021.
Slamming the brakes on growth is disruptive to a business's operations. This is especially true when management is caught off-guard and hasn't adjusted for the coming change. Judging by Peloton management's aggressive investments in increasing capacity during 2020 and 2021, management thought the surge in sales would be longer-lasting. Now that it is clear this will not be the case, Peloton is recalibrating on the fly.
One move was to end the building of a $400 million manufacturing facility already under construction. The massive expansion project in Ohio was only announced a few quarters ago. Peloton said it would complete a skeleton frame and put the building and the land up for sale as soon as possible. The proceeds should bring much-needed cash to a balance sheet that is getting weaker by the quarter.
Peloton is making further moves that will reduce the workforce by several thousand workers. It will also lower ad spending and take more care in future investments in expansion. Overall, the changes are estimated to lower annual expenses by $800 million. That's a meaningful reduction considering Peloton's forecasted revenue in 2022 of $3.75 billion.
What this could mean for Peloton shareholders
The stock price rocketed higher on the day Peloton reported second-quarter results and announced the changes referenced above. The market was well aware of the sales slowdown and was encouraged by the company's moves to adjust for the missteps, including naming a new CEO. Still, the stock price is down almost 76% from its 52-week high and is trading at a price-to-sales ratio of 2.76.
Shareholders, like connected-fitness subscribers, are getting an exhilarating ride with Peloton. It remains to be seen if they can recover from the difficult workout over the past several months.
