Peloton Interactive (PTON 2.62%) wants to upend its entire business in a bid to reverse collapsing sales, but the dramatic change it's making is more likely to do long-term damage to the company.
Despite its stock suffering a massive 80% loss in value over the past year, there is still plenty of air beneath the shares, and investors would do well to avoid Peloton until it can prove it can grow its base once again.
Image source: Peloton Interactive.
Pay as you go
The pandemic proved to be a boon to Peloton as stuck-at-home consumers bought up its pricy workout equipment. But the momentum proved to be short-lived and sales quickly evaporated as a reopened economy proved gyms, fitness centers, and even the great outdoors were a more hospitable environment for working out than getting all sweaty in your living room.
Peloton admitted it badly misjudged the market's response to once again being able to participate in out-of-home activities and entertainment, but The Wall Street Journal reports Peloton Interactive is testing out a new business model that would allow consumers to purchase a monthly subscription for $60 to $100 and in return receive one of its exercise bikes and a monthly workout subscription.
One of the hurdles Peloton has faced is the fact that its high-priced exercise equipment is a luxury item. It had lowered the price of its gear, but its base Bike starts at $1,495 while its lowest cost treadmill begins at $2,495. A person could just subscribe to the workout classes without having to buy any equipment for $13 a month, and it has 2.7 million people enrolled in its connected fitness classes, but that's hardly the sort of high-growth business investors signed up for.
New CEO Barry McCarthy is hoping that by giving a Bike and a subscription for a monthly fee, it will be a more affordable option for consumers. He's probably not wrong, but because a person can cancel a subscription at any time without penalty (Peloton will repossess the Bike at no charge) it's opening the equipment maker up to having a lot of used inventory on hand.
Inventory congestion risk
We all know what resolutions to get healthy are like, whether they're to go on a diet or get more use out of that gym membership. More often than not we go strong for a couple of months before it peters out. It's been estimated two-thirds of people set fitness goals, but nearly three-quarters quit before achieving them.
Not that Peloton should impose a penalty on consumers who cancel their subscriptions, but how many people will be willing to continue paying a C-note every month once their initial enthusiasm for working out subsides?
Peloton Interactive hopes users will see an incentive to maintain their subscription and workout schedule, but the risk seems higher for the opposite to happen.
Inventory issues are already a problem for Peloton, and maybe that's part of the reason it's trying this new business model. In the fiscal second-quarter earnings conference call, CFO Jill Woodworth cited the company's much higher-than-normal inventory levels as the reason it's cutting production. It didn't expect to return to historical norms until the end of 2023.
However, it's opening up the potential to have a lot of used inventory sitting around that it would presumably then need to sell at a discount.
Pain without gain
The new subscription model is only being tested in select stores in a handful of states, so Peloton is not upending its business all at once.
The risk, though, is that a strong initial response to the program, which is quite possible, sends Peloton the wrong message and induces it to broaden the program nationally, which is where a turn for the worse could happen.
With Peloton's founder still controlling the company, little to no chance the company will be put up for sale, and a risky new business model being tested, investors would be better off staying on the sidelines until it can show some sustained, meaningful improvement.
