The wheels are quickly coming off of Peloton Interactive (PTON +0.58%) in a reopened economy as the thought of exercising at home has lost most of its appeal. Revenues are plunging, losses are widening, and the connected fitness equipment maker was forced to take out a five-year $750 million loan because it is "thinly capitalized."
Peloton has been forced to cut prices on its equipment, introduce new low-cost devices, but also raise its subscription prices in a bid to lure in more customers. The cloudy approach is not working.
The number of connected fitness subscribers will be 2.98 million by the end of the fiscal year, a 28% increase over last year, but below analyst expectations of 3.01 million subscriptions.
Inventories are rising, and it has to write down the value of accessories that have been gathering dust in inventory. The company is in a tailspin with no sense of how it's going to pull out.
Image source: Peloton Interactive.
Spinning its wheels
Fiscal third-quarter revenue plunged 24% year over year to $964.3 million and was down 5% from the connected fitness equipment maker's second-quarter total. Worse, it reported a loss of $757.1 million, or $2.27 per share, compared to a loss of $8.6 million, or $0.03 per share last year, and far worse than Wall Street expectations of an $0.83 per share loss.
And where Peloton had previously been profitable on an adjusted basis, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was a loss of $194 million vs. a year-ago profit of $63.2 million.
It could get worse. Despite lowering the prices of its equipment, it raised the subscription cost from $39 per month to $44 per month and saw an immediate increase in the number of cancellations it handled.
Because most of its subscriptions are month-to-month, people can cancel at any time, but what the price increase portends is that even more people will drop out because the price increase doesn't actually hit until June.
That's playing a role in Peloton's subscriber forecasts and why it's only contemplating a 1% sequential increase in connected fitness subscribers. It just doesn't know what the churn rate will be, though so far, it's been minimal.
NASDAQ: PTON
Key Data Points
A lot of balls in the air
Peloton's new CEO, Barry McCarthy, has had his hands full since joining the company in February. He had to hit the ground running to stabilize Peloton's cash flows, resolve supply chain issues, stop the company's freefall, and ultimately try to get the company growing again.
It's way too early in the process to tell if he can be successful, but the prognosis for the immediate future isn't particularly bright. Peloton is guiding revenue to a range of $675 million to $700 million in the fourth quarter, far below analyst estimates of $820.9 million but also 27% below what the connected fitness guru posted last year.
McCarthy is looking for at least $800 million in annual run-rate savings by Peloton's fiscal 2024 year by realigning the company's spending and revenue, but the immediate impact will continue to be falling sales and worsening profits and margins.
Going nowhere
There are a few interesting programs Peloton is trying, like the bike rental program that it began. Although it's starting small -- McCarthy says about 1,000 orders have been received -- he's hopeful it can build to something more, but there's the very real possibility it could make Peloton's inventory issues even worse.
For Peloton investors, though, this quarter's results mean they're going to have to abide by the old exercise adage of no pain, no gain. They'll be experiencing a lot of pain right now, but with no assurance that there will be any gain in the future.
