Peloton's (PTON -7.32%) business seemed tailor-made to thrive during a pandemic. The company sells in-home interactive exercise equipment, a product high in demand when gyms close their doors. Unsurprisingly, sales soared for Peloton. So much so that it had trouble keeping up with demand.
It invested in expanding capacity to correct what management saw as a persistent imbalance between demand and supply. That expansion was an overshoot, as demand quickly slowed when gyms started reopening. At least when demand outstripped supply, it was not hurting Peloton's financial position. With too much capacity, the expenses are hurting the bottom line.
Peloton's stock has been down by 94% as a result. However, all is not over for Peloton. Here are three ways it can bounce back after the crash.
1. Sell excess inventory
As of its fiscal third quarter, which ended on March 31, Peloton had $1.4 billion of inventory on hand. That was a meaningful increase from the $937 million it had at the same time in the year before. The reversal in revenue growth has been sudden and sharp.
PTON Revenue (Quarterly YoY Growth) data by YCharts
Sales in connected fitness products fell to $594 million in the quarter that ended in March, down from $1.02 billion in the same quarter last year. That's a surprising decrease for a company that had grown accustomed to expanding revenue by over 100% for several years, even before the outbreak. The slowdown has extended over its most recent nine months, where connected fitness product sales were down by more than $600 million.
The inventory buildup is straining its cash balance, which fell to $879 million from $1.1 billion the year prior. If Peloton can sell that excess inventory, it would go a long way to add cash to its coffers, decrease the expense of storing the products, and give investors confidence in the company's balance sheet.
2. Lower expenses
Another consequence of the over-investment in capacity was that it increased Peloton's recurring expenses. These are costs the company must pay regardless of the level of sales. As you might imagine, these are not ideal to have during declining sales like Peloton is experiencing.
PTON Total Operating Expenses (Quarterly) data by YCharts
In its most recent quarter, Peloton's total operating expenses more than doubled to $920 million. Meanwhile, total revenue declined by nearly $300 million. This led to losses on the bottom line of $757 million. Management is working to stem the losses, but they say it will take time. Peloton has initiated plans to lower annual operating expenses by $800 million by 2024.
If it can demonstrate progress on this front or even reveal more areas of possible reduction, it will go a long way to assuage investors' concerns about losses on the bottom line.
3. Stop bleeding money
Finally, and perhaps as a consequence of success in steps one and two mentioned above, Peloton needs to stop bleeding money. The company lost $1.7 billion in cash from operations in its most recent nine months. Considering that it has $879 million in cash on the balance sheet, you can see that Peloton cannot continue for very long at this rate.
The heavy cash losses are raising concerns about its need to raise equity through a stock sale or taking on more debt, both undesirable now. The stock is down 94% off its high, not an ideal time to raise cash through equity. Further, borrowing money when your financial condition is as poor as Peloton's will likely require paying a higher interest rate to lenders.
Therefore, if Peloton can stop bleeding cash, it would reduce that worry and could boost the stock price in response.
