Peloton (PTON +4.65%) reported fiscal year 2022 fourth-quarter earnings before the markets opened on Thursday, Aug. 25. The interactive exercise equipment company disappointed investors, and the stock plunged 18% on the day of the announcement.
Peloton overinvested in growth following the boom in sales during the lockdown phase of the pandemic. Sales started falling almost as soon as gyms were allowed to reopen. The lack of foresight has burdened the company with more inventory and manufacturing capacity than it can handle with normal business operations.
NASDAQ: PTON
Key Data Points
Peloton's loss on the bottom line rises nearly fourfold
In its most recent quarter, which ended on June 30, Peloton reported sales of $679 million. That decreased 30% from the $964 million it reported in the same quarter last year. It's a dramatic turnaround for a company that was growing sales at over 100% for several consecutive years, even before the outbreak of COVID-19.
Sure, government-mandated lockdowns of gyms appeared to be great news for Peloton on the surface. Digging deeper, it's apparent that the pandemic has been terrible. In the quarter just ended, Peloton lost $1.2 billion on the bottom line, a nearly fourfold increase from the loss of $313 million in the same quarter the year before.
Sales exploded at the pandemic's onset -- so much so that the company could not keep up with demand. Observing this trend, the previous management team invested aggressively in adding manufacturing capacity. By the time those investments came online, governments had allowed gyms to reopen, and consumer demand for in-home exercise equipment was tanking.
That's why Peloton has gone from a healthy business, growing revenue at over 100% per year while expanding profit margins, to one that is taking extreme measures to stop the bleeding. The new management team led by the newly appointed CEO Barry McCarthy has implemented several rounds of layoffs, divested from in-house manufacturing, taken on hundreds of millions in debt, and signed an unprecedented distribution deal with Amazon (AMZN +3.47%) in trying to right-size the business following the overinvestments.
Peloton noted that the moves are starting to pay off: "In the six months leading up to Q4 2022, we averaged negative free cash flow of approximately $650 million per quarter. We reduced that outflow to $412 million in Q4." That said, it's hard to get investors excited about losing $400 million in a quarter.
Peloton asks investors for patience
Turning around a business the size of Peloton is not an easy or fast thing to do; the new CEO compared it to trying to change the direction of a large ship. Investors were hoping for these changes to have more meaningful impacts more quickly. Instead, in its fourth-quarter shareholder letter, Peloton indirectly asked investors for patience as it worked to correct the overinvestments of the previous management team.
Unsurprisingly, the stock was down nearly 18% on the day of the announcement. Price moves of this magnitude are not very common for companies the size of Peloton. You can understand why the investing community was buzzing about Peloton stock on August 25.
