Demand for Peloton's (PTON +1.49%) pricey connected-fitness products is tumbling, and with a recession likely looming, the situation probably isn't going to improve anytime soon. There are only so many people willing to spend $1,500 on an exercise bike, which then requires a $44 monthly subscription. And there are even fewer people willing to shell out more than $3,000 for the company's new rowing machine.
Peloton made the mistake of assuming that pandemic-era trends would continue indefinitely, and that was a costly error. The company posted a net loss of $2.8 billion in fiscal 2022 on $3.6 billion of revenue, and cash flow wasn't much better.
On top of having a cost structure that needs some serious trimming, the plunge in demand has bloated Peloton's inventory. The company was sitting on $1.1 billion of inventory at the end of June, even after taking significant impairment charges in the fourth quarter.
NASDAQ: PTON
Key Data Points
An odd partnership
Peloton announced on Thursday that it had partnered with Dick's Sporting Goods (DKS +2.92%). Dick's is Peloton's first retail partner, and the company's connected-fitness products will be available at 100 stores and on Dick's website early in the holiday season.
Getting its products into stores will probably boost sales a bit, but there are some serious downsides. First, by inserting Dick's as a middleman, Peloton is almost certainly going to have to accept a lower gross margin on its products.
The company's gross margin is already pretty terrible. In fiscal 2021, when things were generally going well for the company, Peloton's gross margin on equipment was about 29%. It was negative in fiscal 2022, thanks to inventory write-offs.
In theory, Peloton can make little on actual equipment sales because each piece of equipment requires a subscription to be very useful. But that subscription also makes its products a harder sell, especially when they can now be directly compared to the competition in person.
Picture a Dick's customer stumbling upon the connected-fitness section of the store. They see a Peloton bike and less expensive alternatives, something from Echelon or Schwinn. The Peloton has a built-in screen, which seems nice. But wait -- it requires a $44 monthly subscription! These other bikes don't have a screen, but they also don't have mandatory subscriptions, and you can attach an iPad and use whatever content you want.
Dick's isn't exactly known for being a high-end store. It would have made a lot more sense for Peloton to choose a retailer like Nordstrom, where it wouldn't face direct comparisons with other brands and the customer bases are more aligned. If Peloton is trying to maintain its status as a premium brand, this isn't the way to do it.
Not a positive development
This partnership looks like a way for Peloton to get rid of inventory it can't sell otherwise. Weirdly enough, sales through Dick's will still require in-home delivery and set up via Peloton. That's not the case for competing products, and many customers will probably view this as a headache instead of a convenience.
Peloton seems to be pursing two diametrically opposed strategies at once. It's trying to position itself as a premium brand known for quality, evidenced by the egregiously priced rowing machine it just announced. But it's also trying to throw its brand in front of the masses with this Dick's partnership and its decision to sell through Amazon.
Very few companies can pull such a thing off, and Peloton is almost certainly not one of them. Don't expect the Dick's partnership to move the needle.
