Peloton Interactive (PTON +6.51%) was a quintessential pandemic stock, performing exceptionally well at the height of COVID-19 and the social restrictions that came with it. The company makes at-home exercise equipment that grew popular among fitness enthusiasts during lockdowns and gym closures.
But those factors have mostly dissipated, and now Peloton is fighting to stay afloat as it faces shrinking sales and falling user engagement. As a result, CEO Barry McCarthy has been slashing costs and last week completed yet another round of layoffs, letting go of 500 employees.
Peloton's workforce is now less than half the size that it was at its peak of 8,600, and the company says the restructuring is finally done. But whether this is the end will depend largely on how popular the company's products are. Peloton stock is down 94% from its all-time high, but should investors be rushing out to buy it?
NASDAQ: PTON
Key Data Points
Some of Peloton's biggest challenges
In fiscal 2022 (ended June 30), Peloton lost a whopping $2.8 billion primarily because sales took a nosedive. After generating over $4 billion in revenue during fiscal 2021, the company was expecting further growth in fiscal 2022, which never happened. Instead, its revenue sank by 11% to $3.5 billion.
Peloton was investing heavily in marketing and innovation, but an increase in sales never followed, which led to the massive bottom-line blowout. Now, the company has just $1.2 billion in cash and equivalents left on its balance sheet, so it simply cannot afford a similar loss in fiscal 2023, and that's why cost cuts are so essential.
Increasing sales from here won't be easy because Peloton faces two key barriers. First, the social environment is totally different now than it was during the height of the pandemic. Gyms have reopened and people are free to exercise outdoors, so there's simply less need for Peloton's products.
Second, the economic climate is incredibly weak right now. Interest rates are on the rise and consumers are tightening their belts, so forking out thousands of dollars for exercise equipment can be a tall order.
Nonetheless, Peloton just released its new rowing machine to give customers another tool in their at-home workout regimen. But with a price of $3,195, it certainly isn't cheap.
Beyond the price tags and the weak economy, users are engaging with their Pelotons at a decreasing rate. The number of average monthly workouts per subscriber has fallen 43% from its pandemic-era high point to just 14.8 at the end of fiscal 2022. Unfortunately, less use is typically a precursor to fewer sales.
Peloton has overhauled its sales model
When a particular product or brand faces declining popularity among consumers, recapturing their attention can be difficult. But Peloton is making some smart moves to meet them where they're at, especially in the online sphere.
Peloton has always sold its products directly to the customer, but it recently cut a deal with Amazon (AMZN 0.41%) to sell its equipment and accessories on its e-commerce site, where the company says consumers search for Peloton about 500,000 times per month. Satisfying those search queries could result in a significant uptick in sales.
Similarly, Peloton products are now available at Dick's Sporting Goods (DKS 0.31%), which already carries a broad range of at-home equipment. It means the Peloton brand will be placed among its largest competitors, potentially generating sales that might have gone elsewhere in the past.
And the company is experimenting with subscription-based pricing to reduce the up-front cost for potential customers.
Image source: Peloton.
Don't rush to buy Peloton stock just yet
Some of the changes Peloton has made in the restructuring have been enormous. For example, part of the company's workforce was laid off because it's no longer manufacturing its own products. Therefore, not only has Peloton overhauled its sales strategy but also its entire production process, and those changes will take time to bear fruit.
There's also no guarantee the moves will yield a sustained increase in sales, and Wall Street analysts predict fiscal 2023 revenue will dip yet again, this time at an accelerated pace of 15%, to $3 billion.
Put simply, completing this restructuring is just the first step on what could be a multiyear road back to sustainable growth, with no shortage of speed bumps along the way. For that reason, it's probably better if investors sit on the sidelines and wait for concrete signs that sales are improving, and that user engagement has stopped heading south.
