Peloton Interactive (PTON 9.43%) thrived during the depths of the coronavirus pandemic as consumers searched for convenient exercise options while being stuck at home. The stock skyrocketed 434% in 2020 on booming customer demand and investor enthusiasm.
But things have taken a turn for the worse. Easing pandemic-related restrictions and normalizing consumer behavior have seriously hurt this consumer discretionary stock, which is down 95% from its all-time high. The revamped leadership team is trying hard to improve the situation. At this point, however, I'm not so convinced they'll succeed.
Let's take a look at three reasons why I made the decision to close my entire Peloton position.
Falling demand and poor financial position
Over the last five fiscal quarters, Peloton lost a combined $3.1 billion. This is a gargantuan sum, and it has happened as a direct result of falling revenue. In fiscal 2022 (ended June 30), sales dropped 10.9% year over year. This was a major reversal of the previous trend when revenue soared 18-fold between fiscal 2017 and fiscal 2021.
Ever since Barry McCarthy took over the CEO role from co-founder John Foley, he has instituted drastic measures in an attempt to raise the chances of the company's survival. Most recently, Peloton decided to lay off 500 employees. This follows several previous rounds of job cuts. What's more, management is cutting costs in areas like manufacturing and logistics. But none of this matters if the business can't find ways to boost demand and stabilize its sales.
Additionally, continuing to post a net loss quarter in and quarter out is only worsening Peloton's financial position. While the company does have $1.3 billion in cash and equivalents, its debt and operating lease liabilities have consistently climbed since last year to $2.4 billion as of the latest quarter. Further losses will only put more pressure on Peloton's balance sheet.
Tough industry to succeed in
Finding long-term success in the fitness industry is known for being extremely difficult. New products and fitness trends come and go, while companies have to bank on customers' discipline to continue sticking to their workout regimens, a poor bet given how often people give up on their new diets and exercise plans.
In Peloton's case, the business not only needed customers to spend a four-figure sum to purchase its high-priced equipment -- already quite the hurdle -- but the company then needs these people to actually use the product and complete workouts every month to feed its subscription business. Average workouts per month of 14.8 and monthly churn of 1.41% last quarter are both trending in the wrong direction for Peloton.
McCarthy has adjusted the pricing of Peloton's products multiple times this year. Furthermore, the company has introduced a new rental program to try to increase accessibility for consumers and get them into the ecosystem. These initiatives have yet to spur material growth, though.
A rare success story in the fitness sector is Planet Fitness, one of the largest franchisors and operators of gyms in the U.S. Planet Fitness appeals to broad swaths of the general public thanks to its low-cost ($10 per month) membership option. But for a premium brand like Peloton, its market opportunity is much smaller, a difficult reality the company has struggled to overcome in the past year.
Turnarounds are difficult to execute
Warren Buffett, arguably the greatest investor ever, has an apt quote that applies in this situation. "Turnarounds seldom turn," he said. Peloton was once on top of the world, approaching a $50 billion market cap. But even new partnerships with Amazon, Dick's Sporting Goods, and Hilton Hotels might not be enough to move the needle for the business. That's probably why McCarthy recently said he gives Peloton six months to turn things around and prove itself as a stand-alone company.
With the U.S. economy potentially on the brink of a recession, it'll become even more difficult for Peloton to boost sales if consumers are struggling to pay for basic necessities like groceries and gas.
I don't think I possess the investing skill and prowess to be able to predict Peloton's ability to change course and right the ship. That's simply too difficult to do at this point, and I've sold out of my entire position. I may revisit the stock in the future but only when I see concrete evidence this business is heading in the right direction again.
