Earnings season for the quarter ended March 31 is officially underway. The technology sector will start reporting its results at the end of April and continue through May, and while it's important to see how companies are managing this tough economic environment, the quarter was critical for one company in particular.
Peloton Interactive (PTON -0.98%) has been hit with a series of headwinds, from weakening consumer spending to a new social climate free from pandemic restrictions. Those challenges decimated the producer of at-home exercise equipment in 2022, but sweeping changes made by the company's new CEO might have given it new life.
Peloton isn't out of the woods just yet; here's what investors will want to see on May 9, when the company reports results for its third quarter of fiscal 2023.
Image source: Peloton.
Another beat on revenue guidance
Peloton's annual revenue hit an all-time high of $4 billion in fiscal 2021 (ended June 30, 2021), when consumers were awash with government stimulus dollars and the benefits of record low interest rates. Plus, many parts of the world were still under pandemic restrictions, which meant they were confined to their homes and unable to go to the gym.
At-home exercise equipment fitted with digital screens delivering virtual fitness classes to the user's living room was a home run idea in that environment. But in reality, that need was only temporary because consumers really couldn't wait to get back to their normal lives. As a result, Peloton's revenue sank to $3.5 billion in fiscal 2022 and Wall Street analysts expect that decline will worsen in fiscal 2023, with just $2.7 billion in sales in the cards.
Peloton can't change its environment, and the tough economic climate right now is adding to its woes. Fewer consumers are in a position to spend $3,195 on Peloton's new rowing machine, for example, while battling high inflation and rising interest rates. But what the company can do is try to capture more of the demand that already exists by tapping into new sales channels.
That's why it opted to start selling its equipment on Amazon's website and at Dick's Sporting Goods last year. It marked a major shift in Peloton's strategy because up until that point, it had only sold its products through its own physical and online stores.
On Amazon.com, for example, consumers were searching for Peloton's products about 500,000 times per month prior to its deal in August last year, so the company was losing potential sales by failing to meet those customers at the place they wanted to shop.
There have been signs Peloton's new strategy is working. In the second quarter, the company gave investors an upside surprise by delivering $792 million in revenue compared to the $725 million it originally expected. Investors will be looking for another beat in Q3.
Peloton must also continue to cut costs
The largest misstep Peloton made in fiscal 2022 was assuming its sales would grow significantly compared to the peak in fiscal 2021, and setting up its cost structure for that outcome. When revenue actually declined in fiscal 2022 instead, it led to an absolute blowout net loss of $2.8 billion for the year.
From that point onward, Peloton has been in a fight for survival. Its new CEO, Barry McCarthy, was appointed in February 2022 and tasked with turning the business around, and he has made significant progress so far.
He slashed Peloton's workforce from 9,000 to 4,000 employees, and outsourced manufacturing of the company's fitness equipment to Taiwan. He also shrank operating costs; in the first six months of fiscal 2023, Peloton spent 43% less on marketing year over year, 29% less on research and development, and 21% less on administrative expenses.
It resulted in the company's net loss shrinking 8.7% for the period. And after accounting for one-off operating costs like restructuring expenses and settlement payments to suppliers, its bottom line would have looked even better.
In fact, in the second quarter, Peloton delivered $8.2 million in adjusted (non-GAAP) free cash flow, which marked a significant milestone. But it's going to have to achieve true profitability under generally accepted accounting principles very soon -- or break even at the very least -- because the company has just $871 million in cash on hand. It can't afford to lose as much money in the second half of fiscal 2023 as it did in the first half.
That's why I'll be watching its third-quarter results closely. If the company continues to make progress by arresting its sales declines and cleaning up its bottom-line losses, there could be renewed upside potential in its stock after the 94% collapse from its all-time high.
