It feels like an age since pandemic-related lockdowns and social restrictions were lifted. And for Peloton Interactive (PTON 4.29%), that marked the end of the boom in its business.
The maker of at-home exercise equipment was one of the greatest growth stories of 2020 and 2021, as it gave consumers an outlet during a time when gyms were closed, and opportunities for physical activity were few and far between. But with conditions now mostly back to normal, Peloton has been grappling with collapsing sales and steep financial losses.
The company just reported its financial results for the fiscal 2023 full year (ended June 30). While there were apparent improvements thanks to its new CEO, who joined in 2022, the company is clearly still fighting for survival.
Peloton stock plunged 22% to a new all-time low following the release of the fiscal 2023 report, and it's now down 96% from its all-time high. Will a comeback ever be in the cards? Let's explore what the company needs to do.
Peloton's new CEO is racing to transform its business
Barry McCarthy joined Peloton as CEO a little over halfway through its fiscal 2022 year. He brought an impressive amount of experience to the company, having spent over 20 years in senior roles at Spotify and Netflix. He was a fan of Peloton's products, which now include a digitally enabled exercise bike, rowing machine, treadmill, and a host of virtual classes and content to go with them.
He needed to hit the ground running because after Peloton delivered surging growth in fiscal years 2020 and 2021, it adjusted its cost structure for further expansion, which, unfortunately, wasn't materializing. By the end of fiscal 2022, Peloton's revenue had shrunk 10% compared to fiscal 2021, while its operating costs more than doubled. That resulted in a whopping $2.8 billion net loss for the year. The company didn't have enough cash on hand to endure more of the same in fiscal 2023.
McCarthy immediately began slashing expenses. He cut Peloton's workforce by more than half, closed its in-house manufacturing operations in favor of offshoring, and slashed marketing costs. To compensate for the lower advertising spend, Peloton began selling products through third parties, like Amazon and Dick's Sporting Goods, whereas it previously only sold through its own retail channels.
The company also began selling its equipment on a subscription basis. Given that its products are quite expensive -- the Bike+ retails for $2,495 -- it wanted to reduce the up-front cost burden on new customers by allowing them to pay per month. So far, about 48,000 customers have taken up the offer, which isn't a big number, given that Peloton has over 3 million connected fitness subscribers overall, but the offer is still in its early days.
Overall, the McCarthy-led initiatives have succeeded in stabilizing Peloton's financial position. While fiscal 2023 revenue shrank by another 21% compared to fiscal 2022, its net loss narrowed by more than half to $1.2 billion. Now, the company wants to return its revenue to growth over the next 12 months and consistently achieve cash-flow breakeven.
A series of speed bumps might stand in the way
While Peloton has made positive progress over the last 12 months, the path forward is plagued with uncertainty. In May, the company announced a voluntary recall for its Bike product sold between January 2018 and May 2023. Over 2.1 million units are eligible for a new seat post, which poses a small risk of breakage.
It's having a twofold effect on the company right now. First, sales of new Bikes are constrained by shortages of new seat posts, which are instead going toward fulfilling recalls. Second, it has received over 750,000 recall requests so far, more than anticipated, costing Peloton $40 million to date. And that number is expected to rise.
An unexpected drop in connected fitness subscriptions also hurt Peloton in the fiscal 2023 fourth quarter. The company lost 29,000 members on a net basis as hardware sales slowed due to seasonal factors, affecting the acquisition of new customers. Unfortunately, Peloton expects that seasonal weakness to continue, and it issued very weak guidance for the fiscal 2024 first quarter, which points to a sequential revenue drop of as much as 9.6%.
In an economic environment plagued by high inflation and rising interest rates, consumers typically spend money more cautiously. Spending thousands of dollars on at-home exercise equipment might not fit the profile, especially with so many other options available for physical activity.
Image source: Peloton Interactive.
Peloton's fight for survival isn't over just yet
Peloton currently has just $813 million in cash and equivalents on its balance sheet, which isn't much to work with, considering the scope of the task at hand and the size of its net losses. It needs to generate more revenue; otherwise, it will be forced to cut costs further, potentially resulting in a further slowdown in sales and a proverbial death spiral for its business.
Given the slowdown in hardware sales, Peloton is trying to increase its addressable market to include fitness enthusiasts who don't want to own its equipment products at all. In May, it launched three new subscription tiers for its mobile application (one free and two paid), all offering users access to Peloton Gym. It provides unique workout plans and challenges to help users on their fitness journeys -- from running to weight training and everything in between.
While this initiative was off to a hot start, subscriptions fell 16% (year over year) in Q4, and Peloton's guidance suggests another 10% drop compared to the Q4 number in the upcoming quarter.
Circling back to the original question I posed at the top of the piece, I personally don't think Peloton stock will ever return to its all-time high of $162, which valued the company north of $50 billion. Despite recent progress, the 96% plunge in value since then is warranted because there is still a question as to whether Peloton will survive. Until that is answered, most investors will likely view the stock as far too risky to own.
