The results were grim: in a letter to shareholders, CEO Barry McCarthy (who took over the reins in February after John Foley was ousted) outlined key takeaways from a quarter marked by declining sales, an accumulation of inventories and significant cash losses. He noted that the company ended the quarter “low capitalized” with $879 million in unrestricted cash and cash equivalents and signaled that management was focused strongly on developing a recovery plan. “Turnarounds are hard work,” he said.
Following the news, shares of Peloton fell 16% in premarket trading this morning.
What do the results show?
● The company reported a net loss of $757.1 million, or $2.25 per share, in the quarter, a dramatic change from the same period last year, when net losses were 8 $.6 million, or 3 cents per share. The loss is much greater than the projections showed; analysts had estimated a share loss of 83 cents.
● Revenue fell almost 27% year over year (YoY), from $1.26 billion to $946.3 million. The decline exceeded analysts’ estimates. The company attributed the revenue losses to a dramatic drop in demand as consumers return to gyms after the pandemic. The loss was partially offset by an increase in treadmill sales.
● Peloton recorded a negative return on equity of 59.67% and a negative net margin of 27.48%.
● During the quarter, the company made $594 million in sales for its connected equipment and $370 million for user subscriptions. At the end of the quarter, Peloton had 2.96 million fitness-connected subscribers, a net increase of 195,000.
● The company also reduced its churn rate compared to the previous quarter: the monthly churn rate of its Connected Fitness subscribers was 0.75%, compared to 0.79% in the second quarter. This is good news for Peloton as it increasingly focuses on growth through subscriptions. “The challenge and opportunity today is to maintain and expand this success,” McCarthy wrote in his letter, referring to subscriber retention.
● Overall, the company’s stock is down 80% over six months. As of Monday’s market close, Peloton stock was at $14.13 per share, down nearly 69% from its IPO price of $29 in September 2019.
What is Peloton’s recovery plan?
● With only $879 million in unrestricted cash and cash equivalents, the company is rethinking its capital structure, in line with McCarthy’s letter to investors.
● Part of the company’s recovery plan was clarified earlier this week, when Peloton signed a deal with Goldman Sachs and JPMorgan – both of which backed the company’s IPO in 2019 – to borrow $750 million dollars on five-year term debt. With the loan, McCarthy predicted that the company’s free cash flow would be “significantly better” by the fourth quarter and suggested that Peloton would be able to generate positive cash flow by fiscal year 2023.
● Management sketched a poor sales outlook for the coming quarter, citing “weaker demand” compared to the company’s February forecast, which McCarthy said in its letter to investors was “partially offset by the sales acceleration that we have seen following our recent hardware price reductions.
● The fitness equipment maker also hints that it could lose many users in the next quarter due to planned price increases for its subscriptions. However, the company’s management appears to view subscription revenue as a central part of its financial strategy. Even so, Peloton expects its fitness subscriber count to grow just 1% in the next quarter.
● Peloton plans to focus more on marketing its digital app in the coming months. He has enjoyed success in recent months; digital app subscriptions grew 10% year-on-year. But McCarthy said he sees a major opportunity: to use the app as a tool for growth. As it stands, unaided awareness of the digital app in the US hovers around 4%, which the executive acknowledges is “pretty low”. He says it’s time to make the app the centerpiece of the brand’s marketing strategy. “We are still known primarily as a stationary bike company. The app has never been central to our marketing campaigns or growth strategy. The digital application must become the tip of the spear. »
● From a more general point of view, the company is rethinking its marketing priorities. It shifts its focus from subscriber acquisition cost (CAC) to new profit metrics based on long-term value added. “Looking forward, as we play for scale, we focus on customer lifetime value (LTV), which is the net present value of gross profit per subscriber over the expected lifetime of the subscriber. “, McCarthy said in his letter. . “We do this because we maximize profit when marginal cost equals marginal revenue, or in our case when marginal CAC equals our marginal LTV.” He admits that while high customer acquisition costs can equate to immediate losses, new subscribers drive value for the business through long-term LTV. He cites Netflix and Spotify (both of his former employers) as good examples of the promise of the LTV-focused marketing strategy.
● As part of its growth plans, McCarthy also said Peloton plans to start selling its gear through third-party retailers in the near future, a break from its existing model.
● To address an excess inventory issue seen in the third quarter, McCarthy said the company was working quickly to adjust production levels appropriately.
● Generally speaking, it is clear that Peloton is experimenting with payment models in an effort to gain more users and increase profitability. In addition to a renewed focus on subscriptions rather than equipment sales, the company is trying new tactics. McCarthy said in the letter that the company plans to expand a trial it ran earlier this spring that lets customers pay a bundled flat rate for a stationary bike plus a fitness membership. To achieve its overarching goal of reaching 100 million subscribers, the company also hopes to expand into other international markets, although the timeline for that growth is unclear. McCarthy admitted in his letter that the goal is “very, very far from where we are today.”
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