Peloton pedals for its survival. The manufacturer of connected exercise bikes that triumphed during the first stage of the pandemic has seen its sales plummet with the relative return to normality. In its last fiscal year, closed on June 30, it has closed with red numbers of 2,823 million dollars (a similar figure in euros), compared to losses of 189 million dollars the previous year. Revenues for the year have fallen by 11%, to 4,021 million.
The year has gone from bad to worse and the fourth quarter has concentrated the greatest losses, of 1,244 million, after sales sank 28%, to 679 million dollars. However, the company’s chief executive, Barry McCarthy, who took over in February, sees signs of hope: “Naysayers will look at our fourth-quarter results and see a cocktail of declining revenue, a negative gross margin and higher operating losses.” . They will say that this threatens the viability of the business. But what I see is significant progress that furthers our recovery and the long-term resilience of Peloton.” On what do you base your optimism? “Important milestones achieved include new executive leadership, renegotiated supply contracts and a significant reduction in cash consumption,” assures in a letter to shareholders.
It does not seem that McCarthy has managed to spread his optimism to the market. Peloton shares plummeted this Thursday on Wall Street, with falls of more than 15% in the pre-opening, and lose 90% of their value in a year.
Several factors converge in the collapse of Peloton sales. The pandemic is being left behind and outdoor exercise is recovering lost ground compared to sports at home. Inflation has also changed the habits of consumers, who spend more on gasoline and food and have less disposable income for discretionary consumption. In addition, whoever buys an exercise bike has it for several years, especially considering the high prices at which they are sold, starting at around $1,500.
a subscriber business
Partly aware of this, the company has tried to become a business of subscribers who pay a fee for training. McCarthy hails from Netflix and Spotify and tries to emulate that model. In the fourth quarter, for the first time, the subscriber business, with 383 million dollars, has surpassed in revenues the sales of handsets, with 296 million. But that was due more to the 50% collapse of the second than to the 4% growth of the first. Furthermore, after initial rapid growth, the company has warned that it has only gained 4,000 subscribers in the last three months and that it expects the number of subscribers to remain flat in the current quarter.
“We are on track to achieve positive and sustained free cash flow,” says McCarthy. But that road is long. The company had been burning through $650 million of cash per quarter, an outflow that has shrunk to $412 million in the fourth quarter. “Our goal is to break even on quarterly cash flow in the second half of FY23. We’re still making progress, but we still have work to do,” says the company’s CEO. The company has 1,200 million cash and lines of credit for 500 million. You can’t afford to keep burning cash much longer.
Of the $1.2 billion operating loss in the fourth quarter, $415 million was due to restructuring charges to adjust costs, reduce excess inventories and resolve supply chain issues. The company has closed its factories in Taiwan, has canceled the project of another plant in Ohio, and has instead outsourced production, to try to convert fixed costs into variables based on demand. It has also restructured its distribution channels, which has led to the departure of 760 employees. Recently, it has announced a deal with Amazon for the e-commerce company to sell its bikes. In addition, instead of personalized advice for assembly, they have chosen to encourage users to assemble their devices, as with Ikea furniture.
Along with that, the company has readjusted its pricing policy. It has disposed of excess inventory, has decided to keep the entry price low for the simpler bikes and raise the prices of the higher-end ones. In parallel, it is reinforcing content creation for its subscribers, even signing up stars like Ashton Kutcher for training sessions.
McCarthy recalls in his letter when he was a high school student and interned on a freighter. One day the alarms sounded (“fear is a great motivator, I got dressed while I was running,” he recalls) and after a difficult maneuver in which the steel hull shook, the ship managed to maneuver and save two men adrift in the Mediterranean. “Platoon is like that freighter. We’ve raised the alarm at headquarters. Everyone is at their post. We continue to add elements to evolve our go-to-market strategy and regain growth. The question is when will the ship respond? finish your letter.
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