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Market Insights

Peloton tries to stabilise a wobbling business

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Peloton is a fascinating business. The rapid rise and plunge epitomises everything about this market cycle. The key question we posed in May still applies.

On many levels, FAAS (Fitness As A Service), or connected fitness makes sense as a concept in the digital era. One crucial question for investors now is whether that idea can translate into a solid, profitable business, especially as the global economy searches for post-Covid balance.

The share price has barely moved since then, fluctuating a few dollars either side of the 20 day moving average. Since early May, the highest price posted was $16.18 and the lowest $8.20.


The company will report earnings this Thursday. In the background, new CEO Barry McCarthy has been busy making changes to right the ship and set them on their way again.

Cost-cutting measures are part of the solution. From next year, the fitness firm will cut back the number of retail stores, as disclosed by the CEO in a memo to staff a couple of weeks ago:

“We need to rebalance our e-Commerce and retail mix to drive efficiencies, which means we will reduce our retail presence across North America. This decision will result in a significant and aggressive reduction of Peloton’s retail footprint.

Data tells us that in the post-COVID economy, consumers want a mix of virtual and in-person engagement with the brands they love, meaning a hybrid model of e-commerce as well as limited physical retail touchpoints. We have to meet our prospective Members where they are.

We will provide future updates on which retail operations will be impacted by this decision in the coming months. We do not anticipate closing retail locations in calendar 2022, but the timing is uncertain as we begin negotiations to exit our store leases.”

The company has also turned to outsourcing as it seeks to bring costs down. The era of in-house production is over. Chief Supply Chain Officer Andrew Rendich told Bloomberg News

“We are going back to nothing but partnered manufacturing. It allows us to ramp up and ramp down based on capacity and demand.”

Not only that, they’re also looking to ship the bikes for DIY assembly, rather than delivering them pre-assembled. CEO McCarthy confirmed this last week, saying:

“We’ve been working on it for a while, and it’s a real thing. We’ll continue to cost-reduce the hardware and we will engineer it so that you can assemble it, so that we can ship it via FedEx.”

That last point is another crucial one. Peloton will also expand their work with third-party logistics providers, which means the end of the line for their own delivery workforce. They will also shed a number of member support roles.

Overall, the company expects to cut approximately 800 jobs. McCarthy understands the magnitude of the task and the real-world effects:

“These are hard choices because we are impacting people’s lives. These changes are essential if Peloton is ever going to become cash flow positive. Cash is oxygen. Oxygen is life. We simply must become self-sustaining on a cash flow basis.”

He’s also conscious that cutting costs is only half of the battle:

“In the past you have heard me say we cannot cost cut our way to success. We have to make our revenues stop shrinking and start growing again.” While we’re reducing our workforce in certain areas of the business, we continue to fill roles on key teams to drive the business forward. This includes further commitment to recruiting top talent in key areas of need such as our software engineering team.” “I share this so you won’t think we’re driving with our foot on the gas and the brake at the same time. Success is about making the right investments to drive growth while managing to a cost structure the business can afford.”

Saying all of the right things, making a lot of tough choices. But is the demand there for the products and can the business sustain in a slowing economy?

Expectations for this earnings report are pretty low. According to Bloomberg, consensus estimates are projecting a 27% year-on-year contraction in revenue -- the steepest since Peloton shares began trading -- and the slowest sequential growth in Connected Fitness subscribers, anticipating a mere 22,000 additions from the prior quarter.

It’s a low bar to clear. But is it too soon to expect progress?

Not investment advice. Past performance does not guarantee or predict future performance.

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