Peloton shares drop 20% after posting wider-than-expected loss, falling sales due to Bike recall, seasonality

John Smith | Corbis News | Getty Images
  • Peloton reported its results Wednesday for a quarter its CEO warned would be among its most challenging.
  • The connected fitness company posted a wider-than-expected loss but beat sales expectations.
  • Peloton's shares plunged off the news, opening 20% lower.
The exterior of a Peloton store is seen on February 05, 2022 in Dusseldorf, Germany. 
Jeremy Moeller | Getty Images
The exterior of a Peloton store is seen on February 05, 2022 in Dusseldorf, Germany. 

Peloton on Wednesday reported a wider-than-expected loss and a quarterly drop in new subscribers that it blamed on its recall of its Bike seat post and seasonality, sending shares plunging about 20%.

The company fell short of analysts' earnings estimates but beat sales expectations.

Here's how the fitness company did in its fourth fiscal quarter compared with what Wall Street was anticipating, based on a survey of analysts by Refinitiv:

  • Loss per share: 68 cents vs. 38 cents expected
  • Revenue: $642.1 million vs. $639.9 million expected

The company reported a net loss of $241.8 million, or 68 cents per share, for the three-month period that ended June 30, compared with a loss of $1.26 billion, or $3.72 a share, a year earlier. 

Sales dropped to $642.1 million, down $678.7 million a year earlier.

The company's fiscal fourth quarter, which falls during the summer months, is traditionally slow not just for Peloton but also for other fitness retailers. Consumers have a tendency to pull back on workouts during the season as they travel and take part in other summer plans. 

In May, CEO Barry McCarthy warned the fourth quarter would be among its most challenging from a growth perspective. For the first time, Peloton projected a decline in subscribers.

It ended the quarter with 3.08 million subscribers, up 4% year over year and in line with the company's expectations. But compared with last quarter, subscribers declined by 29,000. Peloton attributed the drop to a "seasonal" slowdown in hardware sales and higher-than-anticipated churn.

"Peloton's FYQ4 performance is a reminder we operate a seasonal business," McCarthy wrote in a letter to shareholders.

"The slowdown exceeded our expectations through May and through the first three weeks of June as consumer spending shifted toward travel and experiences," he wrote. "Then eight weeks ago the trend reversed itself, and we began to see a reacceleration in hardware sales."

Peloton also believes the recall of its Bike seat post, which had a tendency to detach and break unexpectedly during use, created more churn than it expected. The metric stood at 1.4% for the quarter. The company suspects 15,000 to 20,000 people decided to pause their monthly subscriptions during the quarter while they waited for their seat post to be replaced.

The recall, announced in May, impacted more than 2 million Bikes the company had sold since January 2018 and cost $40 million in the quarter, far more than Peloton expected, McCarthy said. To date, the company has received 750,000 requests for replacement seat posts, which is also more than it had anticipated. So far, Peloton has fulfilled 340,000 requests and expects to wrap up the rest by the end of September.

Peloton narrowly reached positive free cash flow status on an adjusted basis, but doesn't expect that will last during the next two quarters due to expected slowdowns in hardware sales, timing of inventory payments, marketing spending and the cash needed for the seat posts. However, it does expect to reach free cash flow positivity in the second half of fiscal 2024.

In premarket trading, Peloton's shares plunged about 30%, but they regained some ground after the market opened. McCarthy commented on the stock price during his call with analysts, saying there is "enormous disconnect between the stock price" and the work the company is doing to drive growth.

"I don't mean to sound like one of those CEOs who's completely disconnected from the stock price, because it's not lost on me," said McCarthy. "But I have never been more optimistic, more excited about the future of the business."

Strategy changes on the path to growth

McCarthy, a former Netflix and Spotify executive, has spent the last three months focusing on new strategies aimed at getting the fitness company back on a path to growth.

The company has been working to capture customers who don't have thousands of dollars to splurge on a stationary bike or treadmill by offering a rental program and a certified refurbished option. The rental service, which recently launched in Germany, now has more than 48,000 subscribers. The refurbished line brought in 6,500 sales during the quarter. 

Both are "proving to be important growth initiatives," McCarthy told shareholders. 

Part of that strategy is the company's rebrand under the guidance of its new Chief Marketing Officer Leslie Berland, a former Twitter (now known as X) executive. The retailer has positioned itself as a fitness company for all that is just as invested in its app as it is its pricey connected fitness products, such as its Bike, Tread and Row. 

In May, it unveiled a series of new pricing tiers for its fitness app that includes an unlimited free membership option (with no credit card required) and levels that cost $12.99 and $24 monthly. The app allows consumers to watch Peloton's fitness classes and build their own workouts from wherever they are, including their gym. 

Since the relaunch, the company has clocked more than 900,000 app downloads, over two-thirds of which were non-Peloton members. It is also seeing more purchases of its higher-priced membership tier than it expected. It ended the quarter with 256,000 free monthly active users.

"The anytime, anywhere, anyplace message is absolutely landing," McCarthy said on a call with analysts.

"The last objective [of the relaunch] was to remind people that, and particularly with the launch of the app, that it's more than just a stationary bike company and that message is also finding traction."

Peloton is also seeing "meaningful positive shifts in perception across a range of measures" including gains among Gen Z consumers and others who may be older but still new to fitness. Peloton is also seeing a shift in the types of people who are downloading its app toward men, Gen Z, Black and Hispanic consumers.

As part of the rebrand, Peloton is beginning to offer a variety of "limited edition bike frame colors and graphics to both the consumer and commercial markets," McCarthy said.

"For the last ten years Peloton has been the Henry Ford of stationary bikes. We sold any color bike frame you wanted as long as you wanted black," he told shareholders. "I'm excited to announce a change in strategy. ... Expect to hear more about this exciting initiative this fall."

Peloton has also been leaning into its business-to-business strategy to further drive revenue and capture new customers. Earlier this month, it announced the launch of Peloton for Business, which allows companies to offer access to the app and its connected fitness products through its benefits offerings. 

Clients include Volvo, which has Peloton bikes in its company fitness center and offers employees access to the Peloton app, its all-access membership and discounts on hardware, including the Bike, Bike+, Tread and Guide. Dropbox offers a similar package to its employees. 

Peloton also launched a new program aimed at partnering with NCAA Division 1 schools. The new strategy kicked off Tuesday with its announcement that it will be partnering with the University of Michigan to create co-branded Peloton bikes that will be used at the school's various fitness facilities – and along the sidelines at the school's football stadium, known as the Big House. 

"Expect to hear more announcements about additional global partners in the weeks ahead," McCarthy said.

It also launched a new discounted offering for college students of its "One" tier, which typically costs $12.99 a month but will be cut to $6.99 a month.

Read the full earnings release here.

Copyright CNBC
Contact Us