Peloton's Turnaround: Shrinking Losses and Soaring Shares
Peloton, the once-struggling connected fitness company, is showing signs of a significant turnaround. On Thursday, the company announced that it’s emerging from the red, achieving a slight sales increase for the first time in nine quarters while also reducing its overall losses. This positive news led to a remarkable 35% spike in its shares on the same day.
Quarterly Performance Highlights Sales Growth: During its fiscal fourth quarter, which ended on June 30, Peloton managed to grow its sales by 0.2%. While this might seem like a modest uptick, it’s a significant milestone as it marks the first year-over-year revenue growth since the 2021 holiday quarter, a typically strong period for the company. Sales rose to $643.6 million, up from $642.1 million a year earlier.
Loss Reduction: The company also made substantial progress in narrowing its losses. It posted a loss of $30.5 million, or 8 cents per share, compared to a hefty loss of $241.8 million, or 68 cents per share, in the year-ago period.
Revenue Segment Changes: Peloton’s pricy connected fitness hardware sales continued a downward trend, falling about 4% during the quarter. However, there were bright spots in other areas. Subscription revenue rose by 2.3%, and the segment’s gross margin increased by 1 percentage point. Subscription revenue from hardware purchased on the secondary market grew 16% year over year, indicating that Peloton is finding ways to boost its income even as new hardware sales face challenges.
Specific Product and Program Updates Tread Growth: Despite the decline in overall hardware sales, Peloton’s Tread is performing well. After overcoming a costly recall, sales from its treadmill portfolio grew 42% year over year during the quarter.
Bike Rental Program: The company’s Bike rental program also showed positive signs. It helped clear through a glut of inventory, and during the quarter, the average net monthly paid subscription churn for rentals was down 1.1 percentage points. Due to steady demand and depleted refurbished inventory levels, Peloton ceased offering its original Bike rental program on Aug. 1. Since then, there’s been growing demand for its Bike+ rental, refurbished original Bike sales, and financed new Bike sales. The company noted that these alternative programs have stronger unit economics than the original Bike rental, with more cash paid upfront and a better retention profile.
Financial Metrics and Balance Sheet Improvements EBITDA and Free Cash Flow: Peloton delivered adjusted EBITDA and free cash flow for the second consecutive quarter, a feat not achieved since the height of the Covid-19 pandemic. It posted $70 million of adjusted EBITDA, exceeding the $53 million that analysts had expected according to StreetAccount. This metric was up $105 million compared to the year-ago period and $64 million quarter over quarter. Additionally, the company generated $26 million in free cash flow, compared to negative $74 million in the year-ago period and $8 million in the prior quarter.
Debt Refinancing: Improvements to Peloton’s balance sheet also came after it completed a major refinancing of its debt, which staved off a looming liquidity crunch and extended its debt maturities by several years.
Leadership and Future Plans CEO Search: Interim co-CEO Karen Boone stated that the search for Peloton’s next leader is “well underway.” She mentioned that they’ve done extensive vetting and conversations and have narrowed it down to highly qualified candidates. Boone anticipates that the new hire will be in place by the time the company next reports earnings, expected to be sometime in the fall.
Investment and Focus: For the year ahead, Peloton plans to invest in its hardware and software to enhance the user experience. However, its guidance assumes that these new initiatives won’t lead to subscriber growth within the fiscal year, suggesting a shift in focus from growth to profitability and free cash flow generation. The company is also being cautious with its marketing spend, given the uncertain consumer backdrop and macro environment. It cut sales and marketing spending by $25.5 million, or 19% year over year, during the quarter and expects to continue reducing the marketing budget throughout fiscal 2025.
Guidance for Current and Full Year Current Quarter: Peloton is projecting sales to be between $560 million and $580 million for the current quarter, which is lower than Wall Street’s estimate of $609 million according to LSEG. However, it’s guiding to adjusted EBITDA of $50 million to $60 million, higher than the forecasted $45 million according to StreetAccount. The company also anticipates a connected fitness subscriber range of 2.88 million to 2.89 million, below the StreetAccount analysts’ expectation of 2.96 million.
Full Year: For the full year, Peloton expects sales to be between $2.4 billion and $2.5 billion, compared to analysts’ estimates of $2.7 billion according to LSEG. In conclusion, Peloton’s recent performance and strategic moves indicate that its turnaround efforts are starting to bear fruit. While challenges remain, especially in the hardware sales segment and with meeting Wall Street’s expectations, the company’s focus on profitability and balance sheet improvements positions it for a more stable future in the highly competitive fitness industry.