Joe Raedle | Getty Images Peloton on Thursday reported widening losses and falling sales in its fiscal fourth quarter, as the maker of connected fitness equipment tries to win back investors with cost cuts and strategic changes. It marks Peloton’s sixth straight quarter of reported losses. The company said it plans to break even on a quarterly basis in the second half of its 2023 fiscal year. But Peloton CEO Barry McCarthy said he expects the market for connected fitness to remain challenging for the foreseeable future as consumer demand for home exercise machines declines from pandemic highs. “The naysayers will look at ours [fourth quarter] financial performance and see a melting pot of declining revenue, negative gross margin and larger operating losses,” McCarthy wrote in a letter to Peloton shareholders. “But what I see is significant progress driving our comeback and the long-term resilience of the Peloton,” he said. “We still have work to do.” Peloton did not offer an outlook for the upcoming fiscal year 2023. For the first quarter, it said it sees subscribers remaining flat and revenue between $625 million and $650 million. Peloton said this takes into account short-term weakness in demand and seasonal fluctuations in the business. There was a silver lining for the company: This marked Peloton’s first reported quarter where higher-margin subscription revenue accounted for the majority of total sales.
Losses are mounting
Peloton’s net loss widened in the quarter ended June 30 to $1.24 billion, or $3.68 per share, from a loss of $313.2 million, or $1.05 per share, a year earlier. McCarthy said the losses stemmed from Peloton’s efforts to avoid excess inventory, reduce fixed costs and address other supply chain issues. The company earlier this year launched an $800 million restructuring plan. Peloton ended the fourth quarter with $1.1 billion in inventory. Revenue fell 28% to $678.7 million from $936.9 million a year earlier. That was less than the $718.2 million analysts were looking for, according to Refinitiv estimates. Within that figure, connected fitness revenue that includes the contribution from Peloton’s Precor business fell 55% to $295.6 million. Peloton’s connected gross fitness margin was another bleak spot, at a negative 98.1% compared to a positive 11.7% a year earlier. Peloton said it faced higher logistics costs per delivery, increased port and warehousing costs, and charges related to the recall of the Tread+ treadmill. Peloton posted $383.1 million in subscription revenue, up 36% from last year and representing 56.4% of the company’s total sales. McCarthy, who previously worked at Netflix and Spotify, has made it clear that he is more interested in pursuing growth on the subscriber side of Peloton’s business, rather than such an emphasis on hardware. He believes Peloton’s digital application will be core to the company’s future success.
The number of members is decreasing
Peloton ended its latest quarter with 2.97 million connected fitness memberships, nearly flat from the previous quarter and up 27% from a year ago. Connected fitness subscribers are people who own a Peloton product, such as its original bike, and also pay a monthly fee to access live and on-demand training classes. Its total membership, however, fell by about 143,000 people from the previous quarter to 6.9 million. McCarthy, following Foley’s original vision, said the company hopes to one day reach 100 million members. Peloton’s average net monthly churn levels for connected fitness users increased to 1.41% from 0.73% a year ago. The company said that was above its internal expectations in part because of a consumer protection ruling in Canada that forced all customers in the country to approve subscription price increases that took effect in June, and about 85% of them have done so to date. . Peloton said it expected some people to drop their memberships after the price hike. But investors may be wary of the leap. A lower bounce rate would be better news for Peloton, as it means people stick around and keep paying for their memberships. McCarthy said in the letter to shareholders that the fourth quarter should prove to be the “high mark” for write-downs and restructuring charges related to inventory and supply chain challenges. It should also mark the beginning of Peloton’s comeback story, he said. Peloton shares are down about 60% year to date since the market closed on Wednesday. This story is developing. Check back for updates.
