In this photo illustration the Peloton Interactive logo seen displayed on a smartphone screen.
Raphael Henrique | light flare | Getty Images
Peloton founder John Foley, who is set to step down as CEO, issued a mea culpa on Tuesday for past missteps as the connected fitness company undergoes massive restructuring.
“We own it. I own it. And we hold ourselves accountable,” Foley told analysts on a conference call. “It starts today.”
The company has cut its financial targets for the full year as it continues to lose money. Peloton said it expects to achieve at least $800 million in annual savings and will cut planned capital expenditures by about $150 million this year. As part of these efforts, about 20% of its workforce, or about 2,800 people, will lose their jobs.
Chief Financial Officer Jill Woodworth said there would be cuts in real estate and marketing, with no segment of the business on the table for resizing. Foley described the whole experience as “humiliating”.
As analysts and investors digest all the announced changes, including the appointment of new CEO Barry McCarthy, they must now also reassess what kind of business Peloton will emerge from the Covid pandemic. The potential market for fitness equipment may have been artificially inflated by the health crisis, which has forced many people to temporarily step away from gyms.
Peloton, in turn, has set ambitious goals for its total addressable market. But it’s unclear if he’ll still be able to achieve those goals. Stocks are rallying, however, as investors believe Netflix and Spotify veteran Barry McCarthy could be the one to help bring it closer.
The company previously said its total addressable market was 67 million households worldwide, including 45 million in the United States. As of December 30, Peloton has more than 6.6 million members worldwide, including people who don’t own any equipment but only pay for monthly access to the company’s on-demand workout classes.
Asked about it on Tuesday, management said the company doesn’t believe Peloton’s market opportunities have changed in recent months, despite reported declining sales growth. The company’s cost actions are independent of the company’s long-term growth prospects, he said.
“We have work to do,” Woodworth said. “But we’re going to look at what our post-Covid demand is without getting into marketing, to better understand the baseline, and we’re going to come back to effective marketing next year.”
“We will get back to basics over the next few quarters,” she added. “We feel good about it.”
McCarthy’s “to do list”
Still, Peloton hasn’t been incredibly forthcoming about how it plans to achieve those goals and what growth will look like in the coming quarters. Tuesday’s conversations focused on cost cuts and a new CEO. It may be up to Barry McCarthy to come up with a three- or five-year plan once it’s installed.
Dan McCarthy, an assistant professor of marketing at Emory University, points out that a price cut on Peloton’s original bike, initiated last fall, hasn’t boosted demand for the machine the way the company had. hoped. Last week, the company began charging a $250 fee for delivery and installation of the bike, and a $350 fee for such services on its tread, thereby raising prices.
“It doesn’t seem to me that pricing is a very effective lever to bring in a lot of new people,” said McCarthy, who is not related to Peloton’s new CEO. “And I don’t think they’ll be able to somehow change that.”
Peloton also reiterated on Tuesday that it believes the market for treadmills is much bigger than its cycles. But it still has a lot of work to do to raise awareness about its treadmills, in part because of a recall that temporarily pulled its Tread and Tread+ from the market. For too many consumers, Peloton is seen as a cycling brand.
As of June 30, only around 3% of Peloton connected fitness subscribers had both a Bike (or Bike+) product and a treadmill.
“Peloton management suggests that despite a complete change in cost structure and their operating structure, they see no change in revenue…no change in long-term opportunity,” Simeon said. Siegel, analyst at BMO Capital Markets. “It raises questions.”
The advantage of the peloton: loyalty
One final benefit of Peloton, and one that Barry McCarthy probably realizes, is its loyal membership. The company has done a decent job of maintaining its subscribers, as evidenced by its very low churn rate.
Peloton reported an average monthly churn of 0.79% in the second quarter. That’s lower than the 0.82% it reported in the first quarter and slightly above the 0.76% it saw a year ago.
Last August, as it became more difficult for Peloton to predict where user trends were heading, the company said it would no longer forecast churn rates on a quarterly or annual basis. But he said over time he expected churn and retention rates to remain “relatively constant”.
The bottom line is that while new users are harder to find, Peloton is showing that it can keep its current users happy.
This begs the question: what kind of business will Peloton be in the long run? Will it be a high-growth business – disrupting the fitness industry – or generating a more predictable and recurring revenue stream? The answers will help determine how investors value the company’s stock.
If Peloton can increase the value of each of its subscribers, it will be in better shape. Stifel analyst Scott Devitt previously calculated the lifetime value of a Peloton customer to be around $4,500 in gross profit.
One of Barry McCarthy’s top priorities may very well be to get these existing users to spend more money within the Peloton ecosystem, such as additional clothing, gear, or services.
It will work if users remain as loyal as they have been. In Peloton’s latest financial report, a concerning metric was that subscribers were reducing their monthly workouts. This could stem from many factors. This could be a sign of hybrid use, for those who can afford it: mixing a gym membership with a Peloton membership. But it could also be a sign that some are tired of the platform.
The average number of monthly workouts per connected fitness subscriber in the last quarter fell to 15.5, from 16.1 in the prior period and 21.1 a year ago. Notably, this drop in usage occurred during the winter months, when people tended to stay indoors rather than train outdoors, and the omicron variant was spreading rapidly.
Citi analyst Jason Bazinet said while there are risks associated with how Barry McCarthy chooses to execute a turnaround plan, Peloton shares are likely to rise as investors gain clarity on cost reductions and the company’s cash position.
Shares of Peloton closed Monday up more than 25%, at $37.27. The jump took the title to levels not seen since early January. Peloton’s market capitalization is approximately $12.2 billion.
In the short term, Peloton appears determined to fix the underlying issues itself rather than sell the company to a potential suitor such as Amazon or Nike, he said.