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Cover image by Rajan Mithra

Peloton, the at-home digital exercise company, was a pandemic darling. Benefiting from the stay-at-home orders and gym closures, Peloton’s revenues doubled YoY in 2020, net losses shrunk by 63%, and subscribers increased from 2.6 million in Mar 2020 to 4.4 million in Dec 2020. Riding on investor euphoria, the company touched an all-time high market cap of US$47 billion by Jan 2021, but since then, the stock has shed 91% of its value and is now worth less than the price it debuted back in 2019. So what happened to Peloton? What are its financials like? What does its restructuring plan entail?

The Fall

Founded in 2012, Peloton is an American interactive fitness platform headquartered in the city of New York. The company offers its portfolio of Connected Fitness products and associated subscriptions. Peloton’s product portfolio includes the Peloton Bike, Bike+, and the Peloton Tread and Tread+. 

As the pandemic restrictions took hold in the first half of 2020, gyms were shut down, and fitness enthusiasts were forced to look for alternatives. For many, Peloton’s at-home fitness equipment was a perfect fit, and soon, the company was overwhelmed by the demand for its products. Customers were buying its bikes faster than the company could supply them, leading to absurdly long waiting times, in some cases more than ten weeks. 

To meet the surging demand, Peloton announced that it’d be spending more than US$100 million on supply chain investments, doubled its production capacity in 2020 and acquired a US manufacturing facility in early 2021. 

Just when Peloton started moving into high gear, things started falling apart. By June 30th, 2021, close to 50% of the US’s total population had received both the doses and pandemic restrictions were eased, leading to more people hitting the gyms and abandoning their home equipment. This trend is visible in the data provided by Peloton in its Q2 2022 shareholder letter, where average monthly workouts per connected subscription have been on a downward trend since Q3 2021 (Jan-Mar 2021). Average monthly workouts for Q3 2021 were 26 and have since fallen to 15.5 in Q2 2022 (Oct-Dec 2021). 

Despite multiple price cuts in 2021, demand has not picked up, which prompted Peloton to slash its FY 2022 revenue forecast by US$1 billion. Now, the company expects to make US$3.7 billion to US$3.8 billion in total revenue in FY 2022, down from US$4.4 billion to US$4.8 billion it projected in Q1 2022.   

The at-home digital exercise company also faced other problems such as the recall of 125k of its treadmills after reports of a dozen injuries and a child’s death.

Tables Turn

Peloton vs Planet Fitness

Demand for in-person fitness classes and gym memberships has rebounded compared to the early days of the pandemic. According to SafeGraph, a data analytics company, the YoY increase in foot traffic at US gyms was in the range of 25-50% for the period Jul-Dec 2021 but was still 25-35% lower when compared to the pre-pandemic period (Jan-Feb 2020). 

Realising that COVID-19 is endemic, gyms have adapted to the new normal by offering their own online classes and rolling out hybrid offerings. Planet Fitness, one of the largest gym chains in the US, has benefitted from the return-to-the-gym movement, with its shares up by 142% since its all-time low in March 2020. Planet Fitness’ full-year revenue increased by 44% to US$587 million, and the company ended 2021 with 15.2 million members, adding 1.7 million members over the year. 

Financials

Highlights

For the period ended Jun 30th, 2021:

  • Total revenues were US$4.02 billion, up 120% YoY. Revenue from Connected Fitness products was up 115% YoY, while subscription revenue was up by 140%. 
  • Net loss widened to US$189 million, increasing 164% YoY. 
  • Gross margins on Connected Fitness products took a hit, falling from 43% in 2020 to 29% in 2021, while subscription gross margins increased from 57% to 62%. 

For the six months ended Dec 31st, 2021

  • Total revenues were US$1.94 billion, up by just 6.4% compared to the same period in 2020. Despite the overall revenue increase, revenues from Connected Fitness products fell by 12%, while subscription revenues increased by 83%. 
  • Peloton derives 91% of its revenues from North America
  • Gross margins on Connected Fitness products got decimated, now at a meagre 8.6% and subscription gross margins were 67.3%. The alarming decrease in Connected Fitness products’ gross margins was due to a mix of factors: 
  1. Price reduction on the Bike from US$1,895 to US$1,495. 
  2. Charges associated with the voluntary recalls of Tread+ and Tread.
  3.  Increased materials and component part costs.
  • Net loss jumped to US$815 million, rising 714% compared to the six months ended Dec 31st, 2020.

Peloton derives a majority of its revenue from the sale of Connected Fitness products which have accounted for around 80% of total revenues on average, but this figure fell drastically to 67% for the six months ended Dec 31st, 2021. Among its Connected Fitness portfolio, a major chunk of the revenue comes from the sale of Bike and Bike+

Due to the lack of demand, Peloton paused the production of Bikes from Feb to Mar this year, while the production of Bike+ was halted in Dec last year and is said to continue till Jun 2022. It also paused the production of Tread for six weeks starting in Feb 2022 and doesn’t anticipate producing any Tread+ machines in FY 2022. The high-end fitness company cited shoppers’ price sensitivity and amplified competitor activity as reasons for the significant reduction in demand. 

Between Jun 30th, 2021 and Dec 31st, 2021, finished products have increased by 73%, while net inventory levels have increased by 65%

Peloton’s days of inventory on hand has increased from 70 days on Jun 30th, 2020, to 84 days on Jun 30th, 2021. Days of inventory on hand is the time it takes to process inventory, so a figure that is too high (relative to an industry average) means that too much capital is tied up in inventory and could also mean that the inventory is obsolete. 

There’s also been an alarming increase in the cash conversion cycle. The cash conversion cycle is the time it takes for a company to retrieve the cash investment made in inventory from the sale of that inventory. Peloton’s cash conversion cycle has increased by 61%, from 38 days on Jun 30th, 2020, to 61 days on Jun 30th, 2021.

Restructuring

Faced with an existential crisis, Peloton’s board of directors approved a restructuring plan on Feb 1st, 2022, to realign its operational focus to support multi-year growth, scale its business, and improve costs. The plan includes: 

  1. Laying off 2,800 employees or 20% of its corporate workforce.
  2. Shutting down several assembly and manufacturing plants, including its US$400 million factory in Ohio, US.
  3. Shifting to third-party logistics providers in select locations.
  4. Closing and consolidating multiple distribution facilities.

In implementing the plan, Peloton will incur cash charges totalling US$190 million but expects it to yield at least US$800 million in annual run-rate cost savings through operating expense efficiencies and material improvements in its Connected Fitness gross margins. The company expects the restructuring plan to be substantially implemented by the end of FY 2024.

On Feb 7th, 2022, Co-Founder and CEO John Foley stepped down from his post and Barry McCarthy, former CFO of Netflix and Spotify, took his place. Foley will preside as the executive chair of the Board. 

Despite the absurdity of Foley’s claims that Peloton could reach 100 million subscribers (the company had 6.6 million members as of Dec 31st, 2021) or half of the world’s current gym members, McCarthy also seemingly believes in it. To achieve this lofty vision, McCarthy believes that Peloton has to pursue:

  • International growth
  • Retail partnerships
  • Expand the reach of an app that requires no bike or treadmill.
  • Launch fitness-as-a-service that lets users rent Peloton’s hardware and access its classes for a monthly fee.

Conclusion

Peloton has essentially become a case study of demand forecasting gone wrong. It shows how difficult it has become for businesses to accurately forecast demand in the post-pandemic world. A lot of the sales which were supposed to happen in 2021 and 2022 got pulled forward to 2020, giving Peloton the wrong signal of surging demand for its products which in turn led it to invest heavily in ramping up production. 

Even Peloton admitted to overestimating demand for its machines and virtual classes in November last year. 

Part of the solution is to accept that Peloton’s total addressable market has significantly reduced and is definitely not 100 million subscribers. While the growth plan proposed by McCarthy sounds logical, Peloton needs to pursue a revolutionary new idea. At this point, McCarthy and his team need nothing short of a miracle to pull Peloton out of this mess. If not, Peloton risks becoming like Fitbit, being bought out by a tech giant subsidising health and fitness tracking as an ecosystem feature. 

Financial Analysis | Fitness | Pandemic Stock | Peloton | USA

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Rajan writes about the startup ecosystem on VCBay. He is a Master of Business Finance graduate from XIM University and has cleared CFA's Level II exam. Rajan is passionate about data viz and business journalism.

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