Peloton Investors Are Really Sweating Now
(Bloomberg Opinion) -- Welcome to today’s ride, Peloton investors. I want you to start by reaching down, turning that resistance up a few notches and slowing your speed for a sweat-filled climb.
If Thursday’s earnings report from Peloton Interactive Inc. were narrated by one of its energetic virtual spin instructors, that’s probably how it would go. The stock — one of last year’s biggest pandemic winners — dropped Thursday on financial results that included a product price cut, a disappointing forecast and the disclosure of a “material weakness” in its accounting controls. The pathway back up that hill — as Peloton groupies know — won’t be easy.
The shares continued to slide 5% in early trading Friday morning after Peloton said in a subsequent filing that it has been subpoenaed by the U.S. Justice Department and Department of Homeland Security for documents related to its reporting on injuries caused by its products. It said the Securities and Exchange Commission is also investigating its public disclosures on these incidents.
That matter aside, the price cut is perhaps most notable because in an inflationary environment that had been putting a premium on trendy home-workout gear, Peloton is now feeling the pressure to lower the price of its original Bike by $400 to $1,495 to try to appeal to more customers. It had already lowered the price in September, but cited in its letter to shareholders Thursday that cost “remains a barrier” to what is its cheapest product. By comparison, the Bike+, which includes a rotating touchscreen to use for strength workouts done off the machine, starts at $2,495.
Not only is Peloton facing pressure from cheaper substitutes, it also has fresh competition from all the gyms that have reopened as fitness fans look to get out of the house. The company spent 172% more on sales and marketing compared with a year ago, when advertising wasn’t necessary because it couldn’t even keep up with demand. Current Peloton customers are also using the service less often amid reopenings, with average monthly workouts per subscription dropping more than 20% to 19.9. That’s still slightly better than pre-pandemic levels.
Meanwhile, Peloton’s expansion into the treadmill business has been rocky. It had to recall both models after reports of screens falling off the Tread and videos of children getting sucked under the Tread+ (one incident resulted in a child’s death). The recalls pointed to a general weakness observed by some Peloton users: Its products don’t always seem to be of the best quality, even if their coupling with lively classes makes the brand rather special. But more important, how it handled these matters has now caught the attention of regulators. The company still sees treadmills as a growth opportunity, potentially more than twice as large as the bikes. It will begin selling the Tread again on Aug. 30.
Peloton expects an adjusted loss of $325 million before interest, taxes, depreciation and amortization for its 2022 fiscal year that just began. After getting through this period of higher advertising, commodity and shipping costs and other “significant investments,” Peloton expects to return to profitability on an adjusted Ebitda basis in fiscal 2023. It said the issue related to its inventory accounting didn’t create a material misstatement of its financial results.
The business is still growing. Lowering the Bike price should only help that, and it’s successfully shifting the Peloton image from a spin-bike-only company to a general-fitness service as users start trying its other classes including yoga. Also, its first major acquisition — for rival exercise-machine maker Precor, completed last year — should give it more reach and manufacturing might.
Still, last year’s pandemic boon is ending, and it's learning the responsibility that comes with being the maker of such a popular product. Now Peloton must compete in a market where it’s no longer the only option, and with the recalls in the backs of people's minds.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tara Lachapelle is a Bloomberg Opinion columnist covering the business of entertainment and telecommunications, as well as broader deals. She previously wrote an M&A column for Bloomberg News.
©2021 Bloomberg L.P.