Peloton is the story of feeling bad that keeps on giving.
On Tuesday, the company reported weak earnings as it failed to meet expectations and saw mounting losses, increasing inventories, and a drop in overall cash levels. Not exactly what investors had been hoping for under new CEO Barry McCarthy.
In the three-month period ending March 31:
- Peloton’s loss per share was $2.27 versus the $0.83 forecast by The Street.
- Net losses widened to $757.1 million.
- Revenue came in lower than expected – $964.3 million vs. $972.9 million expected.
- Cash and cash equivalents for the quarter were down 22% year over year.
McCarthy joined the company about three months ago with a plan to change its narrative from getting out of hand to moving forward. So far, the road has been arduous.
In his letter to contributors, McCarthy highlighted how challenging the pledge can be: “Transitions are hard work. It’s intellectually challenging, emotionally draining, physically exhausting, and all-consuming. It’s a full-contact sport.”
On the other end of the spectrum, traditional gyms have seen sharp increases in both revenue and profitability. Last week, we received strong earnings reports from both Planet Fitness and LifeTime Fitness in a stark reversal of their “2020 digital fitness transition.”
In the first quarter of 2022, Planet Fitness saw an increase in nearly all of its financial metrics year on year.
- Total revenue increased 66.9% to $186.7 million.
- System-wide same-store sales increased 15.9%.
- Net income increased to $16.5 million from $5.6 million in the previous period.
- 37 new Planet Fitness stores opened during the quarter.
LifeTime Fitness is experiencing an equally remarkable rally as the gym company sets its sights on expansion. In the first quarter, LifeTime sales were up 50% year over year and memberships were up 24%. The company plans to add its 160 locations with 12 more in 2022 and 2023.
While both companies have exceeded most financial expectations in the market, neither has benefited when it comes to estimating the share price. Planet Fitness and LifeTime are down 21% and 17%, respectively.
The whole scene at the moment is a bit baffling. Just 18 months ago, connected fitness seemed here to stay.
Fast-forward to today and connected fitness companies like Peloton and Beachbody have undergone a restructuring in their platforms and pricing models, sales have slowed dramatically, and customers are increasingly choosing personal workouts instead.
Make sense of numbers
Even in the most turbulent times, Peloton boasts a rate of less than 1%. This number is impressive regardless of the industry, and is an indication of the fact that Peloton has already solved the hardest part of the puzzle: the product’s suitability for the market.
With a loyal user base and a track record of growing monthly connected fitness users for over three years, how is it going so bad?
According to the company’s financial statements, it’s a cash issue.
- In the third quarter, Peloton’s free cash flow was negative $746 million, which means cash generated after operating and capital expenditures is nonexistent.
- The company’s revenue growth declined 24% to $946 million during the quarter.
- For every $1 of revenue, Peloton has to burn 79 cents of free cash flow.
Peloton currently has $879 million in cash on its balance sheet. The company also recently secured a five-year loan from JP Morgan and Goldman Sachs for $750 million. Add cash on the balance sheet and a new loan from the banks and the company is running at $1.6 billion.
However, the company is expected to burn through approximately $500 million in cash flow over the next quarter. That means Peloton — even after taking out a $750 million loan — has only enough cash to survive three-quarters of the current burn rate.
On the earnings call, McCarthy hinted that the company aims to be cash flow positive by 2023 — a challenging task by any means.
The biggest hurdle will be the hardware. “We need to be good at hardware, but being good at hardware isn’t nearly enough and this calls for a shift in the company’s investment priorities,” McCarthy said on the call.
Sentiment is that a continued shift to a subscription-first approach is imminent, but it also appears that Peloton remains determined to diversify its hardware portfolio.
On Friday, the company teased the long-awaited Peloton Rower. Although no financial or product information was disclosed, the partial disclosure seems odd given the surrounding circumstances, and she believes McCarthy would know better.
“The challenge on the balance sheet is inventory management,” he said in the above letter to shareholders. “We have a lot more for the company’s current operating rate, and that stock has taken up a massive amount of cash, more than we expected, which has prompted us to rethink our capital structure.”
Existing customers love Peloton’s products, but the company has set itself on an unsustainable growth path by positioning itself as a tech stock. Without the required growth in cash, the downward spiral continues.
The real issues are heating up
So, has the connected fitness bubble popped?
Peloton’s problems alone aren’t a breakdown of digital fitness – quite the contrary. The product works, and people love it. The issue is how we perceive the company.
Facilitating the level of growth that Peloton experienced from 2019 through 2021 (547% increase in share price) is very difficult when a core product is capital-intensive like a high-end stationary bike.
I think connected fitness is just as important and beneficial an industry trend as it was at the start of the pandemic. The market simply needs to realize that not every technology-enabled platform deserves to be treated as a tech giant.
