Shares of Peloton (NASDAQ:PTON), the renowned fitness equipment and media company, plummeted about 23% in early trading on Wednesday. The dip followed the announcement of the company’s wider-than-expected loss and a decrease in new subscribers for its fourth fiscal quarter.
Peloton’s Q4 performance did not align with Wall Street’s projections. While sales surpassed expectations, coming in at $642.1 million as opposed to the predicted $639.9 million, the reported loss per share stood at 68 cents, which is significantly higher than the anticipated 38 cents. This quarterly result paints a stark contrast from the prior year, where the company reported a loss of $3.72 a share on a revenue of $678.7 million.
A year-to-year comparison indicates a net loss of $241.8 million in contrast to the previous year’s staggering $1.26 billion. Several factors contributed to this downturn:
- Seasonality: Traditionally, Peloton, much like other fitness retailers, faces a slump during the summer months. The season witnesses a notable decline in fitness engagements as consumers opt for travels and summer activities. CEO Barry McCarthy had earlier predicted the fourth quarter to be particularly challenging from a growth standpoint. For the first time, Peloton had forecasted a dip in subscribers, which indeed became a reality. By the end of the quarter, there was a 4% YoY increase in subscribers tallying up to 3.08 million. However, the number fell by 29,000 compared to the previous quarter.
- Product Recall: Another significant blow was the recall of the Bike seat post, which was prone to sudden detachments and breakages. This caused a substantial churn, as between 15,000 to 20,000 users opted to suspend their monthly subscriptions awaiting seat post replacements. Initiated in May, this recall affected over 2 million bikes sold since January 2018 and drained $40 million from Peloton’s Q4 revenue. Peloton is actively addressing this issue, having received 750,000 replacement requests, a figure surpassing their initial projections. As of now, 340,000 requests have been met, and the company aims to fulfill the remaining by September end.
McCarthy’s letter to shareholders emphasizes the inherent seasonality of Peloton’s business model. He noted that while the slowdown was sharper than anticipated until June’s third week, a reacceleration in hardware sales was visible eight weeks ago.
While Peloton managed to attain a positive free cash flow status on an adjusted basis this quarter, the trend may not persist in the upcoming quarters. This forecast stems from anticipated hardware sales decline, inventory payment timings, escalated marketing expenses, and the financial requisites of the seat post replacements. Despite these challenges, Peloton remains optimistic, targeting free cash flow positivity by the second half of fiscal 2024.
In conclusion, while Q4 was a turbulent period for Peloton, it offers valuable insights into the company’s adaptability and resilience. How Peloton navigates through these challenges and capitalizes on future opportunities remains a point of interest for investors and fitness enthusiasts alike.