Peloton (PTON) reports fourth quarter 2022 losses widening

A person walks past a Peloton store on January 20, 2022 in Coral Gables, Florida.

Joe Raedle | Getty Images

Peloton on Thursday reported widening losses and falling sales in its fiscal fourth quarter as the connected fitness equipment maker tries to win back investors with cost cuts and strategic changes.

Shares fell more than 1[ads1]5% in premarket trading, a day after the stock rose more than 20% on news of the Amazon partnership.

It marks Peloton’s sixth consecutive quarter of reported losses. The company said it aims to reach break-even cash flow on a quarterly basis in the second half of fiscal 2023.

Still, Peloton CEO Barry McCarthy said he expects the connected exercise market to remain challenging for the foreseeable future as consumer demand for home exercise machines declines from pandemic heights.

Since McCarthy took over as CEO from Peloton founder John Foley in February, the company has pursued sweeping changes that have yet to fully pay off. Peloton raised membership fees, raised prices on some equipment, laid off thousands of workers, tested a rental option, abandoned last-mile delivery and outsourced all manufacturing to third parties. On Wednesday, Peloton also began selling some of its products on Amazon in the US, the first such deal with another retailer.

“The deniers will look at ours [fourth quarter] financial results and see a melting pot of declining revenue, negative gross margin and deeper operating losses,” McCarthy wrote in a letter to Peloton shareholders.

“But what I see is significant progress driving our comeback and Peloton’s long-term resilience,” he said. — We still have work to do.

Peloton did not provide an outlook for the upcoming fiscal year 2023. For the first quarter, it said subscribers remain flat and revenue ranges between $625 million and $650 million. Peloton said this takes into account weak short-term demand and seasonal fluctuations in business.

There was a silver lining for the company: This marked Peloton’s first reported quarter in which higher-margin subscription revenue accounted for the majority of total sales.

The losses are increasing

Peloton’s net loss widened in the three-month period ended June 30 to $1.24 billion, or $3.68 per share, from a loss of $313.2 million, or $1.05 per share, a year earlier.

McCarthy said the losses stemmed from Peloton’s efforts to avoid inventory gluts, cut fixed costs and address other supply chain issues. Earlier this year, the company launched an 800 million dollar restructuring plan. Peloton ended the fourth quarter with $1.1 billion in inventory.

Revenue fell 28% to $678.7 million from $936.9 million a year earlier. That fell short of the $718.2 million that analysts had been looking for, according to Refinitiv estimates.

Within that figure, affiliate fitness revenue that includes the contribution from Peloton’s Precor business fell 55% to $295.6 million.

Peloton’s associated gross margin for fitness was another dismal point, at a negative 98.1% compared to a positive 11.7% a year earlier. Peloton said it experienced higher logistics costs per delivery, increased porting and storage costs, plus costs associated with the recall of the Tread+ treadmill.

Peloton posted $383.1 million in subscription revenue, up 36% from the prior year and representing 56.4% of the company’s total sales.

McCarthy, who previously worked at Netflix and Spotify, has made it clear that he is more interested in pursuing growth on the subscription side of Peloton’s business, rather than putting such an emphasis on hardware. He believes Peloton’s digital app will be at the heart of the company’s future success.

Membership is declining

Peloton ended its most recent quarter with 2.97 million connected fitness subscriptions, about flat with previous quarterly levels and up 27% from a year ago. Connected fitness subscribers are people who own a Peloton product, such as its original bike, and who also pay a monthly fee for access to live and on-demand training sessions.

However, the total number of members decreased by around 143,000 people from the previous quarter to 6.9 million. McCarthy, following Foley’s initial vision, has said the company hopes to one day amass 100 million members.

Peloton’s average net monthly churn rate for connected fitness users rose to 1.41% from 0.73% a year ago.

The company said this was ahead of its internal expectations in part because of a consumer protection ruling in Canada that forced all customers in the country to approve the subscription price increases that took effect in June, and about 85% of them have done so to date. Peloton said it had expected some people to drop their memberships after prices rose.

But investors may be wary of the leap. A lower churn rate would be better news for Peloton, as it means people are staying and continuing to pay for their memberships.

McCarthy said in the letter to shareholders that the fourth quarter would prove to be the “high water mark” for write-downs and restructuring costs related to inventory and supply chain challenges. It should also mark the beginning of Peloton’s comeback story, he said.

Peloton shares have fallen about 60% so far this year, as of Wednesday’s market close.

This story is in development. Please check back for updates.

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