Peloton Sales Drop in Q3 2022, Anticipates Even Lower Demand in Q4

Peloton reported third quarter 2022 revenue of $964.3 million, down from $1.262 billion in third quarter 2021, the company reported on May 10.

Peloton’s third quarter runs January through March.

Peloton does not anticipate a rebound in fourth quarter 2022, noting it forecasts revenue of $675 million to $700 million.

In addition, Peloton finished the quarter with $879 million in unrestricted cash and cash equivalents, which leaves it “thinly capitalized for a business of our scale,” Peloton President and CEO Barry McCarthy wrote in a letter to shareholders.

To strengthen its balance sheet, the company signed a binding commitment letter with JP Morgan and Goldman Sachs to borrow $750 million in five-year term debt.

In second quarter 2022, Peloton underwent several cost reduction initiatives to generate positive cash flow by realigning spending and revenue, resulting in at least $800 million in annual run-rate savings by fiscal year 2024. The initiatives include $500 million in operating expense savings and at least $300 million in lower Connected Fitness COGS.

“The program is a work-in-progress,” McCarthy wrote.  

Through initiatives already in place, Peloton expects to achieve $165 million operating expense reductions in the second half of fiscal year 2022, and approximately $450 million in savings for fiscal year 2023, he wrote.

In Connected Fitness COGS, the actions are anticipated to yield $30 million to $35 million savings in the second half of the current fiscal year and $100 million in savings for fiscal year 2023.

Since being appointed CEO on Feb. 9, McCarthy has focused on stabilizing the cash flow, getting the right people in the right roles and growing again, he said.

“We’re making progress on all three priorities,” he added.

To spur more growth, the company plans four initiatives:

  • Evolve its go-to-market strategy partially by broadening its distribution to third-party retailers.
  • Rethink the value proposition of its digital app to drive more top of marketing funnel growth.
  • Expand its international markets.
  • Continue to test and broaden the roll out of Fitness-as-a-Service (FaaS).

FaaS is a rental program that combines the cost of connected fitness hardware and Peloton’s All-Access subscription service into one low monthly fee, McCarthy explained.

The company has been testing different price points to see its effects on consumer demand and return on investment.

“To date we’ve seen steady increases in growth (on the order of 90 percent + uplift currently) compared to our control markets, and we are broadening the size of our test markets as we continue testing different consumer offers,” he wrote.

The price cuts on hardware that took effect April 14 “look promising,” he said. It increased daily unit sales by 69 percent, which increased revenue by more than $25 million per month.

So far, the price increase on all-access monthly subscription that will take effect on June 1 has created “only a modest increase in churn,” he wrote. If churn levels remain the same after the price increase is effective, it will generate about $14 million more monthly in revenue.

More Third Quarter Results

Connected Fitness revenue, which includes Precor, was $594.4 million, down 42 percent compared to third quarter 2021. The primary driver of the year-over-year revenue decline was a reduction in consumer demand exiting the pandemic’s peak, partially offset by the contribution of Tread sales, according to the company. Connected Fitness revenue was also negatively impacted by higher than anticipated Tread+ returns totaling $18 million related to its May 2021 product recall.

In contrast to the decline in Connected Fitness revenue, subscription revenue of $369.9 million grew by 55 percent year-over-year, and represented 38.4 percent of total company revenues compared to 19 percent in third quarter 2021.

Gross profit in the quarter was $184.2 million and 19.1 percent of revenue, representing a 59 percent year-over-year decline. Compared to the year ago period, the Connected Fitness gross margin was pressured by the August 2021 Peloton Bike price reduction, impact of accessory inventory write-down, higher logistics expenses per delivery, increased port and storage costs, and charges associated with the voluntary recall of its Tread+ product (approximately $19 million impact to gross profit in the quarter). Subscription gross profit was $252.1 million in the third quarter, representing 63 percent year-over-year growth. Subscription gross margin was 68.1 percent, up from 64.6 percent in the year ago period driven by continued leveraging of fixed costs.

Total operating expense was $920 million, and grew 101 percent year-over-year, representing 95.4 percent of total revenue compared to the prior year period of 36.3 percent. The current quarter operating expense included $158.5 million in restructuring expense, $181.9 million in goodwill impairment, and $32.5 million in impairment expense and loss on disposals. Excluding these non-recurring items, operating expense grew 19 percent to $547.2 million, representing 56.7 percent of revenue.

Net loss for the quarter was $(757.1) million, versus $(8.6) million in the year ago period. Adjusted EBITDA for the quarter was $(194) million, versus $63.2 million in the year ago period. The primary drivers of the year-over-year decline were lower revenue and Connected Fitness gross margins, as well as higher operating expenses, according to the company.  

Free cash flow (net cash provided by (used in) operating activities less capital expenditures and internal-use software development costs) was $(746.7) million, a higher outflow than anticipated, Peloton said. Primary drivers of the company’s underperformance were higher inventory payments, softer than anticipated demand (both Peloton and Precor) as well as higher detention and demurrage, shipping and logistics, and storage costs. Peloton ended the third quarter with $879.3 million in cash and cash equivalents. It also has a $500 million revolving credit facility, which remains undrawn to date.

Third quarter operating cash flow was $(670.1) million. Capital expenditures and internal-use software development costs were $76.6 million, the majority of which were related to construction of Peloton Output Park in Troy Township, Ohio, which Peloton said it expects to recoup later this calendar year upon sale of that facility.

Fourth Quarter Outlook

The company’s outlook for the fourth quarter of revenue of $675 million to $700 million reflects softer demand compared to its February forecast, partially offset by accelerated sales the company has seen as a result of its recent hardware price reductions.

The company expects an overall gross margin of approximately 31 percent for the fourth quarter. The Connected Fitness margin in the quarter will be impacted by the pricing changes and continued headwinds in freight, storage, and logistics due to the reduction in its demand outlook, Peloton said, noting that the company expects headwinds in freight to largely abate and storage costs to come down in fiscal year 2023, resulting in a positive Connected Fitness margin profile next fiscal year.

Peloton anticipates expect adjusted EBITDA of approximately $(120) million to $(115) million in the fourth quarter, largely reflecting lower pricing and demand and continued headwinds in freight and storage costs.