Peloton shares fell after the company reported a big loss and a decline in revenue

Peloton on Thursday reported widening losses and slumping sales for its fiscal fourth quarter, as the connected fitness equipment maker tries to lure investors through cost cutting and strategic shifts.

The company’s shares are down more than 20% — a day after the stock rose more than 20% following news of its partnership with Amazon.

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

However, Barry McCarthy, Peloton CEO, said he expects the connected fitness market to remain challenging for the foreseeable future, as consumer demand for at-home exercise devices wanes from the heights of the Covid pandemic.

Since McCarthy took over as CEO from Peloton founder John Foley in February, the company has pursued sweeping changes that haven’t yet fully paid off. Peloton has raised membership fees, raised prices for some equipment, laid off thousands of workers, tested a rental option, and gone out of last-mile delivery, moving all production to third parties. On Wednesday, Peloton also began selling a portion of its products on Amazon in the US, the first such deal with another retailer.

The naysayers will look at us [fourth-quarter] “Financial performance is witnessing 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 the long-term resilience of Peloton,” he said. “We still have work to do.”

Peloton has not provided an outlook for the upcoming fiscal year 2023. For the first quarter ending on September 1. 30 said it expects subscribers to remain flat, with revenue in the range of $625 million to $650 million, which is below analyst estimates. Peloton said this takes into account weaker near-term demand and seasonal business fluctuations.

There was a positive side for the company: This was the first reported quarter for Peloton in which higher-margin subscription revenue made up the majority of total sales.

During a call with analysts, McCarthy also described a number of things Peloton was still testing to boost sales. This includes selling pre-owned bikes, renting bikes for a monthly fee, and adding new levels to the Peloton digital app, including a premium category where people pay more for expanded content and better features.

“It is not enough to just cut expenses, we have to increase revenues,” he said.

Using the movie rental wars as an example, McCarthy said that Netflix was able to emerge at the helm of Blockbuster, a movie rental company that filed for bankruptcy in 2010, because it offered its customers customized content and a multitude of options.

Losses are escalating

Peloton’s net loss widened for the three months 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 were caused by Peloton’s efforts to avoid an inventory glut, cut fixed costs and address other supply chain issues. The company earlier this year embarked on an $800 million restructuring plan. Peloton ended the fourth quarter with inventory of $1.1 billion, compared to $937.1 million a year earlier.

Revenue fell 28% to $678.7 million from $936.9 million a year earlier. That came in less than the $718.2 million analysts were looking for, according to Refinitiv estimates.

Within that number, connected fitness revenue that includes the contribution from the Peloton Precor business decreased 55% to $295.6 million.

The overall fitness margin related to Peloton was another bleak spot, registering a negative 98.1% compared to a positive 11.7% a year earlier. Peloton said it faced higher logistical expenses for delivery, increased port and warehousing costs, as well as fees related to recalling the treadmill + walker.

Peloton reported $383.1 million in subscription revenue, up 36% from the previous year and representing 56.4% of the company’s total sales. Gross underwriting margin increased to 67.9% from 63.3%.

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

Peloton burned $412 million in cash in the fourth quarter, after negative cash flow averaged $650 million in each of the previous two quarters. It ended in June with cash reserves of $1.25 billion and a revolving credit facility of $500 million.

Simeon Siegel, an analyst at BMO Capital Markets, praised McCarthy for making some “very constructive decisions” to stem the cash bleeding in recent months. But he said Peloton may have a bigger problem with brand saturation.

Peloton finished its fourth quarter with 2.97 million connected fitness subscriptions, roughly flat with previous quarter levels and up 27% from a year ago. Connected Fitness subscribers are people who own a Peloton product, like the original bike, and also pay a monthly fee to access live and on-demand workout classes.

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

The average Peloton net monthly fluctuation levels for connected fitness users increased to 1.41% from 0.73% a year ago.

The company said this was ahead of its internal expectations due in part to a Consumer Protection decision in Canada that forced all customers in the country to agree to a subscription price hike that took effect in June, and about 85% of them have done so so far. . Peloton said it expected some people to drop their membership after the price hike.

But investors may be wary of the jump. The lower rate of decline may be better news for Peloton, as it means that people stay permanent and continue to pay for their membership.

McCarthy said in his letter to shareholders that the fourth quarter should prove to be a “high watermark” for write-offs and restructurings related to inventory and supply chain challenges. It should also mark the beginning of the Peloton comeback story, he said.

Peloton shares are down about 60% year-to-date, as of the market close on Wednesday. Its market capitalization has fallen to less than $5 billion, after reaching nearly $50 billion in early 2021.