Review and Analysis of Peloton’s Earnings Results

November 4, 2022 / John Bernstein / Comments Off

Introduction

This is my summary of Peloton’s quarterly earnings results, which the company released November 3^rd. In addition to providing many of the facts from that release, I also provide my own thoughts and opinions about the results. This is not intended to be a recommendation to buy or sell the stock. Moreover, when I discuss the future viability of the company, I am referring to the operations of the company, not the stock. I avoid getting into the specifics of the stock valuation, which should be an integral part of any decision to buy or sell the shares. This is meant for both Peloton enthusiasts who may be interested in the challenges and opportunities facing the company, as well anyone interested in business analysis.

Peloton reported results for their fiscal 2023 1^st quarter (calendar 3^rd quarter), which ended September 30^th.[1] As in past quarters, the call was conducted by CEO Barry McCarthy, and new CFO Liz Coddington. The format was similar to the last few quarters with no formal remarks or presentation from either executive, just questions and answers.

Continued Steady Progress Toward Profitability

Interestingly, it seems that the news media and the interweb are much less occupied with Peloton’s results than in recent past quarters. Of course, this is just my own anecdotal assessment, but perhaps it’s because there are no headline grabbing facts like a $1 billion loss. Actually, I found these results quite orderly and predictable with no surprises. If I were to summarize the quarter, I’d say that the company’s restructuring plan, released last February, remains on track to slightly ahead of schedule. The progress toward reaching breakeven free cash flow (FCF) has been very substantial. So much so, that management is beginning to increase their focus on the next phase of the turnaround, which is a return to growth.

Earnings and Cash Flow

The company reported a loss for the quarter of $408.5 million[2] compared with a loss of $1.255 billion[3] last quarter. Much more importantly, PTON reported another substantial improvement in FCF (FCF = free cash flow which is defined as cash from operations minus capital expenditures and capitalized software costs). For the quarter just ended, FCF was -$246.3 million, compared to -$411.9 million in the June quarter, and -$746.7 million in the March quarter.[4] [5] The company continues to reiterate their goal of being FCF breakeven or near-breakeven in the second half of fiscal 2023.[6] That goal is looking increasingly conservative, and I would not be surprised to see them hit it early.

Having said that, it’s my personal opinion that the economy is headed for a recession, and probably a fairly deep one that may include a stagflation component (meaning slow to negative growth with elevated inflation). While a reasonable argument can be made that fitness-related products are more recession proof than other discretionary consumer products, ultimately they are also discretionary. All of this just means that if sales were to slow, or decline, meaningfully from current levels that will negatively impact profits and free cash flow. As McCarthy said on the call, most of the cost cutting has been completed, though some of it will take time to flow through to the financial statements.[7] I mention all of this because that could be the reason why management appears fairly conservative on their guidance to reaching breakeven. In the release, McCarthy speaking to the broader turnaround of the company did state, “…I believe our 1Q23 results make a strong case that we will beat the one-year timeline and deliver on our turnaround goal.”[8]

As mentioned above, the restructuring effort is substantially complete. They still need to sell Peloton Output Park, the manufacturing facility they were planning to build in Ohio. That is scheduled to occur this quarter. McCarthy specifically mentioned that there will be no further headcount reductions. The only exception to this is the previously announced showroom closings, which have not yet been completed. It sounds as though an important piece of the decision about showroom closings has to do with lease terms, and is still being determined.

Liquidity

Finally, though the company running out of cash appears to a fading concern, here is an update on their balance sheet liquidity. They ended the quarter with $938 million in cash and near-cash equivalents. They also have an unused $500 million line of credit. This aligns with their stated goal of maintaining about $1 billion in cash and cash equivalents.[9]

Growth

With much of the restructuring already in place, McCarthy spent some time reviewing the company’s growth strategies, which are now becoming the focus of management. Those strategies include: fitness as a service (FaaS), which is the equipment leasing program; the certified pre-owned business; the commercial channel; new third party retail partners (Amazon and Dick’s); and the relaunch of the digital app in pursuit of their goal of 100 million users. McCarthy mentioned that FaaS is growing very fast and is giving Peloton access to a new demographic, which is expanding their total market. He also talked about the relaunch of the digital app, which is scheduled to occur in the new year. It will have a different price/value structure including a premium level, gated content, and tiered pricing.[10]

New Products and Third-Party Retailers

On new products, McCarthy said Guide is doing okay, but there is a lot of opportunity on which they need to capitalize. They remain confident that Peloton Row will change the category similar to the way the bike did. He described it as well received, and he mentioned that as of November 2^nd it has been rolled out to all showrooms. Lastly, he said the rower will remain inventory constrained for the rest of this year.[11]

Management also gave a brief update on their new third-party retail partners. The Dick’s Sporting Goods partnership is too new for any results, but they have high expectations. The Amazon partnership has outperformed expectations. Both of these partnerships have different accounting ramifications for revenue. As they become more meaningful sources of revenue growth, this may lead to misinterpretation about sales growth for investors who do not understand these details.

Conclusion

Last quarter, I described my outlook for the future of the company as guardedly optimistic. Given the steady improvement the company has made toward breakeven FCF over the last three quarters, I am feeling much more confident about the ongoing viability of the business. Barry McCarthy is proving to be a very capable leader. They are not quite there yet, but the finish line is visible. So, barring some sort of major and sudden change, the worst appears to be behind them. A return to growth is the next challenge facing the company, and that could prove to be more difficult particularly given the deteriorating economic environment. At this point, I don’t think that means their efforts won’t be successful, but rather that it may take longer. Finally, I never thought PTON was a likely acquisition target, and I think it is even less likely that will happen now.

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