Peloton to Sell 29M Shares of Stock to Raise $1B

Peloton Reports Slowing Revenue Growth and Large Net Loss in Q4 FY21

Due, in part, to costs related to treadmill recalls

Peloton will be glad to see fiscal year 2021 in the rearview mirror. Last Friday, the company reported total revenue of $936.9 million for the fourth quarter of fiscal year 2021. While this was a 54% increase over the fourth quarter of fiscal year 2020, it is down from third quarter revenue of $1.26 billion and second quarter revenue of $1.06 billion. Of total revenue from the fourth quarter, $655.3 million, or 70%, came from connected fitness products including Peloton bikes and treadmills, and $281.6 million, or 30%, came from subscription revenue. The company’s net loss for the fourth quarter was $(313.2) million, or $(1.05) per diluted share.

“This past year represented an inflection point for the connected fitness industry, with significant increases in awareness and demand following the onset of the COVID-19 pandemic,” said Peloton in its shareholder letter. “As we have discussed in the past, this necessitated significant investments in manufacturing capacity, logistics and expedited shipping to reduce order-to-delivery windows, which we were pleased to restore to pre-pandemic levels during the fourth quarter.”

Financial and subscription highlights

Other financial and subscription highlights from the quarter include the following:

  • Connected fitness subscriptions grew 114% to more than 2.33 million, and paid digital subscriptions grew 176% to 874,000. This represents a steady uptick since the first quarter of fiscal year 2020 when the company had 563,000 connected fitness subscriptions.
  • The company had 5.9 million members at the end of the quarter.
  • Connected fitness subscription workouts grew 75% to 134.3 million year-over-year, an average of 19.9 monthly workouts per connected fitness subscription, compared to 24.7 in the fourth quarter of fiscal year 2020. However, this is down from third quarter connected fitness subscription workouts of 149.5 million.
  • Average net monthly connected fitness churn was 0.73% for the quarter. The company’s 12-month retention rate was 92%.
  • Gross profit was $253.6 million, or 27.1% of revenue.
  • Connected fitness product gross profit was $75.5 million, or 11.6% of revenue.
  • Subscription gross profit was $178.1 million, or 63.3% of revenue.
  • Subscription contribution was $195.2 million, or 69.3% of revenue.
  • Total operating expenses for the quarter were $555.4 million, a 179.4% increase year-over-year. Expenses grew in triple digits across every category (sales and marketing, general and administrative, research and development). Most notably, general and administrative expenses were $232.1 million, a 169.3% increase year-over-year. This was due, in part, to the negative impact to revenue from Tread product recalls.
  • The company ended the quarter with $1.6 billion in cash, cash equivalents and investments in marketable securities.

Operational highlights

In its shareholder letter, Peloton reiterated its May announcement that the company is building its first factor in the United States on 200 acres in Troy Township, Ohio. The facility will include more than 1 million square feet of manufacturing, office and amenities space. Peloton is referring to this facility as the Peloton Output Park (POP). It is expected to start producing Peloton Bike, Bike+ and treadmill products starting in 2023. POP will complement Precor facilities in North Carolina and Washington state. Peloton acquired Peloton in April 2021. The company announced its plans to purchase Precor last December

Another significant highlight is the company has lowered the price of the Peloton Bike to $1,495 or $39 per month over 39 months. This is a $400 decrease per bike. The goal was to make the bikes more affordable and accessible to more people. They are also offering 43-month, 0% financial options for Bike+ and Tread, so they’ll be $59 a month.

In June, the company launched the Peloton Corporate Wellness program, an initiative that allows employers, insurers and other partners the opportunity to offer employees and members discounted access to Peloton digital subscriptions, all access memberships and/or connected fitness products.

Image courtesy of Peloton

In terms of content, Peloton has expanded its collection of classes. The fitness company now offers close to 190 exclusive classes across nine disciplines, including cycling, strength, meditation/yoga and running. Since the program relaunched at the end of April, Peloton members have taken more than 3 million classes during the quarter.

Perhaps most importantly, on Monday, the company relaunched sales of the Peloton Tread in the U.S. after receiving approval of their proposed repair remedy from the Consumer Product Safety Commission. Sales of the Peloton Tread are expected to resume in Germany in the fall and in Australia “in the near future.” In May 2021, the company voluntarily recalled its Tread and Tread+ treadmills after 70 injuries and one child death after initially ignoring the CPSC’s recall recommendation.

Peloton Says Recall Will Reduce Revenue by $165M and Increase Costs
Image courtesy of Peloton

Guidance for the first quarter of fiscal year 2022

The company offered the following outlook for the first quarter of fiscal year 2022:

  • 2.47 million connected fitness subscriptions
  • Average net monthly connected fitness churn of approximately 0.85%
  • $800 million in total revenue
  • Gross profit margin of about 33%
  • $(285) million adjusted EBITDA

Insider Take

Investors were not impressed with Peloton’s slowing revenue growth and its failing to meet expectations in several categories. On August 25, Peloton stock was valued at $116.25 per share, and as of 7:57 p.m. Eastern yesterday, Peloton stock was valued at $100.19. In the last year, the company has had supply chain issues, a major recall and the ups and downs that can be attributed to the pandemic. However, in spite of those challenges, the company remains forward-thinking. They are investing in infrastructure and technology, and they have loyal followers. It may take them a few years for them to be profitable, but they have the resources to turn things around.

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