Peloton (PTON) believes connected fitness market will remain challenging for foreseeable future

Shares of Peloton Interactive Inc. (NASDAQ: PTON) plummeted 19% on Thursday after the company delivered disappointing results for its fourth quarter of 2022. Revenues declined and losses widened as the company struggles to turn its business around. Peloton also issued a gloomy forecast for its upcoming quarter which fell below expectations. The stock has dropped 69% year-to-date.

Quarterly numbers

Peloton generated total revenue of $678.7 million for Q4 2022, which was down 28% year-over-year. Connected Fitness revenue, including the Precor contribution, dropped 55% YoY to $295.6 million. The top line declined mainly due to a reduction in consumer demand as the momentum seen during the pandemic wanes.

On the bright side, subscription revenue grew 36% YoY to $383.1 million and comprised 56.4% of total revenues. This marked the first quarter where the majority of the company’s revenues came from the high-margin subscription segment.   

Net loss widened to $1.24 billion, or $3.68 per share, compared to $313.2 million, or $1.05 per share, in the year-ago period. Gross profit for the quarter was a negative $29.8 million and gross margin was a negative 4.4%.

Connected Fitness gross margin was a negative 98.1%, driven mainly by an increase in inventory reserves. The company also incurred higher logistics expenses, storage costs and other charges related to the recall of its Tread+ product. Subscription gross profit increased 46% YoY to $260.3 million while gross margin rose to 67.9% from 63.3% in the year-ago period.

Total operating expenses increased to $1.17 billion in Q4 from $556.3 million last year. The increase was driven by several one-time expenses related to supplier settlements, impairment expenses as well as write-offs and expenses related to restructuring activities. Operating cash flow was a negative $360 million while free cash flow was a negative $412 million.

User metrics

Peloton had 6.9 million members at the end of the fourth quarter, up 15% YoY but down 2% sequentially. Connected fitness subscriptions stood at 2.97 million at quarter-end, up 27% YoY and flat sequentially. Net monthly churn for connected fitness users rose to 1.41% from 0.73% last year.

Turnaround plan

Peloton has been taking several measures to turn around its business. The company outsourced all manufacturing for connected fitness hardware, rightsized and outsourced around half of its member support resources, and shifted last mile delivery in the US to third-party providers. These actions are expected to reduce expenses annually by around $45 million. The company also cut hardware prices in order to sell inventory and hiked prices on some of its connected fitness units. Peloton has also made some of its products available for sale on Amazon.

Outlook

In its shareholder letter, Peloton said that the US market for connected fitness was down an estimated 51% year-to-date and that it expects this market to remain challenging for the foreseeable future in FY2023.

Due to the broader macroeconomic uncertainties and the changes being made to its business, Peloton did not provide guidance for fiscal year 2023. For the first quarter of 2023, the company expects revenue to range between $625-650 million, reflecting a YoY decline of 21% at the midpoint.

Gross margin is expected to be around 35% and connected fitness subscriptions are expected to remain unchanged on a sequential basis at 2.97 million. The Q1 outlook reflects near-term demand weakness and typical seasonal demand softness.

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