When Barry McCarthy took over as Peloton’s new CEO last quarter, amid news that the company had laid off 2,800 employees, it was clear he had a lot of work ahead of him. Since then, McCarthy has spoken out about shifting the company’s focus from hardware to software. This new direction can be explained by looking at the Q3 profit release, which paints a difficult financial picture for Peloton. The company continued to post larger-than-expected losses, and then share prices down more than 20 percent†
Peloton today said its third-quarter losses were $757.1 million, compared to a loss of $8.6 million at this time last year. Meanwhile, sales fell to $964.3 million, from $1.26 billion a year ago. As in the previous quarter, Peloton attributed the decline to lower demand as pandemic restrictions eased and costs increased due to higher-than-ideal inventory. in his shareholder letter, Peloton said that number was partially offset by tread sales. However, the company also said Tread Plus’ returns were higher than expected after last year’s recall, which cost the company $18 million. McCarthy also noted that the company ended the quarter with $879 million in cash, leaving the company “thin capitalized” for its needs. To strengthen [its] balance sheet,” McCarthy pointed to an additional $750 million in funding it received from JPMorgan and Goldman Sachs earlier this week.
Those numbers don’t paint a rosy picture for the affiliate fitness company’s current finances, which is why the company is in the midst of a dramatic change in strategy — though it may not be all doom and gloom. In April, the company announced it would lower prices for all of its hardware and increase the cost of its All-Access membership to $44 starting June 1. The company also began testing a new subscription model, One Peloton Club. called, which allows users to rent the bike and take lessons for a monthly fee. So far, McCarthy said in today’s investor call that the company has seen promising results from these efforts. Lowering the price of its equipment increased daily unit sales by 69 percent. Meanwhile, McCarthy cited the “mass-market appeal” of the One Peloton Club pilot, with 53 percent of applications coming from those with household incomes less than $100,000.
Peloton’s quarterly subscriber churn also improved to 0.75 percent, from 0.79 percent last quarter. Peloton’s has always had impressively low customer churn, and the third quarter figure also includes a “modest increase” in cancellations after news the company would increase its monthly membership fee from June 1. That said, during the investor call, McCarthy said Peloton was “shielding his bets” on what churn could look like once the price hike hits.
“It remains to be seen what the net impact will be when the price hike hits in June,” McCarthy said during the call, adding that the company “won’t know until it does.”
Furthermore, McCarthy said he was optimistic about the company’s future “despite the stock price”, saying that “reversals are hard work”. (Of course, you’d expect McCarthy to be optimistic about his own company.) He doubled down on switching the company to rely less on hardware — which is interesting given the recent launch of the Peloton Guide and rumors it’ll eventually release a connected rower.
“The overarching strategy is connected fitness,” McCarthy said during the call. “We have to be good at hardware, but being good at hardware isn’t nearly enough.”
McCarthy went on to elaborate on what he meant by “connected fitness.” The company aims to grow its membership to 100 million members by expanding into global markets and promoting the Peloton app. That’s a significant jump from current membership, which grew 29 percent year over year to 7 million. Meanwhile, familiarity with the Peloton app in the US unaided is a meager 4 percent — probably because Peloton is best known as “that bike company.” He also noted that the app hasn’t been central to the company’s marketing efforts until now, though it’s the easiest way to expand outside of the US. McCarthy also started with the idea of potentially changing hardware designs in the future so that Peloton products arrive at consumers’ homes in one piece. Currently, Peloton’s treadmills and bicycles must be delivered and installed with white gloves.
“We have to be good at hardware, but being good at hardware is not nearly enough”
The company is also exploring partnerships with third-party retailers, though McCarthy has yet to provide any insight into that strategy. And while Peloton says the One Peloton Club pilot has produced some “promising results,” the company says it’s too early to say whether the pilot will become a permanent option.
Likewise, it’s too early to say if McCarthy’s strategy is paying off, given he’s only been at the helm for 13 weeks. We’ll likely see more hints of what McCarthy has planned at Peloton’s annual Homecoming event later this week. The event is generally aimed at Peloton’s loyal fans and is the time when the company traditionally teases new products and features. But given that it’s happening so close to profit, it’s another good chance for Peloton to give hints to grumpy investors about its product roadmap and how it plans to get back on track.