Peloton's Troubles Continue With No End in Sight

Customer demand is slowing, inventory is piling up, and cash flow is moving in the wrong direction.

Peloton Interactive, Inc. is an American exercise equipment and media company based in New York City. Peloton's main products are Internet-connected stationary bicycles and treadmills that enable monthly subscribers to remotely participate in classes via streaming media. Peloton charges a US$39 monthly membership fee to access classes and additional features on their exercise equipment, or $12.99 for users only accessing the content via app or website.

Peloton (PTON 16.52%) thrived at the pandemic's onset. Folks who were used to exercising at gyms and other away-from-home facilities were forced to make other arrangements. Peloton's in-home interactive exercising equipment was one obvious choice. However, the boom was short-lived, and consumers quickly returned to their previous habits when economies started reopening.

Unfortunately, Peloton's management had invested in increasing capacity, expecting the sales boom to be longer-lasting. Now the company is grappling with the fallout from those investments and declining customer demand.

Customer demand is slowing sharply for Peloton's products

Note that Peloton reports sales in two segments: connected fitness products and subscriptions. The former includes sales of exercise machines like the Bike and Treadmill. In its most recent quarter, which ended March 31, Peloton's connected fitness segment reported sales of $594 million. That was down considerably from the $1 billion in revenue it generated during the same quarter in the year prior. The decrease in customer demand for its in-home exercise equipment has been sharp and fast.

For several months after the pandemic's onset, sales were surging, and Peloton was having trouble keeping up with demand. The backlog was so deep that customers were waiting ten weeks from order to delivery. In the quarter ended in March, inventories of products were piling up, increasing to $1.4 billion from $937 million at the same time last year. The rise in stockpiles was partly to blame, and its $1.6 billion net loss for Peloton losing $1.7 billion in cash from operations in Q3.

The company is taking steps to right the ship, including restructuring the business to reduce operating expenses by $800 million by fiscal year 2024. Some of those savings could be realized in the second half of fiscal year 2022 and even more in fiscal year 2023. Shareholders should hope so because they cannot sustain themselves under current operating conditions. Management has arranged another credit facility of $750 million to stem the tide while it corrects itself. Peloton had only $879 million of cash on the balance sheet on March 31.

What this could mean for Peloton investors

The stock has been crashing as the bad news keeps rolling out of Peloton's quarterly updates. Despite the stock's falling 92% off its high, it appears too early for investors to scoop up shares. The future looks increasingly uncertain, demand for Peloton's exercise equipment is falling fast, and there is no telling what it will need to do to spur enthusiasm again.

Newly appointed CEO Barry McCarthy has stated the goal of reaching 100 million members -- an audacious target considering its current total of 3 million. Still, the shift in focus to software versus hardware could do wonders for the business. The expensive equipment is the central friction point in acquiring customers. If it can find a solution to that pain point, it could unlock another level of growth. Peloton is testing a subscription model for the hardware, where customers can pay one monthly fee for renting the equipment and accessing membership benefits.

Potential investors will want to follow the progress of the several initiatives underway at Peloton and see demonstrable progress before acquiring shares.