Peloton’s restructuring plan is off to a slow start

When Barry McCarthy stepped forward as the new CEO of Peloton last quarter amid the news that the company had laid off 2,800 employees, it was clear that there had been his work cut out for him. Since then, McCarthy has been outspoken about changing the of the company focus from hardware to software. That new direction can be explained by looking at the current situation. Third Quarter Earnings launch, which paints a difficult financial picture for Peloton. The company continued to post higher-than-expected losses and, subsequently, share prices fell more than 20 percent.

Peloton said today that its third-quarter loss was $757.1 million, compared to an $8.6 million loss at this time last year. Meanwhile, revenue fell to $964.3 million from $1.26 billion a year ago. As in the last quarter, Peloton attributed the decline to lower demand as pandemic restrictions eased and costs rose due to higher-than-ideal inventory. In its shareholder letterPeloton said that number was partially offset by Fingerprint Sales. However, the company also said Plus tread yields were higher than expected after memory of last year, costing the company $18 million. McCarthy also noted that the company ended the quarter with $879 million in cash, leaving it “under-capitalized” for its needs. To strengthen [its] balance sheet,” McCarthy pointed to an additional $750 million in funding he received from JPMorgan and Goldman Sachs earlier this week.

Those numbers don’t paint a rosy picture for the connected fitness company’s current finances, which is why the company is in the midst of a dramatic shift in strategy, though it may not all be doom and gloom. In April, the company announced that it was cutting prices on all your hardware and raising the cost of your All-Access membership to $44 starting June 1. The company also began testing a new subscription model called One Platoon Club which allows users to rent the Bike and take classes for a monthly fee. So far, McCarthy said on today’s investor call that the company has seen promising results from these efforts. Reducing the price of his equipment led to daily unit sales increasing by 69 percent. McCarthy, meanwhile, cited the “mass-market appeal” of the One Peloton Club pilot, with 53 percent of sign-ups coming from people with household incomes of less than $100,000.

Peloton’s quarterly subscriber churn rate also improved to 0.75 percent, from 0.79 percent last quarter. Peloton has always had impressively low turnover, and the third-quarter figure also includes a “modest increase” in cancellations following news that the company would increase its monthly membership fee starting June 1. That said, McCarthy said on the investors’ call that Peloton was “hedging its bets” on what the rotation would look like once the price increase hits.

“It remains to be seen what the net impact will be when the price increase comes around in June,” McCarthy said on the call, adding that the company “won’t know until it does.”

Photo by Victoria Song/The Verge

Otherwise, McCarthy said he was optimistic about the company’s future “regardless of the share price,” saying “changes are hard work.” (Of course, one would expect McCarthy to be optimistic about his own company.) He doubled down on gear shifting the company to rely less on hardware, which is interesting considering the recent launch of the Platoon Guide and rumors that he will eventually release a connected rower.

“The overall strategy is connected fitness,” McCarthy said on the call. “We need to be good at hardware, but being good at hardware is not enough.”

McCarthy went on to elaborate on what he meant by “connected fitness.” Namely, the company aims to grow its membership to 100 million members by expanding to global markets and promoting the Peloton app. That’s a significant jump from its current membership, which is up 29 percent year over year to 7 million. Meanwhile, unaided awareness of the Peloton app in the US is a scant 4 percent, likely because Peloton is mostly known as “that bike company.” He also noted that the app hasn’t been at the center of the company’s marketing efforts thus far, though it’s the easiest way to expand outside of the US. McCarthy also floated the idea of ​​potentially changing hardware designs. in the future so that Peloton products reach consumers’ homes in one piece. Currently, Peloton treadmills and bikes require careful delivery and installation.

The company is also exploring partnerships with outside retailers, though McCarthy declined to provide more information on that strategy at this time. And while Peloton says the One Peloton Club pilot has yielded some “promising results,” the company says it’s still too early to say whether the pilot will become a permanent option.

Likewise, it’s still too early to tell whether McCarthy’s strategy is paying off, as he has been in charge for just 13 weeks. We’ll likely see more clues than McCarthy has planned at Peloton’s annual Homecoming event later this week. The event is typically geared toward loyal Peloton fans and is when the company traditionally introduces new products and features. But given that it’s happening so close to earnings, it’s another good opportunity for Peloton to hint to uneasy investors about its product roadmap and how it plans to get back on track.