Barry McCarthy Archives

Peloton shares soar 35% as turnaround plan takes hold,…

22 August 2024
by admin

Peloton shares rise 7% as turnaround plan takes hold, losses shrink

Peloton said Thursday it is digging itself out of the red and eked out a slight sales increase for the first time in nine quarters as it slashed its overall losses.

The company’s shares spiked 35% on Thursday.

The beleaguered connected fitness company, which two board members have run since former CEO Barry McCarthy resigned earlier this year, saw sales grow by 0.2% during its fiscal fourth quarter. While only a modest uptick, it’s the first time Peloton posted year-over-year revenue growth since its 2021 holiday quarter.

The company also indicated it’s ready to focus on profitability over growth with significant cuts to its marketing and sales spending and meaningful increases to free cash flow and adjusted EBITDA. Those cuts helped Peloton narrow its quarterly losses to $30.5 million from $241.1 million in the year-ago period.

Here’s how the Bike and Tread maker performed compared with what Wall Street was anticipating, based on a survey of analysts by LSEG:

Loss per share: 8 cents vs. 17 cents expected
Revenue: $644 million vs. $631 million expected

For the three-month period that ended June 30, Peloton significantly narrowed its losses. The company posted a loss of $30.5 million, or 8 cents per share, compared with a loss of $241.8 million, or 68 cents per share, a year earlier.

Sales rose to $643.6 million, up about 0.2% from $642.1 million a year earlier. That’s only a $1.5 million increase, but Peloton did it at a time when sales are typically a bit slower for the company, because the quarter bleeds into the summer when people are more focused on going out and traveling than working out. The last time Peloton delivered year-over-year sales growth was during its holiday season in 2021, which is typically the company’s strongest quarter.

Secondary market gains

During the quarter, sales for Peloton’s pricy connected fitness hardware fell about 4%, continuing a trend for the company. But subscription revenue rose by 2.3%, and the segment’s gross margin increased by 1 percentage point.

Though hardware sales were down, Peloton is growing its subscription revenue through the secondary market where people can buy used stationary bikes for a fraction of the cost of a new one. During the quarter, subscription revenue from hardware purchased on the secondary market grew 16% year over year.

“We believe a meaningful share of these subscribers are incremental, and they exhibit lower net churn rates than rental subscribers,” the company said in a letter to shareholders.

While hardware sales have hurt Peloton’s overall performance, sales for its Tread are growing after it overcame a costly recall. During the quarter, sales from Peloton’s treadmill portfolio grew 42% year over year.

The company is also seeing some positive signs in its Bike rental program, which allowed it to clear through a glut of inventory. During the quarter, average net monthly paid subscription churn for rentals was down 1.1 percentage points. Demand has been so steady, it no longer has the refurbished inventory levels necessary to supply that side of the program. The company ceased offering its original Bike rental program on Aug. 1 and since then, has seen demand grow for its Bike+ rental, refurbished original Bike sales and financed new Bike sales.

“These alternative programs have stronger unit economics than original Bike rental, with more cash paid upfront and a stronger retention profile,” the company said in its shareholder letter.

Ever since Peloton’s pandemic heyday came to an end, the company has struggled to generate free cash flow and ensure it has enough assets on its balance sheet to cover its many liabilities. Earlier this year, it announced a sprawling restructuring plan that included cutting 15% of the company’s global workforce to achieve $200 million in annualized cost savings by the end of fiscal 2025.

Those efforts are starting to bear fruit.

During the quarter, Peloton delivered adjusted EBITDA and free cash flow for the second consecutive quarter – a feat it had not pulled off since the height of the Covid-19 pandemic. It posted $70 million of adjusted EBITDA, far more than the $53 million that analysts had expected, according to StreetAccount.

That metric was up $105 million compared with the year-ago period and $64 million quarter over quarter.

Peloton also generated $26 million in free cash flow, compared with negative $74 million in the year-ago period and $8 million in the prior quarter.

Improvements to Peloton’s balance sheet come after the company completed massive refinancing of its debt that staved off a looming liquidity crunch and pushed out its debt maturities by several years.

As far as who will be Peloton’s next leader, interim co-CEO Karen Boone said the search is “well underway” and they’ve seen “no shortage of interest.”

“We are far along in the process. We’ve done a lot of vetting, a lot of conversations, and we’ve narrowed it down to some very highly qualified candidates,” Boone said. “We have some very specific folks in mind at this point.”

In her opening remarks, Boone said the company can’t speculate on when its next CEO will start. But just before ending the call, she said the new hire will be in place by the time the company next reports earnings, which is expected to be sometime in the fall.

“I should probably under-promise here, but I am excited to say that I do believe you will be speaking to and hearing from the new CEO of Peloton on this call next quarter,” said Boone.

Profit over growth

For the year ahead, Peloton is planning to invest in its hardware and software to deliver a better user experience, among other initiatives. However, its guidance assumes that investments in these new initiatives “will not deliver subscriber growth within the fiscal year,” indicating Peloton may finally be shifting its focus away from growth in favor of profitability and free cash flow generation.

“Chris, and I, in partnership with Peloton’s strong leadership team, are continuing to make progress on several key strategic priorities, which include aligning our cost structure to the current size of our business to improve profitability, and deliver meaningful free cash flow without requiring growth to get there,” Boone said on a call with analysts.

“We’re enthusiastic about our innovative roadmap, but we’ll be judicious about deploying marketing dollars until we demonstrate product market fit, and continue to be cautious about marketing spend given the uncertain consumer backdrop, and ongoing macro environment,” she said.

That shift shows in its reductions to sales and marketing spending — an expense that has long dragged down Peloton’s balance sheet and has been criticized as being too high for the company’s size.

During the quarter, Peloton cut sales and marketing spending by $25.5 million, or 19% year over year. It said it expects to continue to make reductions to its marketing budget throughout fiscal 2025.

For the current quarter, Peloton is projecting sales to be worse than Wall Street expected but is guiding to higher-than-forecast adjusted EBITDA. The company said it anticipates sales to be between $560 million and $580 million, compared with estimates of $609 million, according to LSEG. It’s expecting to post adjusted EBITDA of $50 million to $60 million, compared with estimates of $45 million, according to StreetAccount.

StreetAccount analysts had expected the number of connected fitness subscribers to be 2.96 million during the current quarter, but Peloton projects a range of 2.88 million to 2.89 million instead.

For the full year, Peloton expects sales to be between $2.4 billion and $2.5 billion, compared with estimates of $2.7 billion, according to LSEG.

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Science & Environment

Peloton staved off the cash crunch that threatened its…

2 July 2024
by admin

A Peloton Bike inside a showroom in New York, US, on Wednesday, Nov. 1, 2023. Peloton Interactive Inc. is scheduled to release earnings figures on November 2.

Michael Nagle | Bloomberg | Getty Images

Peloton no longer faces an imminent liquidity crunch after a massive debt refinancing, but the company still has a long road ahead to fix its business and get back to profitability.

In late May, the connected fitness company secured a new $1 billion term loan, raised $350 million in convertible senior notes and received a new $100 million line of credit from JP Morgan and Goldman Sachs. All of those are due in 2029.

The refinance reduced Peloton’s debt from about $1.75 billion to around $1.55 billion and pushed off looming due dates on loans that it likely wouldn’t have had the cash to pay back.

Before the refinancing, Peloton would have needed to pay around $800 million toward its debt by November 2025. If it managed to pay that, about another $200 million still would have been due around three months later. The term loan would have been due in May 2027.

For Peloton, which hasn’t turned a net profit since December 2020 and has seen sales fall for nine straight quarters, the debt pile posed an existential threat and fueled investor concerns about a possible bankruptcy.

Now that it has refinanced, Peloton has eased investor concerns about liquidity and has the breathing room it needs to try to turn around its business.

The fact that it was able to secure these loans signals investors believe in its ability to rightsize its business and eventually pay them back, restructuring experts told CNBC.

“This refinancing is now putting us in a much better position for sustainable, profitable growth and just a much stronger financial footing than where we were before, and our investors saw that,” finance chief Liz Coddington told CNBC in an interview. “I think they believe in the story. They believe in what we’re trying to do, as do we, and in the transformation of the business. And so it was just a great vote of confidence for Peloton’s future.”

Peloton faces risks ahead

While the refinance may have bought Peloton some time, it’s far from a panacea. Under the terms, Peloton will now be spending about $133 million annually in interest, up from around $89 million previously. It will make Peloton’s efforts to sustain positive free cash flow more difficult.

Coddington acknowledged to CNBC that the higher interest expense is going to “impact” free cash flow, but said that’s partly why the company started to cut costs in early May. The plan is expected to reduce annual run-rate expenses by more than $200 million.

Even with the higher interest payments, Coddington expects the company will be able to sustain positive free cash flow without having the business “materially grow in the near term.”

“The cost reduction plan made us much more comfortable with that,” said Coddington.

While Peloton insists that investors bought into its refinance because they believe in its strategy, some could be trying to put themselves in a better position if the company fails.

Two of Peloton’s largest debt holders, Soros Fund Management and Silver Point Capital, are known to sometimes invest in distressed companies. Since the Peloton loans they invested in are secured, they are near the top of the capital structure. If Peloton can’t turn its business around and ends up in a position where it’s considering or filing for bankruptcy, its creditors would be in a strong position to take control of the company.

“I would describe this refinancing slash recapitalization as sort of opportunistic,” said Evan DuFaux, a special situations analyst at CreditSights and an expert in distressed debt. “I think that’s just sort of a smart, opportunistic and kind of tricky move.”

Silver Point declined to comment. Soros didn’t return a request for comment.

More cost cuts to come?

Peloton is in a far better cash position than it was a few months ago, but the company still needs to address the demand issues that have plagued it since the Covid-19 pandemic wound down and figure out what kind of business it will be in the future.

“It really is an exercise in kicking the can down the road because the refinancing itself buys time, but it doesn’t actually fix any of the underlying problems at Peloton,” said Neil Saunders, managing director of GlobalData Retail. “Those are very different issues to the refinancing.”

Following former CEO Barry McCarthy’s departure and with two board members, Karen Boone and Chris Bruzzo, now in charge, Peloton needs to decide: is it a content company, like the Netflix for fitness, or is it a hardware company that needs to develop new strategies to sell its pricey equipment?

So far, straddling both has proven to be unsuccessful.

“They’re going to have to make some decisions about which parts of the model are survivable, which parts are not, or things that they can do to advance forward without losing the great brand value that they still currently have, especially with the loyal following that they have,” said Scott Stuart, the CEO of the Turnaround Management Association and an expert in corporate restructurings.

“Money doesn’t fix everything, and the issue becomes the more money you take and the more you refinance … the more problematic it becomes,” he added.

Simeon Siegel, a retail analyst for BMO Capital Markets, said Peloton can start addressing its issues by forgetting about trying to grow the business for now and instead focus on “bear hugging” its millions of brand loyalists.

He pointed out that the company makes about $1.6 billion in recurring, high-margin subscription revenue and sees more than $1.1 billion in gross profit from that side of the business.

“The problem is, they lose money. How do you lose money if you’re generating a billion one of recurring gross profit dollars?” said Siegel. “Well, you take all of that gross profit and you spend it to try and chase new growth.”

He said Peloton could generate around $500 million in EBITDA if it cuts research and development, marketing and other corporate expenses. For example, Peloton’s marketing budget is around 25% of annual sales, and if the company reduces it to even 10%, it would still be in the “upper echelon of most brands,” said Siegel.

“Their debt is scary on a company that’s burning cash, their debt’s not scary at all on a company that can make half a billion dollars of EBITDA,” he said. “They have a business that’s generating a tremendous amount of cash. They need to stop spending it.”

In May, Peloton announced it would cut 15% of its corporate workforce, but it may be more reluctant to back off its growth strategy. Peloton founder John Foley set a goal of growing to 100 million members, and McCarthy adopted the target when he took over. As of the end of March, Peloton had about 6.6 million members — woefully behind that long-term target.

Since the company announced its cost cutting plan, McCarthy’s departure and another disastrous earnings report in early May, Peloton has been largely mum on its strategy. It said that it’s searching for a new permanent CEO, and the person it hires will offer clues about the company’s direction.

If it hires another “hyper growth tech CEO” like McCarthy – who had done stints at Netflix and Spotify – then Peloton will likely face the same issues, Siegel said. But if it taps someone different, it could signal a strategy shift.

Content magic

One notable shift afoot at Peloton is its live programming schedule. The company currently offers live streaming classes from its New York studio seven days a week, but beginning on Wednesday, that will change to six. Last month, its London studio moved from seven days of live streaming classes to five.

“We’re all going to still be creating, creating social content, dropping new classes,” Peloton’s Chief Content Officer Jen Cotter told CNBC. “I think that we’ll just be using the brain space that would have been spent on live classes that day to come up with new programs, new ways to distribute wellness content, new categories of business to go in, like nutrition and rest and sleep, which we’ve not really done as deeply as we plan to do.”

She added that the change will save the company some money, but it’s more of an opportunity to make better use of its production staff than it is a cost-cutting measure.

For example, the company in May partnered with Hyatt Hotels as it tries to generate new revenue and diversify income streams. As part of the agreement, hundreds of Hyatt properties will be outfitted with Peloton equipment, and guests will have access to bespoke Peloton classes on their hotel room TVs in around 400 locations. The schedule tweak will allow staff to be available to make content for projects like the Hyatt partnership.

The shift comes after three Peloton trainers – Kristin McGee, Kendall Toole, and Ross Rayburn – decided not to renew their contracts with the company. The news raised concerns among Peloton’s rabid fanbase that trainers, one of its core assets, were leaving in droves.

Cotter insisted the parting was amicable – and the door is open should the athletes want to return.

“All I can say is, they decided they wanted to leave. All the instructors were offered contracts and I mean it when I say we have deep respect and appreciation for what they’ve contributed, and if they want to try something new, that’s okay,” said Cotter.

“As much as we’re going to miss them, we are like a professional sports team,” she added. “Athletes do leave the team and you still love the athlete and you still love the team and so we’re really hopeful that this change does allow our members to understand this is okay, and yes, we’re going to miss them, but yes, it’s okay for people to go try other things.”

McGee, Toole and Rayburn all left when Peloton was in the process of renewing trainer contracts.

Some instructors may be teaching fewer classes as part of the live content pullback. It’s unclear if any instructors took pay cuts as a result, or if McGee, Toole and Rayburn left because of disagreements over compensation.

When asked, Cotter declined to answer.

Science & Environment

Peloton shares drop after it announces refinancing to stave…

20 May 2024
by admin

A pedestrian walks by a Peloton store in Palo Alto, California, on May 8, 2024.

Justin Sullivan | Getty Images

Peloton shares plunged on Monday after the connected fitness company said it is launching a “global refinancing,” as it looks to stave off a cash crunch amid falling sales.

The company is offering $275 million in convertible senior notes due 2029 in a private offering and plans to enter into a $1 billion five-year term loan and $100 million revolving credit facility.

Peloton plans to use the proceeds to buy back about $800 million of its 0% convertible senior notes, which are currently due in 2026, and refinance its existing term loan.

Shares fell more than 12% in extended trading after Peloton announced the refinancing, but later regained some ground.

Last month, Peloton announced that its CEO Barry McCarthy was stepping down and said it planned to lay off 15% of its workforce because it “simply had no other way to bring its spending in line with its revenue.”

The restructuring was designed to improve Peloton’s cash position as demand for its connected fitness products continues to fall. The company has been working to achieve positive free cash flow, which “makes Peloton a more attractive borrower” and “is important as the company turns its attention to the necessary task of successfully refinancing its debt,” McCarthy said in a memo to staff prior to his departure.

In a letter to shareholders, the company said it is “mindful” of the timing of its debt maturities, which include convertible notes and a term loan. It said it is working closely with its lenders at JPMorgan and Goldman Sachs on a “refinancing strategy.”

“Overall, our refinancing goals are to deleverage and extend maturities at a reasonable blended cost of capital,” the company said. “We are encouraged by the support and inbound interest from our existing lenders and investors and we look forward to sharing more about this topic.”

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