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Peloton shares soar 26% after the fitness company posts growth in subscription sales

Brody Longo trains on his Peloton stationary bike on April 16, 2021 in Brick, New Jersey.

Michael Loccisano | Getty Images

peloton said on Wednesday that its net loss narrowed year-on-year, and for the third straight quarter, subscription revenue outpaced sales of the company’s connected fitness products.

CEO Barry McCarthy called the results a potential “watershed moment” for the company, which has spent much of the past year executing an aggressive turnaround strategy.

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The fitness equipment maker’s second-quarter sales beat Wall Street expectations, but the company posted larger-than-expected losses per share. Peloton shares closed about 26% higher on Wednesday.

Here’s how Peloton compared to Wall Street expectations for the three months ended December 31, based on a poll of analysts by Refinitiv:

  • Loss per share: 98 cents vs. 64 cents expected
  • Revenue: $792.7 million versus $710 million expected

The company’s reported net loss for the period was $335.4 million, or 98 cents a share, compared to a loss of $439.4 million, or $1.39 per share, a year ago. While it’s the eighth consecutive quarter that the practice firm has reported losses, it’s the smallest loss Peloton has posted since the fourth quarter of fiscal 2021.

Revenue fell 30% from the year-ago period, but exceeded the company’s expected range of $700 million to $725 million. Sales of connected fitness products, which are typically strong during Peloton’s vacation quarter, fell 52% year over year, while subscription revenue rose 22%.

“This is the time of year where if we’re selling a lot of hardware, we would expect a lot of hardware-related revenue, and you would expect that revenue to potentially exceed subscriptions,” McCarthy told CNBC. “It didn’t. That’s the reason in the letter [to investors]I’m calling it out because it could be a turning point.”

In his letter to investors, McCarthy said he expects the trend to continue.

The company ended the quarter with a total of 6.7 million members and 3.03 million connected fitness subscriptions, up 10% from the prior-year period. The company counted 852,000 subscribers to its app, down 1% from the same period last year. It aims to get 1 million people to sign up for trials of its app over the next year.

Peloton loses money on bikes, treadmills, and other machines, but its subscription business has once again kept its overall margin afloat. Gross margin for its connected fitness products was minus 11.2%, but gross margin for subscription sales was 67.6%. Total gross margin was 29.7% compared to 24.8% in the prior-year period. However, it declined compared to the previous quarter, due in part to increased promotions during the holiday quarter.

Peloton expects lower sales but higher margins for the next quarter. The company is forecasting revenue of between $690 million and $715 million and an overall gross margin of about 39%. Wall Street analysts have set their revenue estimate at $692.1 million for the quarter.

The company also expects to have 3.08 million to 3.09 million connected fitness subscribers.

Next phase of the turnaround

Peloton, which was booming in the early days of the Covid pandemic, was in the midst of a comprehensive turnaround strategy under McCarthy, who took over the helm of the company a year ago.

Shares of the company have more than doubled this year, closing at $16.36 on Wednesday. However, shares are still a long way off their 52-week high of $40.35, set around the time McCarthy became CEO.

How Peloton stock has performed

“The viability of the business was very dubious when I came in,” said McCarthy, a former Spotify and Netflix Executive. “It probably wouldn’t be an exaggeration to say that there were some people who didn’t expect us to survive this long.”

Since his acquisition, McCarthy has reduced Peloton’s workforce by more than half, expanded its bike rental program nationwide, started selling certified used bikes, introduced a rowing machine, and formed partnerships with Amazon and dicks Sporting Goods to sell its bikes and treadmills.

McCarthy’s top priority was managing cash flow and getting the company out of the red, a goal he says the company has almost achieved. Free cash flow was negative $94.4 million compared to negative $246.3 million in the previous quarter and negative $546.7 million in the year-ago period.

McCarthy said he’s ready to move from trying to keep the company afloat to growing it, he told CNBC.

“Now that we’ve addressed the profitability issues, let’s get back to thinking about the growth and future of the company, such as Punkt,” McCarthy said.

“So there are a number of initiatives that we have announced that will position us to drive growth,” he added. “And the question we have to answer for investors now that we’re not talking about profitability is how fast, how profitable, where is it coming from, and over time we’re going to start to answer some of those questions.”


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