The peloton numbers don’t look great. In this morning’s Q4 2022 results, the company reported an operating loss of $1.2 billion, a 28 percent decline in revenue, a decline in membership and a monthly subscriber churn of more than 1 percent for the first time in a long time. (Maybe someday?) And that’s just the tip of the iceberg. In short, the losses were greater than both Peloton and investors had anticipated.
And yet Peloton CEO Barry McCarthy would have you believe that the numbers actually paint a picture of “substantial progress” and the true beginnings of Peloton’s comeback story.
“The naysayers will look at our fourth quarter financial performance and see a crucible of declining revenues, negative gross margin and increased operating losses. They will say these threaten the viability of the company,” McCarthy said in his shareholder letter. Clearly he doesn’t agree, McCarthy says investors should be happy that a huge chunk of that $1.2 billion – $415 million to be exact – is just what it takes to get back on track. to get on the right track.
Still, it’s hard to turn such a big loss as a win when it’s yours sixth quarter of consecutive losses and you have refused to give a 2023 outlook – which is perhaps why McCarthy quoted a dramatic metaphor about too-fast freighters and daring rescues in the Mediterranean.
To conclude his shareholder letter, McCarthy writes:
In high school I worked on a cargo ship for three summer months. After midnight on my second trip, I was asleep when the general departure alarm woke me. My hotline was on the bridge. Fear is a great motivator. I got dressed as I ran. The 720 ft ship was doing 27 knots and the rudder was hard ale. The ship healed sharply to starboard and the steel hull shook. The captain tried to turn the ship around, but a ship this big and going so fast takes miles and miles to change direction. We saved two men’s lives that night. They had been lost at sea for days, in the Mediterranean. A happy, happy ending.
Platoon is like that freighter. We’ve raised the alarm for the general quarters. Everyone is at their station. We continue to add new inputs to develop our go-to-market strategy to restore growth. When will the ship respond is the question. Our target is FY23.
There’s a grain of truth in that complicated metaphor somewhere. Peloton has made some significant recent changes to “get back on track,” including a third round of layoffs, increased subscription costs, experimenting with product pricing, plans to close store locations, shrinking its distribution and manufacturing network, and redesigning the bikes that they can be self-assembled for easier shipping. All these efforts have resulted in some financial progress. Instead of burning $650 million in quarterly cash, that number improved to $412 million in the fourth quarter. As in, that $1.2 billion loss could have been worse.
And while the overall churn had risen, Churn rates for the One Peloton Club pilot program were lower than expected at less than 3 percent. The program allows members to pay a flat monthly fee of $89 to bundle the cost of a bike and membership. In September, the company plans to expand marketing for the program nationwide. He also pointed out that the program has brought in younger, more value-oriented shoppers.
That said, McCarthy was hesitant to commit to “really leaning on” bike rentals as a panacea for the company’s financial woes. That’s because the company has yet to figure out whether the program is a “nuclear bomb or the path to the promised land.”
Subscriptions were also less pressing. They were broadly flat from last quarter, but were up 27 percent from last year around this time. Subscription revenue also increased 36 percent from last year to $383.1 million, surpassing hardware revenue in the overall mix. McCarthy has been bullish from day one about Peloton subscriptions as the key to success – and it looks like his efforts are starting to pay off.
McCarthy also highlighted the members’ enthusiasm for the reopened Peloton Studios in New York and London as a sign of continued commitment. In particular, he named Lizzo as a superfan in the shareholder letter, saying a surprise studio drop-in from the singer led to 426,000 workouts and the “most attendance of any cycling class within 7 days of the broadcast date.”
It takes more than pure optimism, scraping barrels, and bombastic turns of phrase to convince investors. Peloton’s shares fell 13 percent, despite rising 20 percent less than 24 hours earlier on news that it was partnering with Amazon to sell its bikes. That said, McCarthy acknowledged that there is still a lot of work to be done and that the company will probably not see the fruits of its efforts until 2023.