Peloton General Motors Co said Thursday it had emerged from a loss and posted a slight increase in sales for the first time in nine quarters as it trimmed its overall losses.
The struggling connected fitness company, which has been run by two board members since former CEO Barry McCarthy stepped down earlier this year, saw sales grow 0.2% during its fiscal fourth quarter. While the rise was only modest, it’s the first time Peloton has posted year-over-year revenue growth since the holiday quarter of 2021.
The company also signaled its willingness to focus on profitability rather than growth through significant cuts in marketing and sales spending and significant increases in free cash flow and adjusted earnings before interest, taxes, depreciation and amortization. Those cuts helped Peloton narrow its quarterly loss to $30.5 million from $241.1 million in the year-ago period.
The company's shares rose more than 25% in morning trading.
Here's how the bike and footwear maker performed compared to what Wall Street was expecting, based on a survey of analysts conducted by LSEG:
Loss per share: 8 cents vs. 17 cents expectedRevenue: $644 million vs. $631 million expected
For the three-month period ending June 30, Peloton narrowed its losses significantly. The company reported 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 up just $1.5 million, but Peloton did so at a time when sales are typically a bit slower for the company, as the quarter stretches into the summer when people are more focused on getting out and traveling than working out. The last time Peloton posted year-over-year sales growth was during the holiday season in 2021, which is typically the company’s strongest quarter.
secondary market gains
During the quarter, sales of Peloton’s high-end fitness devices fell about 4%, continuing the company’s trend. But subscription revenue rose 2.3%, and the segment’s gross profit margin increased 1%.
Despite the decline in hardware sales, Peloton is increasing subscription revenue through the secondary market, where people can buy used stationary bikes for a fraction of the cost of a new bike. During the quarter, subscription revenue from hardware purchased on the secondary market grew 16% year over year.
“We believe a significant portion of these subscribers are gradual, showing net decline rates compared to rental subscribers,” the company said in a letter to shareholders.
While hardware sales have hurt Peloton’s overall performance, Tread sales are growing after overcoming a costly recall. During the quarter, sales of Peloton’s treadmill lineup grew 42% year over year.
The company is also seeing some positive signs in its bike rental program, which has allowed it to eliminate excess inventory. During the quarter, average monthly net subscriptions paid for rentals fell 1.1 percentage points. Demand was very flat, and it no longer had the replenished inventory levels needed to supply that aspect of the program. The company discontinued its original bike rental program on August 1, and since then, it has seen demand grow for Bike+ rentals, original refurbished bike sales, and financing for new bike sales.
“These alternative programs have stronger unit economics than the original bike rental, with more cash up front and a stronger retention profile,” the company said in its letter to shareholders.
Since Peloton’s heyday ended due to the pandemic, 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, the company announced a wide-ranging restructuring plan that included cutting 15% of the company’s global workforce to achieve $200 million in annual cost savings by the end of fiscal 2025.
These efforts are beginning to bear fruit.
During the quarter, Peloton posted adjusted EBITDA and free cash flow for the second straight quarter — a feat it hasn’t achieved since the height of the COVID-19 pandemic. It reported $70 million in adjusted EBITDA, well above the $53 million analysts were expecting, according to StreetAccount.
This metric increased by $105 million compared to the same period last year, and by $64 million on a quarterly basis.
Peloton also generated free cash flow of $26 million, compared to negative $74 million in the year-ago period and $8 million in the prior quarter.
Peloton's balance sheet improvements come after the company completed a large-scale refinancing of its debt, averting an impending liquidity crisis and pushing its debt maturities out over several years.
As for who will be the next leader of Peloton, interim CEO Karen Boone said the search is “well underway” and that they have seen “no lack of interest.”
“We’re very far along in this process,” Boone said. “We’ve done a lot of vetting, a lot of conversations, and we’ve narrowed the options down to some very qualified candidates. We have some very specific people in mind at this point.”
In her opening remarks, Boone said the company could not predict when the new CEO would take office. But just before ending the call, she said the new CEO would be in place by the time the company reports earnings, which is expected to be sometime in the fall.
“I may have to under-promise here, but I’m happy to say that I think you’ll be talking and hearing from the new CEO of Peloton on this call next quarter,” Boone said.
profit on growth
Peloton plans to invest in its hardware and software to deliver a better user experience, among other initiatives, next year. However, its guidance assumes that investments in these new initiatives “will not generate subscriber growth during the fiscal year,” suggesting that 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, continue to make progress on several key strategic priorities, which include aligning our cost structure with the current size of our business to improve profitability, and delivering meaningful free cash flow without the need for growth to get there,” Boone said on a call with analysts.
“We are excited about our innovative roadmap, but we will be judicious in deploying marketing dollars until we have proven product-market fit, and we continue to be cautious about marketing spend given the uncertain consumer backdrop and ongoing macro environment,” she said.
The shift is evident in cuts to sales and marketing spending — expenses that have long weighed on Peloton’s balance sheet and been criticized as 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 making cuts to its marketing budget throughout fiscal 2025.
For the current quarter, Peloton expects sales to be worse than Wall Street expected but is reporting adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) above expectations. The company said it expects sales to be between $560 million and $580 million, compared with estimates of $609 million, according to LSEG. The company expects adjusted EBITDA to be between $50 million and $60 million, compared with estimates of $45 million, according to StreetAccount.
StreetAccount analysts had expected 2.96 million connected fitness subscribers during the current quarter, but Peloton is forecasting 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.
