September 14, 2022

Breakingviews: Peloton pack leader has clear road to accelerate

by Breakingviews.

Fitness enthusiasts know that switching up a workout routine can often be a good thing. That same logic can be applied to Peloton Interactive’s leadership. John Foley, who founded the exercise-bike company a decade ago, is stepping down from his role as executive chair, months after he was replaced as chief executive by Barry McCarthy in February. McCarthy may yet fail, but at least it will be on his terms.

Peloton investors have been on a downhill descent since the shares peaked at the end of 2020, after more than quintupling during the pandemic. McCarthy noted last month that the U.S. market in which the company competes was down an estimated 51% year-to-date. Peloton’s own market share has grown, but still, the overall contraction has been a problem. Peloton’s shares are down more than 90% in the last 12 months.

The new boss hasn’t been sitting idle, however. After pledging to achieve at least $800 million in annual cost savings, the company said in July it would outsource production of its bikes and treadmills in an effort to slash costs. Subscription revenue jumped 36% year-on-year to $383 million in the fourth quarter and accounted for over half of revenue, a bright spot. That business is much more scalable, too, with gross margins of nearly 70% and recurring revenue. A new partnership with Amazon.com can’t hurt in that regard.

McCarthy, the former chief financial officer of Spotify Technology and Netflix, is well placed to know how to transition the company from a hardware firm to one that relies on content. He said at Goldman Sachs’ Communacopia and Technology Conference on Monday afternoon that Peloton will reach sustained positive cash flow by the fourth quarter of the fiscal year that ends in June 2023 – or will be “awfully darn close” – after having achieved that previously.

Climbing out of the ditch still won’t be easy. Peloton is facing numerous lawsuits. Sales from equipment like bikes and treadmills made up a little less than half of its revenue in the most recent quarter, despite having fallen 55% year-on-year. The heyday of the home workout may never return, and even if it does, copycats with online content will have had plenty of time to catch up. Still, being able to independently execute on decisions without the founder in the boardroom is surely a benefit.

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