Peloton shares soar 35% 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:

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.

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.

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.