Peloton Reports Q3 Sales Slump 24 Percent

Peloton reported a wider-than-expected loss in the fiscal third quarter ended March 31 amid a steep decline in sales. The connected fitness equipment maker also offered up a weak sales outlook for the fourth quarter, citing softer demand.

The loss in the quarter came to $757.1 million, or $2.27 a share, against Wall Street’s consensus estimate calling for a loss of 83 cents. In the year-ago period, the loss was $8.6 million, or 3 cents.

Revenues fell 23.6 percent to $964.3 million, missing Wall Street’s consensus estimate of $972.9 million.

Connected Fitness revenue, which includes the contribution from Precor, was $594.4 million, down 42 percent vs. Q3 last year. The primary driver of the year-over-year revenue decline was a reduction in consumer demand exiting the pandemic’s peak, partially offset by the contribution of Tread sales. Connected Fitness revenue was also negatively impacted by higher than anticipated Tread+ returns totaling $18 million related to the brand’s May 2021 product recall.

In contrast to the decline in Connected Fitness revenue, Subscription revenue of $369.9 million grew by 55 percent year-over-year, and represented 38.4 percent of total company revenues vs. 19.0 percent in the year ago quarter. Peloton said this mix shift to high margin Subscription revenue is a long term trend in the business the company is taking steps to accelerate with its hardware price changes and FaaS (function as a service) strategy.

Gross profit in Q3 was $184.2 million and 19.1 percent of revenue, representing a 59 percent year-over-year decline. Compared to the year ago period, Peloton said its Connected Fitness gross margin was pressured by the August 2021 Peloton Bike price reduction, impact of accessory inventory write-down, higher logistics expenses per delivery, increased port and storage costs, and charges associated with the voluntary recall of its Tread+ product (approximately $19 million impact to gross profit in Q3). Subscription gross profit was $252.1 million in Q3, representing 63 percent year-over-year growth. Subscription gross margin was 68.1 percent, up from 64.6 percent in the year ago period driven by continued leveraging of fixed costs.

Total operating expense was $920.0 million, and grew 101 percent year-over-year, representing 95.4 percent of total revenue versus the prior year period of 36.3 percent. The current quarter operating expense included $158.5 million in restructuring expense, $181.9 million in goodwill impairment, and $32.5 million in impairment expense and loss on disposals. Excluding these non-recurring items, operating expense grew 19 percent to $547.2 million, representing 56.7 percent of revenue.

Adjusted EBITDA for the quarter was $(194.0) million, versus $63.2 million in the year ago period. The primary drivers of the year-over-year decline were lower revenue and Connected Fitness gross margins, as well as higher operating expenses.

FY 2022 Q4 Outlook

For the fourth quarter, Peloton expects sales in the range of $675 to $700 million, down from $937 million in the year-ago quarter and $964 in the latest third quarter. Peloton said its shareholders’ letter, “Our Q4 outlook reflects softer demand vs. our February forecast, partially offset by accelerated sales we’ve seen as a result of our recent hardware price reductions. Our Q4 ending CF subscriber forecast of approximately 2.98 million incorporates a modest negative impact from our Subscription pricing increase starting June 1. As anticipated, we have seen a small increase to cancellations due to the Connected Fitness subscription price increase announcement, but we expect the impact to moderate as we progress through FY23. We forecast total revenue of $675 million to $700 million in Q4.”

Gross margin is expected to be 31 percent, up from gross margins of 27% in the year-ago quarter and 19% in the latest third quarter. Peloton said, “CF margin in the quarter will be significantly impacted by recent pricing changes and continued headwinds in freight, storage, and logistics due to the reduction in our demand outlook. We expect headwinds in freight to largely abate in FY23 and storage costs to come down as we move through FY23, resulting in a positive CF margin profile next fiscal year. We continue to expect leveraging of fixed costs in our Subscription margin in Q4 and a small positive impact from the Subscription pricing change.”

Adjusted EBITDA is expected to show a loss in the range of $120 million to $115 million compared to a loss of $45 million a year ago and $194 million in the latest third quarter. The year-over-year higher loss reflects lower pricing and demand and continued headwinds in freight and storage costs.

 

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