Summary

• Peloton Interactive, Inc. is a public limited company belonging to the exercise equipment industry founded in January, 2012. It became a public limited company September 26, 2019.
• The company has generated consolidated revenue of $3,582.1 million in FY22, ended June, 30, which was $4,021.8 million a year earlier – a negative growth of 10.93%. Net loss of the company stood at $2,827.7 million in 2022, which was $189 million a year earlier.
• The company has two business segments – Connected Fitness Products and Connected Fitness Subscription. Connected Fitness Products has currently four products – Bike, Bike+, Tread, and Guide.
• As of June 30, 2022, the company has 308,241,938 and 30,032,078 Class A and Class B shares outstanding, respectively with par value of $0.000025, which was 270,855,356 and 29,291,774 shares respectively a year earlier.
• Total assets position of the company at the end of the financial year 2022 is $4,028.5 million, which was $4,485.6 million a year earlier.
• The company will execute a restructuring plan by 2024 which includes plan for downsizing the company, closing several assembly and manufacturing plants as well as distribution facilities, and cutting ties with some third-party manufacturers – while building some.

Brief Company Overview

Peloton Interactive, Inc. (NASDAQ:PTON) is a public limited company belonging to the exercise equipment industry founded in January, 2012 by Graham Stanton, Hisao Kushi, John Foley, Tom Cortese and Yony Feng. The company is headquartered in New York City, New York, United States. The company employs 6,195 employees as of June 30, 2022 across different locations such as United States, United Kingdom, Germany, Australia, and Canada – counting those employed in headquarters, showrooms, field operations, warehouses, also in regional offices. The company reduced the number of employees as a part of its restructuring plan.¹

The company houses about 7 million active, loyal members in their community.

Revenue of the company is primarily generated from the sale of Connected Fitness Products and associated recurring Subscription revenue. The Connected Fitness Products include Bike, Bike+, Tread, and Tread+. Subscriptions include Connected Fitness Subscriptions, and Peloton Digital. The company generated revenue of $3,582.2 million in FY22 ended June, 30, and $4,021.8 million in FY21 – a downgrowth of 10.93%.

The company is currently headed by Barry McCarthy as President & Chief Executive Officer. He is a seasoned executive who served as CFO of Spotify from 2015 to January 2020, and CFO of Netflix from 1999 to 2010. In addition, McCarthy has served as a member of the boards of Chegg, Eventbrite, MSD Acquisition Corp, Pandora, and Rent the Runway. 

The company has operated 135 retail locations as June 30, 2022 across the United States, Canada, the United Kingdom, Australia, and Germany.

Peloton Interactive, Inc. became a public limited company September 26, 2019.

Financial Analysis

The company has generated consolidated revenue of $3,582.1 million in FY22, ended June, 30, which was $4,021.8 million a year earlier – a negative growth of 10.93%. Net loss of the company stood at $2,827.7 million in 2022, which was $189 million a year earlier.² During the current financial year, the company has incurred some additional costs such as goodwill impairment, impairment expenses, restructuring expenses, and supplier settlement. Comparatively higher net loss than the previous year is a result of lower revenue generation and the presence of aforementioned additional costs.

Connected Fitness Products segment

Connected Fitness Product revenue consists of sales of Peloton’s portfolio of Connected Fitness Products and related accessories, delivery and installation services, branded apparel, extended warranty agreements, and the sale, service, installation, and delivery contracts of commercial business of the company. The company generated $2,187.5 million in revenue from this segment

in FY22, while it was $3,149.6 million the previous year. Cost of revenue for this segment in FY22 is $2,433.8 million, netting the business a loss of $243.6 million.

The decrease in revenue is mainly caused by a decline in Bike deliveries. The Bike deliveries has decreased significantly because of the seasonality that Peloton experiences. In fact, 2021 was an unusual year for Peloton due to pandemic-invoked high demand of home fitness accessories. However, according to the filings of the company, the decline is partially offset by increase in Tread deliveries. And overall revenue decline is partially offset by increase in subscription.

Subscription

Subscription revenue consists of revenue generated from Peloton’s monthly Connected Fitness Subscription and Peloton Digital subscription. As of June 30, 2022, 98% and 86% of the Connected Fitness Subscription and Peloton Digital subscription bases were paying month-to-month, respectively. The monthly price for a Connected Fitness Subscription with a combination of Bike, Tread and Guide product is $44.00 monthly. The subscription section generated revenue of $1,394.7 million and incurred a cost of $450.0 million – netting the business a profit of $944.7 million.

Operating expenses

Goodwill impairment of the company is considered on April 1 each year. In the FY22, the company decided to charge a goodwill impairment of $181.9 million.

Impairment charge during the year is $390.7 million. Impairment expense was comprised primarily of $373.8 million of asset write-downs and write-offs related to the restructuring initiatives, including $165.6 million in write-offs of certain acquired developed technology, brand, distributor and customer relationships, and assembled workforce, $86.1 million related to Connected Fitness assets, primarily related to manufacturing and supply chain assets at several of to-be-closed locations, $70.0 million related to software under development, and $40.3 million related to Peloton Output Park and related manufacturing assets. Additionally, Peloton recognized impairment expense of $7.7 million driven by the disposal of lease build out costs for the fiscal year ended June 30, 2022.

Total restructuring expenses was $180.7 million which consisted of $109.1 million of severance and other personnel costs, $56.5 million of stock-based compensation expense driven by the acceleration of certain vesting schedules and incremental stock-based compensation expense pursuant to severance arrangements, and $15.1 million of professional fees and other costs associated with exit and disposal activities.

Supplier settlements during the financial year is $337.6 million which include payments made to third-party suppliers to terminate certain future inventory purchase commitments.

Other items

The company has incurred interest expense of $43 million and foreign exchange loss of $31.8 million which was $14.8 million and $3.5 million a year earlier, respectively.

Cash Position

Net cash used in operating activities of $2,020.0 million for the fiscal year ended June 30, 2022 was primarily due to a net loss of $2,827.7 million and a net increase in operating assets and liabilities of $623.6 million, partially offset by an increase in non-cash adjustments of $1,431.2 million. The increase in cash used in operating activities was primarily due to a $398.6 million increase in inventory levels as the company ramped up supply to support anticipated demand ahead of the 2021 holiday season that did not materialize and prepared for the relaunch of Tread in the United States, Canada, U.K. and Germany, a $168.6 million decrease in accounts payable and accrued expenses as a result of a decrease in payables due to decreased inventory spending in the latter half of fiscal 2022, as well as increased efficiency in accounts payable processes, and $36.8 million increase in customer deposits and deferred revenue driven by timing of sales and deliveries in the period. Non-cash adjustments primarily consisted of goodwill and long-lived asset impairment expense, stock-based compensation expense, excess and obsolete inventory reserves, depreciation and amortization, and non-cash operating lease expense.

Net cash provided by investing activities for the fiscal year ended June 30, 2022 of $153.3 million was primarily related to sales and maturities of marketable securities of $517.7 million, partially offset by $337.3 million used for capital expenditures primarily related to construction of Peloton Output Park in Troy Township, Ohio, the continued build out of showrooms and offices, and software placed into service throughout the year.

Net cash provided by financing activities of $2,015.1 million for the fiscal year ended June 30, 2022 was primarily related to proceeds of $1,218.8 million from the Offering, proceeds from issuance of the Term Loan of $696.4 million, exercises of stock options of $84.3 million, and $17.3 million in net proceeds from withholdings under the 2019 Employee Stock Purchase Plan.

Assets and Liabilities

Current assets position of the company stands at $2,634.6 million in FY22, down from $2,818.1 million the previous year. The decrease is due to the disposal of marketable securities of $472.0 million which affected the cash flow from investing activities positively. Property, plant and equipment remained almost the same at around $610.9 million. Total assets position of the company at the end of the financial year 2022 is $4,028.5 million, which was $4,485.6 million a year earlier.

Total current liabilities of the company is reported $1,105.5 million in 2022, which was $1,243.0 million in 2021. The company raised cash from issuing term loan of $690.0 million, which is a new item in long-term liabilities. Thus, total long-term liabilities stand at $3,435.6 million at the end of FY22, which was $2,731.5 million a year earlier.

As of June 30, 2022, the company has 308,241,938 and 30,032,078 Class A and Class B shares outstanding, respectively with par value of $0.000025, which was 270,855,356 and 29,291,774 shares respectively a year earlier. Additional paid-in capital in 2022 stood at $4,291.3 million and a deficit (accumulated retained loss) of $3,710.6 million.

Business Overview

Peloton Interactive, Inc. is a fitness platform that offers interactive guides, sells fitness accessories, and offers fitness classes with expert teachers. During Covid-19 pandemic, when the gymnasiums closed, Peloton, founded in 2012, suddenly came to attention. Their products such as Bike, Bike+, Tread, Tread+ are equipped with digital contents that the members can watch and choose to reach their fitness goal. Peloton combines technology, innovation, and equipment together to create a community that purports to give its members their best shape possible. The company claims to be the first-of-its-kind subscription platform that seamlessly combines the best equipment, proprietary networked software, and world-class streaming digital fitness and wellness content, creating a product that their Members love.

Products

Bike

The Bikes of Peloton feature a carbon steel frame, a nearly silent belt drive, magnetic resistance, and a 22” high-definition touchscreen with built-in stereo speakers to stream live and on-demand classes. The size of the bike is 4’ by 2’. The product Bike is available in the United States, Canada, the United Kingdom, Germany, and Australia.

Bike+

Bike+ is an extension to the product ‘Bike’. It provides cardio experience and transition to floor-based exercises with a 24”, 360-degree rotating display. Audio experience is improved in Bike+ by a built-in soundbar. Bike+ is currently available for purchase in the United States, Canada, the United Kingdom, Germany, and Australia.

Tread

This product of the company combines a treadmill, 24” touchscreen, a soundbar, heart rate monitor, and subwoofer. Some features include on-demand video lessons, ergonomic pace and incline control knobs, and jump buttons. This product is currently available for purchase in the United States, Canada, the United Kingdom, and Germany.

Tread+

Some additional features that Tread+ contains outside Tread are a shock-absorbing rubber-slat belt and ball bearing system, and 32” HD touchscreen. The company has recalled the product on May 5, 2021 in collaboration with Consumer Product Safety Commission (“CPSC”) and the company did not give any specific possible date of sale resumption.

Guide

Guide is a connected fitness strength product that has dedicated contents, programs for all levels, live body-training classes with instructors, and extensive move library to help members learn and perfect proper form.

Connected Fitness Subscriptions

This subscription allows the purchasers of Connected Fitness Products to access all the classes, compete on our motivating leaderboard, track performance metrics, and connect and interact with the broader Peloton community. Currently, monthly subscription fee is $44. This subscription also includes access to contents through Peloton Digital.

Peloton Digital

This is a mobile application which facilitates the subscribers access all the resources when they are away from their Connected Fitness Products. The Connected Fitness Subscription fee includes a charge of subscription on Peloton Digital. According to the company reporting, the application serves as a tool for acquisition of new members.

Seasonality is present in the business of Peloton. The company experiences higher revenue in the second and third quarters of a fiscal year compared to other quarters, due in large part to seasonal holiday demand, New Year’s resolutions, and cold weather. For example, in fiscal 2018 and 2019, second and third quarters combined each represented 63% of total revenue for the applicable fiscal year. However, in fiscal 2020, the company saw a significant increase in demand in the fourth quarter related to the onset of the COVID-19 pandemic, and in contrast to previous years, only 54% of total revenue was generated in the second and third quarters. In fiscal 2021, the ongoing COVID-19 pandemic and the recalls of the Tread products in the fourth quarter of fiscal 2021 continued to impact the observed historical seasonal patterns, with the second and third fiscal quarters accounting for only 58% of total fiscal 2021 sales.

To create brand awareness, Peloton use different advertising channels such as advertisements on broadcast and cable television, social media, and over-the-top providers such as Hulu and YouTube to reach target audience, focusing on incremental return on investment.

Restructuring Plan

In February 2022, Peloton announced and began implementing a restructuring plan to realign their operational focus to support a multi-year growth plan, scale the business, and improve costs. The Restructuring Plan includes:  reducing headcount; (ii) closing several assembly and manufacturing plants, including the completion and subsequent sale of the shell facility for Peloton Output Park; (iii) closing and consolidating several distribution facilities, and (iv) shifting to third-party logistics providers in certain locations. The company expects the Restructuring Plan to be substantially implemented by the end of fiscal 2024.

Total charges related to the Restructuring Plan were $611.3 million for the fiscal year ended June 30, 2022.

Recent Developments

• On July 12, 2022, Peloton announced an exit from all owned-manufacturing operations and the expansion of their current relationship with Taiwanese manufacturer Rexon Industrial Corp.
• On August 12, 2022, the company announced their decision to perform the following additional restructuring activities:  eliminate their North American Field Ops warehouses, including the significant reduction of their delivery workforce teams; (ii) eliminate a significant number of roles on the North America Member Support team and exit real-estate footprints in Plano and Tempe locations; and (iii) reduce North American retail showroom presence.
• Peloton launched the legal case last November, after Lululemon accused the company of infringing on its clothing patents for its best-selling bra and legging products. After sending a cease-and-desist letter, the fashion brand followed up by suing Peloton. A Manhattan Judge dismissed the case of Peloton on 29 September, 2022.³
• Peloton Interactive formally launched its long-anticipated rowing product Peloton Row on 20 September, 2022.⁴
• Two co-founders of the company stepped down from their position amid the massive restructuring plan execution of the company. Former CEO now John Foley resigned and was released from role on September 12, and Hisao Kushi's, the Chief Legal Officer, resignation takes effect on October 3.⁵
• Peloton launched the sale of its Bike, Guide, selected apparels on U.S. Amazon on August 24, 2022.

1. ^ https://investor.onepeloton.com/static-files/efeaeeda-5814-40f1-83b3-34d4d96c5a43
2. ^ https://investor.onepeloton.com/node/9466/html
3. ^ https://www.cyclingweekly.com/news/peloton-loses-lawsuit-against-lululemon-in-year-of-falling-sales
4. ^ https://seekingalpha.com/news/3884437-peloton-interactive-unveils-long-awaited-rowing-machine
5. ^ https://www.cbsnews.com/news/peloton-co-founders-john-foley-hisao-kushi-leaving-the-company/