Peloton CEO says he was surprised by the depth of some problems in the company

Peloton CEO says he was surprised by the depth of some problems in the company

Peloton CEO says he was surprised by the depth of some problems in the company

Spotify CFO Barry McCarthy attends the Allen & Company Sun Valley Annual Conference on July 11, 2018 in Sun Valley, Idaho.

Drew Anger | Getty Images

When Barry McCarthy showed up to lead Peloton about three months ago, he was surprised to learn how disorganized the supply chain was and how quickly the company’s coffers were shrinking.

“The nature of turnarounds is that they’re full of surprises,” McCarthy told analysts Tuesday, during his first post-earnings conference call with Peloton.

After digging into the business, the CEO said he learned that Peloton was “weaker on anything supply chain related” than he had anticipated. He said the biggest surprise of the previous quarter was cash flow and how bleak it was.

Yet the former Netflix and Spotify executive also said he was equally surprised by Peloton’s ability to “quickly fix” its cash position without diluting existing shareholders and while continuing to adequately capitalize the business. Another positive noted by McCarthy is that he found more talent at Peloton headquarters than he thought he would find.

McCarthy’s comments to Wall Street on Tuesday were incredibly high stakes, given Peloton’s share price decline and investors’ loss of confidence that the company can succeed in a post-pandemic world. .

The CEO’s letter to shareholders on Tuesday came with disappointing results for the three-month period ending March 31 and a gloomy outlook for the current quarter, which ends June 30 and marks the end of Peloton’s fiscal year. McCarthy was quick to call out areas where the Peloton’s former leadership had not been so successful, while laying the groundwork for his turnaround plan.

At least for now, investors are more focused on the current state of affairs. Shares of Peloton fell to an all-time low on Tuesday morning, dragging the company’s market valuation down to around $4 billion. It had hit $50 billion at the start of last year.

Still, McCarthy ended the conference call, telling Wall Street he was “rather optimistic” about the company’s path forward, “despite the stock price.”

“I don’t mean to sound pollyannaish, but hopefully one day soon we’ll see this call as one of the big milestones for the company,” he said.

A change of priorities

On McCarthy’s checklist are:

  • Break into third-party retailers selling Peloton products through other businesses
  • Growing awareness of the company’s digital app, which may be an option for people who don’t want to commit to a bike or tread machine
  • Expand internationally
  • Roll out a pilot test more widely where customers pay a flat rate to rent one of Peloton’s stationary bikes and access its live and on-demand workout classes

“We have to be good in material, but being good in material is not enough,” he said on the call. “And that requires a change in the company’s investment priorities.”

It also, and above all, aims to bring the company back to positive free cash flow in its next fiscal year.

A recent cash injection from JPMorgan and Goldman Sachs should allow it to do just that, McCarthy said, despite the economic headwinds. According to McCarthy’s letter, Peloton ended its “low-cap” last quarter with $879 million in unrestricted cash and cash equivalents.

However, many investors will likely pause until they are able to witness greater signs of progress. There are also concerns that Peloton could lose a fraction of its existing subscriber base – which has proven loyal during the pandemic – if they change too much too soon.

UBS analyst Arpine Kocharyan said he expects Peloton investors to be more concerned in the near term about the company’s ability to preserve cash flow and liquidity. Peloton’s strategy under McCarthy is to place more emphasis on subscriber net present value, as opposed to a previous focus on hardware profits, Kocharyan said in a note to clients.

Other analysts question whether McCarthy’s strategy is really that different from that of former Peloton CEO and co-founder John Foley.

Peloton found success under Foley, who led the connected fitness equipment maker during the height of the pandemic. But it also ran into trouble as consumer demand began to wane but costs still rose and Peloton had invested in things, such as additional manufacturing centers, that it no longer needed.

“The company continues to suggest with its words that it knows it needs to turn around,” said BMO Capital Markets analyst Simeon Siegel. “And yet they cling to this idea that their growth story is their North Star.”

“If the company was just working on selling its existing inventory and focusing on embracing its existing followers, there should be a reasonable path to profitability,” he added. “The problem is that this story is clouded by the belief that they have the right to grow as far and as fast as they want.”

McCarthy reiterated Tuesday that Peloton’s goal is to one day have 100 million members, a goal Foley set in 2020.

“I know of digital apps that already have over 100 million people focused on fitness. And I can’t really think why, given our early success in the category, we couldn’t be one of those digital applications,” he said.

Peloton had 7 million subscribers as of March 31.

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