Long

Peloton Shares Spike 21% As Turnaround Plan Takes Hold

Overview
[1] The Bike and Tread maker has been working to improve its balance sheet and looks to be more focused on profitability than growth.
[2]The connected fitness company posted quarterly results that came in well ahead of expectations and delivered a mixed outlook for the year ahead.
[1]Peloton (NASDAQ: ) has returned to sales growth for the first time in nine quarters.

Peloton (NASDAQ: ) said on Thursday It is digging itself out of the red and making progress out a slight sales increase for the first time in nine quarters as it slashed its overall losses.

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 (NASDAQ: ) posted year-over-year revenue growth since its 2021 holiday quarter.

Peloton (NASDAQ: ) likewise 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 (NASDAQ: ) narrow its quarterly losses to $30.5 million from $241.1 million in the year-ago period.

Peloton (NASDAQ: ) shares rose more than 21% in Thursday's trading.
based on a survey of analysts by LSEG, Here’s how the Bike and Tread maker performed compared with what Wall Street was anticipating:

Loss per share: 8 cents vs. 17 cents expected
Revenue: $644 million vs. $631 million expected
For the three-month period that ended June 30, Peloton (NASDAQ: ) 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 (NASDAQ: ) 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 (NASDAQ: ) delivered YoY sales growth was during its holiday season in 2021, which is typically the company’s strongest quarter so far.

Secondary Market Gains
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 (NASDAQ: ) 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.

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% YoY.

Peloton (NASDAQ: ) is also seeing some positive omens 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 (NASDAQ: ) 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.

The company 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.

Peloton (NASDAQ: ) noted that the search for its next CEO is “top of mind for all stakeholders.” “The process is well underway and we look forward to sharing more when we have an announcement,” it said.

Profit over growth
For the year ahead, Peloton (NASDAQ: ) 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 (NASDAQ: ) may finally be shifting its focus away from growth in favor of profitability and free cash flow generation.

That’s evidenced by 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 (NASDAQ: ) 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 (NASDAQ: ) 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.

Street Account 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. According to LSEG, for the full year Peloton () expects sales to be between $2.4 billion and $2.5 billion, compared with estimates of $2.7 billion.

Technical Outlook
As of the time of writing, Peloton (NASDAQ: ) stock has experienced a significant increase of 24%. This rise has led to the stock being currently overbought, as indicated by its Relative Strength Index (RSI), which stands at 71. The daily price chart shows a gap up pattern, which is a strong indicator of a potential bullish reversal in the stock's performance.

Furthermore, the Moving Average Convergence Divergence (MACD) is recorded at 0.097, which points to a slight bullish momentum in the market. This suggests that there is some upward pressure on the stock, reflecting a positive sentiment among investors. In addition to these indicators, it is noteworthy that Peloton's stock is trading above both the 50-day and 100-day moving averages, reinforcing the notion that the stock is currently in a strong upward trend. This combination of factors highlights the current bullish outlook for Peloton in the market.

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