For luxury fitness brand Peloton, going mainstream is costing it dearly. Shares of Peloton Interactive Inc. plunged 25% in after-hours trading Thursday after it issued a grim earnings report and outlook. The company, whose fiscal year ends in June, said full-year revenue may come in as much as $1 billion below its previous projection. Minutes later, investors had erased nearly $6 billion from its market value.
This isn’t just about the supply-chain and labor challenges that have dominated other companies’ earnings calls this season. Peloton’s issues appear to be more company-specific: It’s struggling to attract less-affluent customers while having to advertise heavily to them for the post-pandemic era. The emergence from lockdowns is also clearly weighing on app use among existing Peloton subscribers as they resume their pre-pandemic office, travel and fitness routines.
Most revealing was that sales and marketing expenses surged 148% in the quarter compared with figures in the period a year earlier. That increased spending was tied to promoting its newly discounted Bike product and the launch of a cheaper treadmill model as Peloton fights the luxury image it once wore with pride. Other costs also ballooned, including a 167% jump in research and development as the brand, best known for its stationary cycles, expands into other fitness areas amid an onslaught of competition and the reopening of gyms.
“Younger and less affluent consumers continue to represent our fastest growing demographic, yet among non-members, there remains a lingering perception that Peloton is a luxury item,” the company’s earnings report said. In August, Peloton again reduced the price of its original Bike, this time to $1,495, a $400 markdown. The company noted then that cost “remains a barrier.” Its Bike+ starts at $2,495. Meanwhile, Peloton’s treadmill business has been fraught with challenges stemming from safety recalls.
Peloton had been one of the biggest winners during covid-19 lockdowns, with its stock price rising 500% between February 2020 and January this year, when it temporarily reached an all-time high. Thursday’s losses now wipe out most of Peloton’s pandemic gains.
It’s frustrating for investors because Peloton would seem to check all the right boxes: At-home fitness and streaming video are hot markets, and Peloton’s brand is the leader. But it can’t keep burning this much cash on advertising, something it didn’t have to do much of during lockdowns or even before covid, when its spin bikes became an immediate home gym staple for an upscale clientele. Its operations burned through $561 million of cash last period, leaving it with $924 million of cash, cash equivalents and investments in marketable securities. The company said that the jump in marketing costs was due in part to advertising its new Tread product and that it’s optimistic it can build up enough sales volume to cover that.
John Foley, Peloton’s chief executive officer, on Thursday discussed the hurdle it faces in helping consumers understand why products like the Tread are worth the still-steep price. “People would say years ago, ‘Why do I need a $2,000 stationary bike?’ Well, it’s not just a bike, it’s a portal to a fantastic indoor cycling” community, with heart-pumping music and top instructors, he said. That may be true, but it’s costing Peloton far too much to explain that to people.