Peloton Stock Drops as CEO Laments Failed College Strategy

The fitness company’s rebrand isn’t yet going according to plan; a bike deal with the University of Michigan won’t be replicated with other schools

Peloton’s comeback story is beginning to look more like a tome in its adventures of successfully pivoting to a less hardware-centric model. Shares of the connected fitness company dropped around 23% on Thursday after Peloton lowered its full-year 2024 revenue to $2.68 – $2.75 billion, down from its previous forecast of $2.70 and $2.80 billion.

In its Q2 2024 results, the connected fitness company posted total revenue of $743.6 million ($319.1 million of connected fitness revenue and $424.5 million of subscription revenue) for the three months ending December 31, 2023, in line with the company’s $715 million to $750 million guidance range.

Peloton also saw a net increase of 40,000 paid connected fitness subscriptions in the quarter, ending with 3 million, but it experienced a net reduction of 44,000 in paid app subscribers, ending with 718,000.

Sales revenue of Peloton products increased to $743.6 million in the quarter when compared to Q1’s $595.5 million, but are down when compared to $792.7 million a year earlier in Q2 2023.

In a letter to shareholders, Peloton CEO Barry McCarthy wrote that the biggest challenge continues to be growth at scale.

University of Michigan Deal Doesn’t Pan Out

Despite a flurry of partnerships designed to promote the brand , not all have succeeded, although Peloton plans to continue exploring other avenues to “ignite growth.”

Touching on one lackluster deal, McCarthy admitted that the premium co-branded Bike experiment with the University of Michigan didn’t deliver.

“Notwithstanding the football team’s success winning the national championship, we sold substantially fewer Bikes to alumni and boosters than we expected,” he wrote. “So instead of launching additional co-branded bikes in school colors, we will end-of-life this hardware initiative.”

McCarthy was also critical of the member service area of Peloton, admitting that the past holiday season was “particularly taxing” for members . Peloton notably had technical issues with its Thanksgiving Day live ride that prevented many members from partaking in the event.

“The member support experience has tarnished our brand, and we simply must do better,” McCarthy wrote. “The team is currently in the middle of a reboot. New leadership . New systems. New third party vendors. New training. New staff. I’m confident we’re on the right path this time.”

Bright Spots for Peloton

As for its wins and areas that show promise, Peloton reported strong sales growth as a result of its third-party retail deal with Dick’s and Amazon and its Bike rental model.

“We’re forecasting more than 100% Y/Y revenue growth for FY24,” McCarthy wrote. “The underlying economics continue to be attractive, given the current churn and buyout rates for Bike and Bike+.”

He noted that the Bike rental program is attracting more diverse, female, and younger consumers than just six months ago and that Peloton will test the model in new areas, such as corporate wellness , later this fiscal year.

There is also high demand for Tread+, which began taking orders in December 2023 for delivery in Q3. Demand has been “significantly stronger” than expected, with a ripple effect of consumers becoming interested in Peloton’s entry-level Tread — which outperformed sales expectations last quarter.

Stating that the treadmill market is roughly 2x larger than the stationary bike market, McCarthy wrote the “newly found momentum” in the treadmill space is “good news” for Peloton’s future growth.

High-Profile Partnerships

As for Peloton’s newer partnership with Lululemon , McCarthy says to expect a “broader assortment” of co-branded merchandise for both members and non-members. He also indicated that he’s excited to see what comes with Peloton’s collaboration with TikTok , which gives Peloton a dedicated and co-branded space to target the app’s users, 60% of whom are Gen Z, with its fitness content

The connected fitness company’s disappointing Q2 results could further fuel Deepwater Asset Management’s 2024 prediction that Apple may look to buy Peloton to grow its Fitness+ subscriber base, although many are skeptical that a deal will take place.

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