Peloton Can’t Keep Up With Demand; Profit to Be Squeezed

(Bloomberg) -- Peloton Interactive Inc. said it can't keep up with surging demand for the company's technology-focused exercise machines, reporting its first $1 billion sales quarter and warning that profit will be squeezed as it tries to fix the problem. The shares dropped about 8% in extended trading.

“West Coast port delays and Covid-related factors continue to present challenges to returning our delivery times to pre-pandemic levels,” the New York-based fitness company said Thursday in its quarterly earnings statement.

Supply remains constrained for both Peloton bike models, with “longer than acceptable wait times,” it added. The company is investing more than $100 million in air and expedited ocean-based delivery over the next six months to improve the situation.

“While this investment will dampen our near-term profitability, improving our Member experience is our first priority,” the company said.

On a conference call with analysts, Chief Executive Officer John Foley said the rollout of the company's new treadmill will be delayed. In most of the U.S., the machine will launch in May, rather than the end of March. This is to meet demand in other regions, including the U.K., where the new model went on sale in December, he explained.

Peloton sales have soared in the past year as the pandemic shut gyms and forced people to work out from home. However, the company has struggled to keep up with demand for months, leading to long wait times and frustrated customers.

For the current period, Peloton forecast revenue of $1.1 billion. Analysts were looking for $1.09 billion. The company also raised its sales forecast for the full fiscal year to $4.08 billion, up from $3.90 billion previously. Wall Street estimated $3.95 billion, according to data compiled by Bloomberg.

“Our revised forecast anticipates slow but steady progress in narrowing our order-to-delivery windows over the remainder of the fiscal year,” the company said.

Peloton also projected connected fitness subscriptions to reach 1.98 million and a gross profit margin of about 35% in the current period.

In the quarter ending Dec. 31, revenue grew 128% from a year earlier to $1.06 billion, the first time quarterly sales have topped $1 billion. Analysts were looking for $1.03 billion. Net income was $63.6 million, or 18 cents a share, up from a $55.4 million loss a year ago.

Of its $1.06 billion in total revenue, Peloton said $870.1 million came from its equipment, while $194.7 million was generated by subscriptions. The company said its churn rate during the quarter was 0.76%, but that 97% of users are on month-to-month plans.

Connected fitness subscriptions -- users who pay for classes on Peloton equipment -- jumped 134% to 1.67 million. Paid digital subscriptions -- people who subscribe to classes on smartphones and other devices, soared 472% to about 625,000. The company said it now has more than 4.4 million users.

The sizable increase in digital subscriptions indicates that fitness apps accessed on devices that people already own are becoming a new battleground for technology companies. Apple recently launched Fitness+, a competitor to Peloton's digital offering that works on iPhones, iPads, Apple Watches and Apple TVs.

Peloton also said that workouts on its equipment in the fiscal second quarter rose 303% to 98.1 million with an average of 21.1 workouts per month by each user. That's up from under 13 monthly workouts in the year-ago quarter.

Peloton made its largest acquisition recently, acquiring fitness-equipment company Precor for $420 million to gain U.S. manufacturing capabilities and new expansion opportunities.

Peloton shares fell to a low of $143 in extended trading after closing at $157.53. The shares have gained 3.8% this year after jumping roughly fivefold in 2020.

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