Peloton (PTON) results for the third quarter of 2023

McCarthy’s focus on a turnaround follows a turbulent period following the company’s post-pandemic recovery.

As fitness equipment sales continue to lag, Peloton has focused on other ways to drive growth and attract new customers. Under McCarthy, a former Spotify and Netflix exec, the company placed emphasis on increasing subscriptions.

The third fiscal quarter marked the fourth straight quarter in which subscription revenue exceeded hardware revenue.

The company has tried to boost sales of equipment by tinkering with prices, offering a rental option and adding rowing machines to its lineup. It got into wholesale by allowing Amazon And Dick’s sporting goods to carry his gear. Peloton also struck a deal with hilton store bicycles in all US hotels.

In Thursday’s letter to shareholders, McCarthy said these efforts are working.

Since the company began testing its rent-to-buy program in March 2022, it has grown to 47,000 subscribers, he said. The average monthly churn rate is 5%, which is higher than Peloton’s overall churn rate.

Still, McCarthy said the option, which allows customers to make rental payments and benefit from the purchase price of the equipment, lowers the barrier to registration. He pointed to an internal survey that found that 62% of respondents would not have subscribed without the flexibility of the rental program.

Peloton’s used bike sales have also been very popular, he said. The company launched this offering in December and is considering adding its treadmills and rowing machines to the program later this year.

Combined, the two programs accounted for 24% of connected fitness hardware sales in the fiscal third quarter, he said.

He said third-party sales have also picked up steam and the company plans to expand its range with Amazon and participate in its promotional events such as Prime Day.

Customers have largely remained loyal to the brand. Average monthly net churn at fitness was 1.1% for the quarter, consistent with the prior quarter, and just above last year’s churn rate of 0.8%.

Speaking on the earnings, McCarthy said consumers continue to spend, but added that it’s difficult to predict their behavior as economists debate the likelihood of a recession or a “soft landing.” He said the debate in Congress over whether to raise the debt ceiling or risk a first default on the US debt is adding to uncertainty.

Aneesha Sherman, an analyst at Bernstein, said Peloton stock fell because Wall Street was nervous about consumers, particularly when it comes to discretionary spending. She said the prospects for subscribers had also unsettled investors.

But she said the reaction was overblown. She said Peloton is “fundamentally changing what business is about” and is on a firmer footing as it moves away from direct-to-consumer sales and reaches customers through Amazon, Dick’s and more affordable options like the rental program.

“The progress has been really significant,” she said. “You won’t see linearity in a turnaround story like this. It’s going to be bumpy from quarter to quarter.”

As of Wednesday’s close, Peloton’s stock was up about 11% so far this year — but Thursday’s drop erased those gains. Its shares are at less than half of its 52-week high of $18.86 — and just a tiny fraction of its peak of over $100 in the early years of the pandemic.

Peloton’s market cap is $2.63 billion, after hitting nearly $50 billion in early 2021.

Simeon Siegel, a retail analyst at BMO Capital Markets, said Peloton has often pointed to the huge market for its products. She has set out her goal of one day reaching 100 million members around the world.

His recent outlook casts doubt on that vision.

“The fact that Peloton is now driving subscribers downward — albeit seasonally — will likely raise questions about its eventual size,” he said. “In the past, people wondered how big it was going to be. The question is whether the company will now give something back.”