Peloton Interactive (NASDAQ: PTON) may have walked back its CEO's statement that if the connected fitness equipment maker failed to make good on its turnaround in six months, it would no longer be a viable stand-alone company, but investors shouldn't dismiss the original report so fast.
So far, there is no proof Peloton's strategy is working and, in fact, the company continues to take a meat cleaver to its employment roster to cut costs. The connected fitness guru is firing another 12% of its staff, some 500 employees, as it tries to discover just how thin its ranks can be shaved and still operate effectively.
It's got $1.2 billion in the bank and $500 million in credit available, but Peloton just burned through $1.7 billion over the last three quarters, so the wick is burning pretty low.
Image source: Getty Images.
Cutting all meat from the bone
Peloton CEO Barry McCarthy created quite the tumult when he reportedly told The Wall Street Journal that the company was essentially living on borrowed time. When asked how long he gave the business to succeed in its turnaround, McCarthy gave it about a year from when he'd joined the company, or about six more months.
In a subsequent statement to employees and the media, McCarthy said there was no clock ticking down on Peloton's survival. He insisted the company is making progress on its turnaround and getting closer to its goal of achieving break-even cash flow by the end of the year.
It's making progress in part by firing thousands of employees this year, but the 500 workers who were just let go will reportedly be the last. McCarthy told CNBC, "The restructuring is done with today's announcement. Now we're focused on growth."
Last year at its height, Peloton had 8,600 employees. After the latest round of job cuts, the connected fitness company will be left with 3,700 employees globally, a 57% reduction in a little over a year.
Peloton has also completely shed its in-house manufacturing operations, which it had launched to meet demand for its exercise equipment, opting instead for a fully outsourced model. It also had to get rid of unsold inventory after demand plummeted following the economy's reopening and is exploring selling its Precor business, which it bought just two years ago.
A high hurdle to clear
To be sure, Peloton has finally begun making moves that could help it reach a wider consumer base. For example, it opened a storefront on Amazon to sell equipment and accessories, it's going to be selling equipment inside 100 Dick's Sporting Goods stores and on its website, and it just announced a partnership with Hilton Worldwide to place its connected stationary bikes in all 5,400 branded hotels in the U.S.
The main problem Peloton still faces is that it sells a suite of high-priced luxury products that could be a tough sell in a recession. Its entry-level Bike starts at $1,445, its Tread Basics treadmill costs $3,495, and its just-introduced Peloton Row rowing machine is $3,195. Each requires a subscription to connected classes, which is $44 per month.
There are plenty of rivals offering competing connected equipment that is much more affordable, and you can buy even cheaper equipment and purchase a Peloton subscription separately for just $13 a month. (Peloton is also considering licensing its connected-fitness classes so they can be used with third-party equipment.) Peloton may be a best-in-class product, but that doesn't mean that people will want to buy in this market.
Wait for the proof
McCarthy contends Peloton has slowed its cash burn and remains both "extremely well capitalized" and "highly liquid," according to CNBC. He feels "about as optimistic as I've ever felt," he told the news outlet.
Investors shouldn't be so sanguine. Sales have plummeted, fewer classes are being taken, and subscriber growth is slowing. Until Peloton can back up its assertion that the situation is improving, investors should continue to believe the clock on its viability is indeed ticking down to zero.
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