Peloton It was announced on Thursday that Chief Executive Barry McCarthy would resign and the company would cut 15% of its workforce because “there is simply no other way to align its expenses with revenue.”
McCarthy, ex. Spotify and Netflix The CEO will become Peloton’s strategic advisor through the end of the year, while company Chairman Karen Boone and Director Chris Bruzzo will serve as interim co-CEOs. Another Peloton director, Jay Hoag, was named the new chairman of the board. Peloton is looking for a permanent CEO.
The company also announced a broad restructuring plan that will reduce its global headcount by 15% to about 400 employees. The company plans to continue closing retail showrooms and changing its international sales plans.
Peloton said in a press release that the moves are aimed at realigning its cost structure based on the current scale of its business. Annual operating expenses are expected to decrease by more than $200 million by the end of fiscal 2025.
The company said: “This restructuring will provide Peloton with sustained, positive free cash flow, while allowing the company to continue investing in software, hardware and content innovation, improving the member support experience and optimizing marketing efforts to expand business scale.” .
The company’s shares soared more than 12% in premarket trading.
McCarthy took over the helm of Peloton from founder John Foley in February 2022 and has spent the past two years reorganizing the business and working to return it to growth.
Once he took over, he began implementing massive layoffs to adjust Peloton’s cost structure, close the company’s high-profile showrooms and develop a new strategy aimed at expanding membership. Contrary to Peloton’s founders, McCarthy has turned Peloton’s attention to its app to attract members who might not be able to afford the company’s pricey bikes or treadmills but might be interested in participating in its digital classes.
McCarthy said in a letter to employees that the company needed to implement the layoffs because it was unable to generate sustainable free cash flow at its current cost structure. Peloton hasn’t been profitable since December 2020, and it can only burn cash for so long when it has more than $1 billion in debt on its balance sheet.
“Achieving positive (free cash flow) makes Peloton a more attractive borrower, which is important as the company turns its attention to the necessary task of successfully refinancing its debt,” McCarthy said in the memo.
In a letter to shareholders, the company said it was “monitoring” debt maturities, which include convertible notes and term loans. The company said it was working closely with its lenders at JPMorgan Chase and Goldman Sachs to develop a “refinancing strategy.”
“Overall, our refinancing goals are to deleverage and extend maturities at a reasonable blended cost of capital,” the company said. “We are encouraged by the support and interest from our existing lenders and investors, and we look forward to sharing information about this More information on the topic.”
In a press release, Boone thanked McCarthy for his contributions.
“Barry joins Peloton during a time of great challenge for the business. During his tenure, he has laid the foundation for scalable growth by steadily re-architecting the business’s cost structure to create stability and reaching the important milestone of achieving positive free cash flow. .
“With a strong leadership team and the company now on a solid foundation, the board has determined that now is the right time to search for Peloton’s next CEO.”
Boone and Bruzzo said in a joint statement that they look forward to working “in lockstep” with the company’s leadership to ensure the company “does not miss an opportunity in its CEO search.”
Also on Thursday, Peloton reported third-quarter earnings that missed Wall Street expectations for both revenue and profit. Here’s how the connected fitness company performed compared to Wall Street expectations, according to a survey of analysts by LSEG:
- Loss per share: 45 cents, compared with expected loss of 37 cents
- Revenue: $718 million, $723 million expected
The company reported a net loss of $167.3 million, or 45 cents a share, for the three months ended March 31, compared with a loss of $275.9 million, or 79 cents a share, a year earlier.
Sales fell to $718 million, down about 4% from $748.9 million in the same period last year.
Peloton has tried various methods to get the company back to sales growth.It removed the free membership option from its fitness app, expanded its corporate wellness offerings, and partnered with big brands like lululemon Increase membership, but these measures are not enough to increase sales.
Peloton’s fiscal third-quarter revenue fell for the ninth consecutive quarter compared with the same period last year. The company’s sales have not grown compared to the same period last year since December 2021, when demand for its stationary bikes remained high and many bikes had yet to return to gyms amid the Covid-19 pandemic.
The business continues to lose money and has not made a net profit since December 2020.
For the current fiscal year, Peloton lowered its forecasts for paid connected fitness subscriptions, app subscriptions and revenue. Looking ahead to the current quarter, the company lowered its forecast for connected fitness subscriptions by 30,000 members, or 1%, to 2.97 million.
“Our paid connected fitness subscription guidance reflects the latest hardware sales outlook based on current demand trends and expectations of lower seasonal demand,” the company said.
Peloton currently expects app subscriptions to decrease by 150,000, or 19%, to 605,000.
“We will maintain a disciplined approach to in-app media spend as we evaluate our app tiers, pricing and refine our paid app subscription acquisition pipeline,” the company said.
Peloton now expects full-year revenue of $2.69 billion, a decrease of about $25 million, or 1%, due to an expected decline in subscription sales. That was below expectations of $2.71 billion, according to LSEG.
However, the company raised its full-year gross margin and adjusted EBITDA forecasts. Total gross margin is currently expected to grow 50 basis points to 44.5%, and adjusted EBITDA will grow $37 million to negative $13 million.
“This increase was primarily due to superior performance in the third quarter, coupled with lower media spend and cost reductions resulting from the restructuring plan announced today,” the company said.
Last February, McCarthy set a goal for Peloton to return to revenue growth within a year. When the company failed to hit that milestone, McCarthy delayed the plan and said he now expects the company to return to growth in June, when the current fiscal year ends.
McCarthy also expects Peloton to achieve positive free cash flow by June – a goal the company said it achieved early in the third quarter. This is the first time in 13 quarters that Peloton has hit this mark. Peloton said in a letter to shareholders that it generated $8.6 million in free cash flow, but it’s unclear how sustainable that number is.
Last month, CNBC reported that Peloton wasn’t paying its suppliers on time, which could temporarily pad its balance sheet. Peloton’s late payments to suppliers surged again in December and February after improving in January, according to business intelligence firm Creditsafe.
The company didn’t provide specific guidance on what investors can expect for free cash flow in the coming quarters, but said it did expect to “achieve modestly positive free cash flow” this quarter.
Part of the reason Peloton has failed to achieve positive free cash flow is that it’s not selling enough hardware, which is expensive to make and has become less popular since the Covid-19 pandemic ended and people returned to the gym .
Soon after McCarthy replaced Foley, he implemented multiple rounds of layoffs, affecting thousands of employees. The last round of layoffs was announced in October 2022, affecting 500 employees.
“We’re done now,” McCarthy said of the layoffs in November 2022. “There are no more people left in the industry.”
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