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Peloton to halt production of its Bikes, treadmills as demand wanes
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Peloton to halt production of its Bikes, treadmills as demand wanes
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PELOTON TO HALT PRODUCTION OF ITS BIKES, TREADMILLS AS DEMAND WANES

Published Thu, Jan 20 202212:46 PM ESTUpdated Thu, Jan 20 20227:16 PM EST
Lauren Thomas@laurenthomas
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Key Points
 * Peloton is temporarily halting production of its connected fitness products
   as consumer demand wanes and the company looks to control costs, according to
   internal documents obtained by CNBC.
 * The company said in a confidential presentation dated Jan. 10 that demand for
   its connected fitness equipment has faced a “significant reduction” around
   the world due to shoppers’ price sensitivity and amplified competitor
   activity.
 * Peloton plans to report fiscal second-quarter results on Feb. 8 after the
   market closes.

In this article

 * PTON+0.17 (+0.57%)
   

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VIDEO4:3804:38
Peloton temporarily halts production of Bikes and treadmills as demand falls
The Exchange


Peloton is temporarily halting production of its connected fitness products as
consumer demand wanes and the company looks to control costs, according to
internal documents obtained by CNBC.

Peloton plans to pause Bike production for two months, from February to March,
the documents show. It already halted production of its more expensive Bike+ in
December and will do so until June. It won’t manufacture its Tread treadmill
machine for six weeks, beginning next month. And it doesn’t anticipate producing
any Tread+ machines in fiscal 2022, according to the documents. Peloton had
previously halted Tread+ production after a safety recall last year.



The company said in a confidential presentation dated Jan. 10 that demand for
its connected fitness equipment has faced a “significant reduction” around the
world due to shoppers’ price sensitivity and amplified competitor activity.

Peloton has essentially guessed wrong about how many people would be buying its
products, after so much demand was pulled forward during the coronavirus
pandemic. It’s now left with thousands of cycles and treadmills sitting in
warehouses or on cargo ships, and it needs to reset its inventory levels.

The planned production halt comes as close to $40 billion has been shaved off of
Peloton’s market cap over the past year. Its market value hit a high of nearly
$50 billion last January.

Peloton shares closed Thursday down 23.9% at $24.22, bringing the stock’s market
value to $7.9 billion. During trading, shares hit a 52-week low of $23.25. The
drop also brought the stock below $29, where it was priced ahead of Peloton’s
initial public offering.


PELOTON STOCK, JAN. 20

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The company’s presentation shows Peloton had initially set expectations on Oct.
31 for demand and deliveries in its fiscal third quarter and fourth quarter that
ended up being far too high. It reevaluated those forecasts on Dec. 14,
according to the presentation, and Peloton’s expectations dropped significantly
for its Bike, Bike+ and Tread.


VIDEO1:4601:46
Peloton to temporarily halt production of bikes, treadmills: Internal documents
Halftime Report


However, Peloton said, the latest forecast doesn’t take into account any impact
to demand the company might see when it begins to charge customers an extra $250
in delivery and setup fees for its Bike, and another $350 for its Tread,
beginning at the end of this month.

Peloton also said it has seen low email capture rates for the upcoming debut of
its $495 strength training product, Peloton Guide, which is codenamed “Project
Tiger” in internal documents viewed by CNBC. Email capture rates keep track of
the number of people who enter their email addresses on Peloton’s website to
receive information on the product. The company said this is a signal of “a more
challenging post-Covid demand environment.”

The official launch of Guide in the U.S. was pushed from last October to next
month and now could come as late as April, the presentation dated earlier this
month said. The company also said it initially planned to charge $595 for the
bundle that includes one of Peloton’s heart rate arm bands and later dropped the
price by $100.

Late Thursday, Chief Executive Officer John Foley said in a statement, “As we
discussed last quarter, we are taking significant corrective actions to improve
our profitability outlook and optimize our costs across the company. This
includes gross margin improvements, moving to a more variable cost structure,
and identifying reductions in our operating expenses as we build a more focused
Peloton moving forward.”

Foley added that Peloton will have more to share when it reports its fiscal
second-quarter results on Feb. 8 after the market closes.


TOO MUCH SUPPLY AS SPENDING FLATLINES

A little more than a year ago, Peloton was facing the exact opposite issue. It
had too much demand and not nearly enough supply. In December 2020, it announced
a $420 million acquisition of the exercise equipment manufacturer Precor, giving
it more than 625,000 square feet of production space. That deal closed early
last year.

Then, last May, Peloton said it would be spending another $400 million to build
its first factory in the United States to speed up production of its cycles and
treadmills. That facility in Ohio isn’t expected to be up and running until
2023.


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In recent months, though, gyms have reopened and consumers don’t appear to be
throwing as much money into at-home fitness equipment. At the end of its latest
quarter, Peloton counted 2.49 million connected fitness subscribers. It only
added about 161,000 net new members in the period ended Sept. 30, its lowest
growth in two years.

The reversal is seen in its stock price. Pelton shares rallied more than 440% in
2020, but dropped 76% in 2021.

In a separate internal Peloton presentation dated October 2021, which was
obtained by CNBC, Peloton said that it was expecting overall fitness spending
would continue to grow year over year, but instead overall spending was flat
following the summer months.

Analysts in recent weeks have been trimming their expectations for Peloton’s
second quarter as well as their price targets for the stock, projecting that
Peloton had a weak holiday.


PELOTON’S MARKET SHARE COULD BE FALLING

One bright spot the presentation noted was that Peloton’s share of the total
connected fitness market had been increasing.

But a report from research firm M Science shows that Peloton’s overall market
share might be on the decline. In November, Peloton’s share of all connected
fitness products priced at a minimum of $1,400 was tracking slightly below
levels observed in 2019 and 2020, M Science said. That’s despite the lift
Peloton saw on key holiday shopping days including Black Friday and Cyber
Monday, it said.

M Science pegs Peloton’s share of the market for products priced at more than
$1,400 at a little more than 65%, making it the leading player. Other at-home
fitness products that M Science tracks include Echelon, Hydrow, Lululemon’s
Mirror, NordicTrack and Tonal.

M Science also said that it didn’t yet see “any evidence of another wave of
at-home fitness demand as a result of recent Covid-19 developments.”

CNBC reported on Tuesday that Peloton is working with consulting firm McKinsey &
Co. to look for ways to slash costs, which could entail job cuts and store
closures. A person familiar with the matter said Peloton has already started
layoffs in its sales division. The person requested anonymity because they
weren’t authorized to speak for the company.

VIDEO3:2003:20
Peloton execs sell shares before prices plunge, CEO pockets $119 million
Squawk Box


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