<span style="color: #9e9e9e;">Peloton Interactive reported another quarter of explosive growth amid the booming at-home fitness trend during the pandemic with revenues running up 233 percent in its first quarter ended September 30. However, fulfillment bottlenecks and shipping delays continue to frustrate efforts to catch up to demand.
“COVID-19 has changed nearly every aspect of how we live including how many of us are staying active and healthy,” said Peloton CEO John Foley on his company’s conference call with analysts. ”Of course, this has benefited our business results, but it has also brought with it unprecedented operational challenges.”
He highlighted that customer service shortfalls are a major concern because, beyond core product, Peloton has an ongoing relationship with subscribers through its workout content. He said, “It pains us that we’ve been underperforming recently versus the high standard we strive for. Wait times for our products have been unacceptably long, but none of us could have predicted that we would see all-time spikes in COVID-19 cases in October and the threat of new lockdowns in our global markets.”
Foley also said high organic sales growth has been steady since March, and the recent lowering of its original Bike price and the launch of its Bike+ premium offering further accelerated demand.
“We did our best to estimate the demand for Bike+, but while we are incredibly excited about the positive reaction, sales outpaced our internal estimates quickly causing wait times to balloon. As such, we are working swiftly to pivot manufacturing capacity to Bike+,” he said.
Another factor in extended wait times for product delivery has been port congestion, periodic warehouse closures associated with COVID-19, the West Coast fires, and hurricanes that have forced the company to reschedule deliveries.
“These external factors, unfortunately, extended already long delivery times,” added Foley. “Launching Bike+ was an exciting milestone in our history; however, it also drove high call volumes and very long wait times to reach our sales support teams, which impacted our customer experience.”
In response to long product wait times and elevated customer support volumes, Peloton is continuing to add manufacturing capacity. Investments are being made in expedited shipping from its Taiwanese factories into the U.S. by adding air shipments of Bike+ and utilizing expedited ocean shipping and ground truck logistics. Said Foley, “While these actions result in higher than usual logistics costs, we feel that incurring these incremental expenses in the short term is the right trade-off to improve our member experience.”
Adding more customer support to handle the call volume and more clearly indicating expected delivery dates on its website, are also emphasized. At the top of the opening page on Peloton’s website, includes the disclaimer, “Most bike delivery times are 4-to-6 weeks. Bike+ delivery times may exceed 10 weeks.”
Said Foley, “We’re fully up to the challenge and are 100 percent committed to delivering the level of excellent customer service our members deserve, and expect, but it will take us a bit more time to get there.”
Other than supply chain issues, Peloton’s business is on fire with first-quarter results topping Wall Street’s targets, and the company raised its outlook for the fiscal year.
Peloton’s Q1 Revenues More Than Triple
Peloton’s total revenue grew 232 percent in the first quarter, ended September 30 to $757.9 million, exceeding Wall Street’s consensus target of $748.1 million.
The gains were driven by strong demand for its Bike and Bike+, the full resumption of Tread+ sales and sustained low churn levels. During the quarter, Peloton launched Bike+, reduced the price of its flagship Peloton Bike and announced the upcoming availability of its new Peloton Tread.
Connected Fitness segment revenue was $601.4 million, representing 274 percent year-over-year growth. Connected Fitness revenue benefited from a large backlog of Bike orders from the previous quarter and continued strong global demand for its Bike product portfolio. The full resumption of Tread+ sales across the U.S. also materially contributed to growth in the quarter.
Subscription revenue grew to $156.5 million, up 133 percent year-over-year growth and driven by strong Connected Fitness Product sales and continued low Average Net Monthly Connected Fitness Churn of 0.65 percent. Peloton’s Connected Fitness subscription base climbed to over 1.33 million at the end of Q1, representing year-over-year growth of 137 percent. As of September 30, Peloton had over 3.6 million global members inclusive of over 510,000 digital subscribers.
Connected fitness subscribers are people who pay a monthly fee to sync Peloton’s workout classes to their Peloton equipment, versus accessing the programs separately through an iPhone or tablet device and paying a lower rate.
“We’re extremely pleased with the successful launch of Bike+ — a product truly developed in collaboration with our member community,” said Foley. “Our plan to introduce our new Peloton tread is progressing, and we expect to provide additional details about its availability soon. In the meantime, we continue to capture email addresses of interested consumers and plan to allow prospective members to see the new tread in our showrooms prior to Thanksgiving.”
Reflecting typical seasonality tied to warmer weather, member engagement eased modestly from Q420 but remained well above year-ago levels. In Q1, average monthly workouts per Connected Fitness Subscription were 20.7 compared to 11.7 in the year-ago period, an increase of over 75 percent.
Net income reached $69.3 million, or 20 cents a share, in its first quarter ended September 30 against a loss of $49.8 million, or $1.29 a year ago. Wall Street’s consensus estimate had been 11 cents. Adjusted EBITDA was $118.9 million representing an adjusted EBITDA margin of 15.7 percent versus a negative 9.2 percent in the same period last year.
Full-Year Guidance Lifted
Looking ahead, Peloton expects to bring in more than $3.9 billion in total revenue in fiscal 2021, up from a prior range of $3.5 billion to $3.65 billion. Analysts, on average, had been calling for $3.63 billion.
Peloton, however, expects profits to be pressured as it quickly opens new manufacturing facilities and because of extra shipping-related expenses it will incur during the holiday season.
For the fiscal second quarter, Peloton expects revenue of approximately $1 billion, representing 114 percent year-over-year growth.
Jill Woodworth, CFO, said on the call, “Continued high global demand for our products resulted in an increased backlog of deliveries at the end of the first quarter. In addition to the strong sales we’ve seen since the early spring due to COVID-19, recent sales performance has been driven by our bike price reduction and stronger than expected reception to Bike+. Also, the recent spike in COVID-19 cases, and newly imposed lockdowns in some of our markets, has had a significant positive impact on sales.”
Woodworth added that expanded manufacturing capacity is expected to allow Peloton to get back to normal order to delivery time frames for its Bike by the end of this calendar year. However, the Bike+ line will likely continue to face supply constraints for the foreseeable future causing longer order to delivery time frames for Bike+ for a couple more quarters. Manufacturing capacity is being shifted in favor of Bike+, but the original Bike is still expected to be its top-selling product in fiscal 2021.
Q2 gross margin to expected to temporarily decline to approximately 39 percent, due to shipping-related expenses in Q2, to alleviate delays ahead of the holiday period. The extra shipping expenses are also expected to impact profitability with Q2 adjusted EBITDA expected to reach $70 million, representing an adjusted EBITDA margin of 7 percent.
Photos courtesy Peloton
