On his last quarterly call as CEO, Peloton’s John Foley admitted to “missteps” as the connected-fitness leader attempted to scale the business during the pandemic. 

His comments came after Peloton, on Tuesday morning, announced a CEO change, significant job cuts as part of a restructuring and slashed its revenue outlook for its current year.

 “I’d like to start by stating I love Peloton,” said Foley, who co-founded Peloton in 2013 at the start of the analyst call. “I love the role we play in connecting the world through fitness. Our goal has always been to bring immersive and challenging workouts into people’s lives in a more accessible, affordable and efficient way. We’ve done a great job of delivering on that vision, and our large and loyal member community is proof of that.”

He added, “But we also acknowledge that we’ve made missteps along the way to meet market demand. We scaled our operations too rapidly. And we over-invested in certain areas of our business. We own this. I own this. And we are holding ourselves accountable. That starts today.”

Spotify Exec To Take Over As CEO
Addressing the leadership change, Foley said Barry McCarthy will assume the role of president and CEO, and Foley will be taking on a new role as executive chair of the Board. The changes will be effective February 9.

Said Foley, “Barry is a tremendously talented executive with deep experience in growing content-dependent digital subscription businesses and doing so profitably. And he has partnered successfully with two extraordinarily talented founders during this journey. Barry most recently led Spotify’s global advertising business and also served as CFO overseeing their direct listing and helping to establish Spotify as the global brand it is today. Many of you may also know that Barry served as Netflix’s CFO for over ten years. Plus, Barry is a longtime passionate Peloton member who shares our team’s enthusiasm for a company’s vision of improving lives through home fitness. I’ll be partnering closely with him as we address the challenges facing our business and work to deliver on the value inherent in Peloton.”

Among other changes, William Lynch will transition from president of Peloton to a non-executive director on its Board.

McCarthy, who was not on the call, said in a statement, “As a passionate Peloton member, I have experienced firsthand this fantastic company’s mission and believe there is enormous potential for the platform. I’m honored to join Peloton at such an important moment in the company’s history and look forward to working closely with John, the Board and Peloton’s team members at all levels of the organization to execute against Peloton’s strategy and take the business to the next level.”

Restructuring To Eliminate 2,800 Jobs
Core parts of the restructuring plan include the reduction of approximately 2,800 positions globally, or about 20 percent of its workforce, to right-size the organization with realigned demand. According to annual filings, the company employed 6,743 people in the U.S. as of June 30, more than double the roughly 3,281 counted a year earlier.

Foley said the job cuts would span across business operations, from corporate functions to manufacturing, logistics and R&D, and nearly all levels. The job cuts will not affect Peloton’s instructor roster or content.

Foley said, “This was a very difficult decision for our management team, who has had the privilege of working alongside many of these team members from the beginning. But it’s a necessary one to get Peloton back on track. We greatly value the contributions of our impacted employees, and we’ll work hard to assist them in their transitions.”

Peloton will also be taking significant structural actions to elevate margins in its hardware business, including optimizing its logistics footprint by reducing owned and operated warehousing and delivery network and generating efficiencies across procurement and manufacturing.

Peloton also decided to wind down the development of Peloton Output Park (POP). In May 2021, Peloton announced plans to build POP, which would have been its first dedicated Peloton factory in the U.S. in Troy Township, OH. The facility would have supported 2,000 jobs with development breaking ground last summer.

Foley said Tuesday that while Peloton still sees strategic merit in diversifying its manufacturing footprint and developing its North American capabilities over the long term, it believes Tonic, a Taiwan-based bike manufacturer Peloton acquired in 2019, and third party manufacturing partners can support the company’s growth for the next few years.

Restructuring Expected To Drive $800 Million In Annual Cost Savings
Foley said that once fully implemented, the restructuring initiatives are expected to yield at least $800 million of annual run-rate cost savings through operating expense efficiencies and “material improvements” in its Connected Fitness gross margin.

“Every cost bucket is under scrutiny,” said Jill Woodworth, Peloton’s chief financial officer, on the call, adding that the “significant restructuring” could also have an impact on demand for Peloton’s products.

The restructuring program is expected to result in approximately $130 million in cash charges related to severance and other exit and restructuring activities and $80 million in non-cash charges. The wind-down of POP will result in $60 million in restructuring capital expenditures. The majority of the charges will be recorded in the fiscal year 2022.

Peloton also currently expects to exit its fiscal year ending June 30, 2022 with approximately $1.2 billion of cash and $500 million of additional revolver capacity.

“Our objective is to best position Peloton for sustainable growth while establishing a clear path to consistent profitability and free cash flow as we pursue the significant connected fitness opportunity,” said Foley. “Our restructuring will allow us to streamline our teams and reporting structures and create clear lines of accountability for all aspects of our P&L. The net result will be better and faster decision making and a more focused team to drive growth and profitability.”

Foley further iterated that the restructuring activities would not impact the user experience.

Foley said, “Our roster of instructors is foundational to the Peloton-user experience, and we will continue to invest in our content creators for the benefit of our growing member base. We will also continue to invest in our platforms through innovative hardware software and content experiences, improving our offering for both current and prospective members. Second, we are committed to increasing accessibility both in terms of overall cost, and in terms of the value we bring to our members. This is critical in order for us to deliver on the longer-term fitness growth opportunity.”

Peloton also released results for the second quarter in line with preliminary results provided on January 21, although Peloton significantly reduced its sales outlook for the current year.

The updated outlook for the fiscal year ended June 30 includes:

  • Peloton now expects to end the year with 3 million connected fitness subscribers. Previously, it projected it would have 3.35 million to 3.45 million.
  • Fiscal 2022 revenue is now expected within a range of $3.7 billion to $3.8 billion, down from prior expectations of $4.4 billion to $4.8 billion.
  • Gross profit margin is now expected to be approximately 28 percent, down from previous guidance of 32 percent.
  • Adjusted EBITDA is now expected to range between a loss of $675 million to $625 million. Previously, the EBITDA loss was predicted to be between $425 million to $475 million.

The moves could buy Peloton time as it fends off pressure from Blackwells Capital, an activist investor that in late January called for the company to fire Foley and explore a sale.

On Tuesday, Blackwells said the company’s actions “do not address any of Peloton investors’ concerns” and again urged Peloton to explore a sale, citing a long list of potential buyers, including Netflix and Amazon. A buyer could pay $75 per share and still make money, according to “myriad valuation metrics,” Blackwells said.

Late Friday, reports arrived that Nike and Amazon have been exploring a possible Peloton and Google, have been cited as potential suitors.

The takeover talks come as Peloton’s stock fell more than 80 percent from a high a year ago as the gradual easing of pandemic restrictions fueled concerns about slowing growth. At the end of last week, Peloton was valued at just over $8 billion, based on Friday’s close of $24.60, below its September 2019 IPO offering price of $29 a share.

In late afternoon trading on Tuesday, Peloton is up $7.47, or 25.1 percent, to $37.22. Shares on Monday rose $5.15, or 21 percent, to $29.75, on the takeover interest news.

The biggest drawback for potential buyers may be that Foley and other insiders control a majority of Peloton’s shares and thus decide on a potential sale. Peloton said on Tuesday that it had no plans to make changes to its super-voting stock.

Peloton also announced on Tuesday that it was appointing two new members to its Board: Angel Mendez, who previously worked as executive vice president and chief operating officer of HereTechnologies and as a senior executive at Cisco Systems, and Jonathan Mildenhall, a co-founder of TwentyFirstCenturyBrand. Erik Blachford, who has served as a director since 2015, will step down.

Photo courtesy Peloton