Home Finance Surprised by the depth of some problems in the company

Surprised by the depth of some problems in the company

by YAR

Spotify CFO Barry McCarthy attends the Allen & Company Sun Valley Annual Conference on July 11, 2018 in Sun Valley, Idaho.

Drew Angerer | fake images

When Barry McCarthy stepped up to run Peloton about three months ago, he was shocked to learn how disorganized the supply chain was and how quickly the company’s cash coffers were shrinking.

“The nature of the changes is that they are full of surprises,” McCarthy told analysts Tuesday, during his first post-earnings conference call with Peloton.

After digging deeper into the business, the CEO said he learned that Peloton was “weaker across the supply chain” than he expected. He said the biggest surprise during the previous quarter was cash flow and how dismal it was.

However, the former Netflix and Spotify executive also said he was also surprised by Peloton’s ability to “quickly address” its cash flow situation without diluting existing shareholders and while continuing to adequately capitalize the business. Another bright spot McCarthy noted was that he found more talent within the Peloton headquarters than he thought he would discover.

McCarthy’s comments to Wall Street on Tuesday were incredibly risky, given the decline in Peloton’s share price and diminishing confidence among investors that the business can succeed in a post-pandemic world.

The CEO’s letter to shareholders on Tuesday came with disappointing results for the three-month period ending March 31 and a gloomy outlook for the current quarter, which ends June 30 and marks the end of Peloton’s fiscal year. McCarthy was quick to mention the areas in which the old Peloton management had not been as successful as he laid the groundwork for his turnaround plan.

At least for now, investors are more focused on the current bad state of affairs. Peloton shares fell to an all-time low Tuesday morning, dragging the company’s market valuation down to about $4 billion. It had been as high as $50 billion near the start of last year.

Still, McCarthy ended the conference call by telling Wall Street that he is “pretty optimistic” about the company’s path forward, “regardless of the share price.”

“I don’t mean to sound like a Pollyannaish, but I am hopeful that one day soon we will look back on this call as one of the major turning points in the business,” he said.

A change of priorities

On McCarthy’s checklist are:

  • Breaking into outside retailers by selling Peloton products through other businesses
  • Increased awareness of the company’s digital app, which may be an option for people who don’t want to commit to a bike or treadmill.
  • International expantion
  • Wider implementation of a pilot in which customers pay a flat fee to rent one of Peloton’s stationary bikes and access its live and on-demand training classes.

“We need to be good at hardware, but being good at hardware is not enough,” he said on the call. “And that requires a change in business investment priorities.”

It also, more importantly, aims to return the business to positive free cash flow in its next fiscal year.

A recent injection of cash from JPMorgan and Goldman Sachs should allow it to do this, McCarthy said, despite any economic headwinds. According to McCarthy’s letter, Peloton ended its latest quarter “low-cap” with $879 million in unrestricted cash and cash equivalents.

However, many investors are likely to pause until they can see further signs of progress. Some also worry that Peloton could lose a fraction of its existing subscriber base, which has proven loyal during the pandemic, if it changes too much too soon.

UBS analyst Arpine Kocharyan said he expects Peloton investors to be more concerned in the short term about the company’s ability to preserve its cash flows and liquidity. Peloton’s strategy under McCarthy is to focus more on subscriber net present value, versus a previous focus on hardware earnings, Kocharyan said in a note to clients.

Other analysts wonder if McCarthy’s strategy is really that different from that of former Peloton CEO and co-founder John Foley.

Peloton enjoyed success under Foley, who led the maker of connected fitness equipment during the height of the pandemic. But it also experienced challenges as consumer demand began to fade but costs were still rising and Peloton had made investments in things, like additional manufacturing centers, that it no longer needed.

“The company continues to suggest with their words that they know they need to change,” said Simeon Siegel, an analyst at BMO Capital Markets. “And yet they cling to the idea that their growth story is their North Star.”

“If the company simply worked on selling off its existing inventory and focused on embracing its existing loyalists, there should be a reasonable path to profitability,” he added. “The problem is that history is clouded by the belief that they have the right to grow as large and as fast as they want.”

McCarthy reiterated Tuesday that Peloton’s goal is to one day have 100 million members, a goal Foley set in 2020.

“I know of digital apps that already have over 100 million people focused on fitness. And I can’t think why, given our early success in the category, we couldn’t be one of those digital apps,” he said.

Peloton had 7 million subscribers as of March 31.

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