What’s going on on Earth with Peloton?

Things are much less rosy for Peloton these days. Once a darling of the pandemic, the connected fitness company has seen its stock price plummet in recent months. TV shows have turned his bike into a deadly punchline, and there’s no shortage of rumors about which company should buy Peloton to save him from impending doom.

Then today, Peloton launched its second-quarter earnings call with a flurry of news: the company has a new CEO. It cuts 2,800 jobs worldwide, cuts marketing and puts a damper on its North American manufacturing ambitions. Overall, it’s a grim picture that raises questions about whether Peloton can find a way out of this mess.

As a fitness tech critic, Peloton’s business issues are baffling because the company offers a great product. Its hardware, while expensive, is aesthetically pleasing and generally well-built. The classes are engaging and the instructors have their own dedicated followers (especially Cody Rigsby). Peloton users are often cult-like, so much so that the Tread Plus recall wasn’t enough to persuade some owners to return the product. While Peloton’s financial news has been grim lately, CFO Jill Woodworth was quick to point out that engagement remains high with an incredibly low monthly churn of 0.79% for the second quarter.

Peloton courses are not the problem.
Photo by Amelia Holowaty Krales/The Verge

So how did Peloton, a company with a stellar product and a dedicated fanbase in a growing connected fitness market, end up like this? The short story is that Peloton got overwhelmed and didn’t anticipate lower demand once gyms reopened.

In 2020, Peloton’s supply chain was struggling to keep up with the unexpected surge in demand created by people suddenly wanting to train at home. Faced with several months of execution delays, Peloton decided to invest heavily in strengthening its manufacturing capacities. He lost millions to expedite shipping and another $420 million to buy Precor, one of the world’s largest manufacturers of commercial fitness equipment. He spent another $400 million on a factory in Ohio. The company was positioning itself to quickly build bikes and treadmills for a market that couldn’t get enough of them.

Then in 2021, Peloton’s success story began to unravel. Its two treadmills were publicly recalled after reports of several injured children, including one case that resulted in death. The response to its upcoming Peloton Guide bodybuilding system has been lukewarm. And demand for its products plummeted as some people returned to gyms once quarantine restrictions were lifted. The result was Peloton’s market capitalization plummeting from a pandemic peak of around $50 billion to around $8 billion last week after it was rumored that the company would halt production of all of its products. All this commercial debacle with sex and the city actor Christopher Noth probably didn’t help.

At the center of this mess is Peloton founder and CEO John Foley. A few weeks ago, activist investor Blackwells Capital wrote an open letter demanding that Foley be fired for leading Peloton off the proverbial cliff. Among the reasons listed were Foley’s initial refusal to cooperate with the Consumer Product Safety Commission on treadmill recalls, hiring his wife as vice president of apparel, taking a poor real estate commitments, failing to properly anticipate consumer demand, and “subverting the roadmap of the product itself authored.

One would think, then, that naysayers might be appeased by today’s news that Foley is stepping down for former Spotify and Netflix CFO Barry McCarthy. After all, Peloton says its cost restructuring measures will save $800 million and reduce capital spending by $150 million this year. Additionally, Peloton’s stock received a nice uptick from the news.

Photo by Amelia Holowaty Krales/The Verge

Not enough. In response to today’s news, Blackwells Capital released a scathing presentation that gutted the company’s leadership but focused on Foley. It included damning quotes from Foley about how he goes months without speaking to the CTO of Peloton and that he didn’t think his colleagues would have anything positive to say about his leadership.

“This company is grossly mismanaged,” acknowledges Eric Schiffer, CEO of private equity firm Patriarch Organization. “I think it comes down to the fact that you have a CEO who is just out of his league. He tries to run an operation that has the potential to be an amazing organization, but he falls off the bike every time.

Schiffer went on to say that there was a “painful delusion” going around Foley that the best thing the CEO could do was leave. As for McCarthy, Schiffer noted that the appointment did not inspire confidence, as his background is primarily that of a CFO. Additionally, Schiffer says nothing has changed, given that Foley will likely continue to make the decisions behind the scenes as executive chairman. “For me, the mark is on this operational kiss of death. They can put any band-aid they want on it, but it’s still abysmal in underlying strengths and leadership.

That’s why investors frothed at a potential selloff. You have a great brand and product with huge potential for growth – if you could put the responsibility in the right person (or company).

There’s just one problem: Foley doesn’t seem keen on selling. At least not yet. Foley may no longer be CEO, but he and his team control 80% of the voting rights at Peloton. In short, no sale takes place without Foley’s consent.

Foley seems to prefer a future in which his business remains independent, even as investors are eager to see it sold. Ahead of the second quarter earnings call, Foley said The Wall Street Journal that he and McCarthy, the new CEO, can together “make a complete adult and build a truly remarkable company”. As analysts brushed off the topic on today’s investor call, Foley repeatedly stressed that he believes Peloton still has growth opportunities.

It’s not impossible for Peloton to succeed as a standalone business if it sticks to the plan outlined today, says Julie Gillespie, market research manager at TipRanks. “They reduce; they slow down their own factory development, stick to current suppliers, cut costs, cut employees – I think they can get back to a place where on their own they would be profitable. We’re just going to see a much smaller growth trajectory.

And this is where the real problem could lie. Peloton says it won’t see the benefits of these measures until the second half of 2022. For these corrective actions to work, it will also take patience from investors and customers. Peloton diehards aren’t going anywhere — and experts agree that connected fitness is here to stay. In the long term, there’s reason to be optimistic about Peloton’s future, even if it means modest growth. But investors want their piece of the pie and their patience is lacking.

Photo by Amelia Holowaty Krales/The Verge

According to Gillespie, as soon as companies like Apple, Amazon, Nike and Disney were launched as buyers of Peloton, “people went crazy.” In a sense, Peloton has become the victim of its own runaway success. “Investors are expecting this hype and excitement, and there’s a lot of pressure to sustain that versus slow and steady long-term growth. Over the past two years, the patience isn’t there.

Schiffer agrees. While Peloton could choose to take things slow, it would make investors unhappy, as it likely means a lower valuation and, therefore, less earnings. Because of this, Schiffer thinks investors are unlikely to give up on pushing for a sell.

“I think you’re going to continue to see a bloodbath and a slow hemorrhage with Foley and management, but at some point investors will pressure him out.”

So the question is not whether Peloton can right the ship. He can, and he probably will. The question is whether it does so as an independent company. For now, only Foley really knows.

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