Peloton stock is plunging after a massive recall and fears the $2,500 bikes will keep falling apart

Revenue will be $580 million to $600 million in the fiscal first quarter, Peloton said in a statement Wednesday. That compared with an average analyst estimate of $647.8 million, according to data compiled by Bloomberg. 

The company said the cost of a seat post product recall in May substantially exceeded its initial projections. Peloton has received about 750,000 requests for replacement seat posts, which was more than it expected, according to the statement. It has fulfilled more than 340,000 requests and expects to fulfill the balance by the end of September.

‘Our share of unanticipated surprises’

The recall lead to an additional $40 million for costs incurred as well as anticipated future related expenses. In addition, about 15,000 to 20,000 of the 2.2 million people who were affected by the recall elected to pause their monthly subscriptions in the fourth quarter pending a replacement seat post.

That contributed to a decline of 29,000 subscribers compared with the previous quarter, adding to the traditional seasonal slowdown in hardware sales. The pullback was sharper than the company expected through May and into the first three weeks of June as consumer spending shifted toward travel and experiences, it said.

“We certainly have had our fair share of unanticipated surprises, not all of them helpful to the business,” Chief Executive Officer Barry McCarthy said on a call to discuss the earnings, referring to the seat-post recall and an expensive lawsuit settlement. “I don’t know how many more of those unwelcome surprises there are in the future, but I figure we have to be getting closer to the end of that story.”

The shares plunged 23%, the most since January, to $5.41 in New York on Wednesday. 

Adjusted earnings before interest, taxes, depreciation and amortization will have a loss of $10 million to $20 million in the fiscal first quarter. Analysts projected a profit of $5.68 million. 

Peloton has been mired in a two-year tailspin after being an early pandemic darling. The company’s stationary bikes had been a hot commodity during Covid-19 lockdowns in 2020, but demand slumped after people began heading back to offices and gyms. The New York-based company also struggled with a glut of inventory and several product recalls.

The seat post was the fourth recall in recent years, following defects disclosed in bike pedals and both its treadmills. In 2021, Peloton was forced to cease sales of its high-end treadmill, the Tread+, following the death of a young child after being swept under the device. 

The company said Wednesday it expects to resume pre-sales of the popular Tread+ in the US this holiday season, with first shipments about six weeks later.

McCarthy, a former Netflix Inc. and Spotify Technology SA executive, was hired in February 2022 to set Peloton on a new course. Since then, the New York-based company has trimmed its workforce, reshuffled management and pared businesses. He’s also tried to make Peloton more of a services company — with its mobile app at the heart of the business — rather than just a seller of expensive bikes and treadmills. 

Most recently, Peloton has sought to forge partnerships with businesses and schools to reach new kinds of customers. Last week, it announced a business-to-business program that aims to turn Peloton into an employee perk. And on Tuesday it rolled out a college initiative that will bring its bikes to athletic programs and offer discounts to students — starting with the University of Michigan.

But turning around Peloton has been a slow process, and the shares remain down more than 90% from their pandemic highs. McCarthy told analysts on the call that there is an “enormous disconnect between the stock price and the energy” in the building.

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Are customers full up on fitness equipment?

But some analysts are skeptical that Peloton can reclaim its former status, or if it’s relegated to a passing fad.

“It is clear that they are having some potentially structural issues in terms of their ability to sell more hardware,” said Shweta Khajuria, an analyst at Evercore ISI, in an interview on Bloomberg TV. “The fundamental question for Peloton remains whether there is already enough number of households and owners for fitness equipment already.” 

She questioned whether Peloton can remain independent for the foreseeable future. “I would argue that it may not. As soon as they get to positive free cash flow on a sustainable basis with some sort of modestly higher top-line growth, the company may be looking for acquisition targets.”

In the fiscal fourth quarter, sales fell 5% to $642.1 million. Analysts estimated $641.6 million. On an adjusted Ebitda basis, the loss was $34.7 million, compared with a projected loss of $19.5 million.

Peloton was cash flow positive last quarter but said it doesn’t expect to be in the first half, mostly as a result of seasonality of hardware sales, timing of inventory payments, marketing to prepare for the holiday season and the cost for the seat post recall. But it does expect to achieve this objective in the second half.

It’s “not a great sign” that that it will take that long, said Bloomberg Intelligence analyst Kevin Near. “There’s lots of demand uncertainty.”