Peloton held their 2021 Q2 earnings call last night with investors. The company addressed steps they are taking to address the shipping backlog, some details about their Precor acquisition, as well as a number of other topics. For raw numbers on profit & margings, we recommend you browse through the company’s letter to shareholder and earnings letter.
You can listen to a recording of the call here, or read a copy of the shareholder letter here. Peloton member John Bernstein (#YukonJack) listened to the call and provided a recap in his Pelofun, Craft Cocktails and More! group. Rather than us try to recap the call itself, John was kind enough to let us share his excellent post on the topic.
I’m continuing to maintain the tradition I started when Peloton first went public. Below is my summary of their fiscal second quarter 2021 (calendar Q4 2020) earnings report that was released after the market close yesterday. As always, this comes with my usual disclaimer. I am in the investment business, so this is not intended to be a recommendation to buy or sell the stock. If you are looking for that type of guidance, I would encourage you to consult with a financial professional who can take into account the specifics of your personal financial situation when making any recommendations.
Not surprisingly, Peloton reported another strong quarter with new subscribers, revenue, and earnings all better than expectations. Instead of summarizing the info that you can easily read in their release (linked below). I’ll focus more on the highlights from the conference call. I will say that they earned net income of $64 million for the quarter, which translates to $0.18 per share.
Here are some interesting tidbits from the call:
- They added 333,000 net connected fitness subscribers in the quarter for a total of 1.67 million.
- As of quarter end, they have 4.4 million global members, of which 625,000 are digital members.
- Strong revenue growth was driven by strong demand for Bike, Bike+, and Tread+. It was also aided by lower than expected financing rates, strong apparel sales, and low churn. They experienced strength across all geographies.
- In Q2, there were 21.1 monthly workouts per subscription, up from 12 in the year ago quarter. They have found that increased engagement results in lower churn.
- Last month they had their first day with more than 2 million workouts.
- They are adjusting their payment processing system to process payment for equipment purchases closer to the delivery date than the order date. This has no impact on revenue recognition, as revenue is not recognized until delivery.
- They have increased their manufacturing capacity by 6x. This is a combination of their own plants and third party partners. Their current manufacturing capacity now exceeds demand, and that will increase further.
- This means the current 8-10 week backlog from order to delivery is a purely a shipping issue. As previously announced, they are investing $100 million in expedited shipping, including ocean freight, air freight, and diversion to ports with less congestion. The majority of this expense will occur this quarter.
- As a result, they expect to have order to delivery time under 4 weeks by mid to late spring. By June, they expect to be able to build domestic inventory.
- Some interesting facts about shipping issues: port unloading times in LA are 4x longer than normal, and pricing on trans-Pacific shipping is 3x normal. With normal pricing, shipping costs are 2-3% of cost of goods sold.
- They are very excited about the Precor acquisition. Three primary reasons for the deal: 1)manufacturing capacity and scale; 2) the team of people (according to Foley they know how to make high quality fitness equipment better than anyone else, PTON is excited about Precor’s product and manufacturing R&D.); 3) commercial platform opportunity – they expect to be able to sell into the following channels: corporate campuses, multi-unit residential buildings, hospitality, and colleges & universities.
- Precor will fast track PTON’s ability to build a larger domestic manufacturing footprint. They expect to be producing bikes at the Precor plant in North Carolina by the end of 2021. This will also enable them to bring new hardware products to market more quickly.
- They expect the deal to close early this calendar year, and they will give more details next quarter.
- The new tread launched on 12/26/2020 in the UK is exceeding expectations. In an effort to maintain better order to delivery times, they are keeping the 2/9 Canadian launch date, but they are postponing the U.S. launch from March to May 27 (still excludes AK and HI). There will be a limited number of U.S. deliveries to customers who have already expressed interest in select zip codes. In addition to delaying the U.S. rollout, they are allocating more resources to the UK and Canada to ensure better customer experience.
- Strength continues to be a key focus for the company. Over 1 million pilates classes have been taken since the fall launch. They are always on the look out for partnerships. They cited the Beyonce and Shonda Rhimes/Year of Yes partnerships.
- During the q&a Foley was directly asked about adding strength hardware (like Tonal or Mirror) vs. adding content. His response was that it’s a “question mark in my own head.” He is either equivocal on this, or he is keeping his cards close to his chest, or maybe a bit of both. Last quarter, he did say that he was unimpressed with all of the existing hardware. So, if you are waiting for PTON to acquire Tonal, don’t hold your breath.
- They have experienced 500% growth in strength category engagement.
- They continued to hold down sales and marketing spending even through the holiday season because of the backlog. They expect to begin ramping that up over the next two quarters. They declined to give any long range guidance on this expense, but they acknowledged that it will continue to be a critical component especially around new product introductions.
- Their guidance for next quarter and the fiscal year was either unchanged or increased with the exception of gross profit. The decline results from the price cut to the bike last September, which is not new, and the $100 million additional spending on shipping. Unless the pandemic is going to last longer than anyone is currently anticipating, this is a short term expense and drag on margins that should be largely gone by the summer.
Some final thoughts. On any reasonable metric the stock is overvalued. At the same time, the company has incredibly strong fundamentals that look to continue for the foreseeable future. It’s entirely possible that it will continue to maintain these valuation levels, but it will undoubtedly cause stock price volatility as many of you are experiencing today. The margin issues are a short term problem and should not have an impact on the long term performance of the stock, notwithstanding today’s action.
Finally, with respect to threats to Peloton’s business, from Apple’s entry to online fitness, to claims that everyone will return to gyms after Covid, I find both claims to be silly oversimplifications that are largely untrue. The fitness market is one of the largest and most fragmented markets out there. Apple’s entry may help competitors more than it hurts them, as it increases interest and likely contributes to overall market growth. Fitness is a distraction for a $2 trillion company like Apple, it’s the singular focus for PTON.
There is no question that PTON sales have benefited from Covid. It’s also true that PTON had triple digit revenue growth in each of the three years prior to the pandemic. There is clearly a secular trend underway. When the pandemic ends revenue growth will likely slow, and the overvalued stock will react. Nonetheless, when that settles out PTON will still maintain stellar, if somewhat lower, growth rates. I believe most people like to have several options when it comes to fitness. This is not black and white: PTON wins, gyms lose. In my view, many people will choose both. This is further supported by that fact that it’s best to switch things up when it comes to fitness. Otherwise, your body becomes efficient and you get diminishing returns from doing the same things. I have gone to the gym every week for the last 11 years until Covid, and I have owned a Peloton for six of those years. When the pandemic ends, I will return to the gym and continue using my bike and tread. Hope this helps! I’m happy to hear and discuss your thoughts below! #YukonJack
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