Peloton co-founder steps down after rough ride

Feb 8, 2022, 5:31 AM | Updated: Feb 9, 2022, 10:14 am

Peloton is replacing its CEO, cutting jobs and reining in ambitious expansion plans after badly misjudging the staying power of the exercise-at-home trend that propelled its sales early in the pandemic.

John Foley first pitched the idea for Peloton in 2011, hoping to disrupt the industry. He will give up the CEO position and become executive chair at Peloton Interactive Inc. The company is also cutting almost 3,000 jobs.

Barry McCarthy, who served as CFO at Spotify as well as at Netflix, will take over as CEO, the company said Tuesday.

Peloton’s shares surged about 25% Tuesday, despite the company reducing its annual outlook for sales and subscriptions and reporting a big loss for its fiscal second quarter.

Peloton has been on a wild ride for the past two years during the pandemic. Company shares surged more than 400% in 2020 amid COVID-19 lockdowns that made its bikes and treadmills popular among customers who pay a fee to participate in Peloton’s interactive workouts. But nearly all of those gains were wiped out last year as the distribution of vaccines sent many people out of there homes and back into gyms.

Peloton’s initial success also created competition, with companies peeling away customers by selling cheaper bicycles and exercise equipment. High-end gyms also jumped into the game, offering virtual classes that once were Peloton’s biggest draws. All the while, Peloton misjudged the slowing demand and kept churning out its products.

“The problem for Peloton isn’t that it has a bad product. Nor is it that there is no demand for what it sells,” said Neil Saunders, managing director of GlobalData Retail in a note published Tuesday. “The central problem is one of hubris and bad judgment. Peloton incorrectly assumed that the demand created by the pandemic would continue to curve upward.”

In a conference call with analysts on Tuesday, Foley acknowledged that the company expanded its operations too quickly and overinvested in certain areas of the business.

“We own it. I own it, and we are holding ourselves accountable,” said Foley, noting he will be working closely with the new CEO. “That starts today.”

Peloton has had to address previous missteps. In May, it halted production of its Tread+ treadmills, after recalling about 125,000 of them less than a month after denying they were dangerous. One was linked to the death of a child, while others were linked to 29 injuries. Last August, the company cut the price of its main stationary bike — the product that was the cornerstone of its original popularity — by $400 because of slower revenue growth.

Peloton also found itself entangled in a marketing debacle in December. Its stationary bike was used in the first episode of “Sex and the City” spinoff “And Just Like That,” but not in a flattering way. One of the characters, Mr. Big, dropped dead after a ride on a Peloton. The company reportedly knew about the product placement but not the plot line, leaving it scrambling to respond to the negative attention.

And last week, there were reports that Amazon or Nike might buy the company. Those that pushed for the sale of Peloton continued to do so this week, with activist investor Blackwells Capital asking again for the company to be sold despite the change in leadership.

Wall Street analysts were divided over whether the latest moves set up Peloton for a sale or position it to remain independent.

“I think the moves, as a whole, do not signify that Peloton is throwing in the towel. I believe this means they are going to slim down, refocus, and stay independent,” said Raj Shah, North America lead for tech, media, and telecom at digital consulting firm Publicis Sapient.

Others maintain the change-up means a sale is more likely to occur: “We believe Foley leaving makes it more likely that Peloton ultimately sells the company and the board clearly has major decisions to make in the days/weeks/months ahead,” wrote Wedbush analysts Daniel Ives and John Katsingris.

Also on Tuesday, Peloton announced that it was cutting 2,800 jobs, including approximately 20% of corporate jobs at the New York City company. The instructors who lead interactive classes for Peloton will not be included in cuts, nor will the content that the company relies on to lure users.

Peloton said it’s winding down the development of its Peloton Output Park factory in Ohio. It will also reduce its owned and operated warehousing and delivery locations and will instead ramp up its third-party relationships.

Peloton is looking to reduce its planned capital expenditures for this year by about $150 million. 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 majority of the charges will be recorded in fiscal 2022.

The company also slashed its full-year sales outlook and now expects a range of $3.7 billion to $3.8 billion. That’s down from a prior range of $4.4 billion to $4.8 billion, which it announced last November. It originally had expected $5.4 billion.

Peloton anticipates it will finish the year with roughly 3 million connected fitness subscribers, compared with previous estimates of 3.35 million to 3.45 million.

Peloton reported a net loss of $439.4 million, or $1.39 per share for its fiscal second quarter, which ended Dec. 31,2021, compared with net income of $63.6 million, or 18 cents a share, a year earlier. Total revenue increased more than 6% to $1.13 billion. Analysts had expected a loss of $1.24 per share on sales of $1.14 billion, according to FactSet.

The company anticipates at least $800 million in annual cost savings once its actions are fully implemented.

___

Associated Press Staff Writer John Seewer in Toledo, Ohio, contributed to this report.

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Peloton co-founder steps down after rough ride