Peloton shares sink on wider-than-expected loss, 'bad news' for paid subscriptions

Shares of Peloton sank about 6% in premarket trading Thursday after the company reported a wider-than-expected quarterly loss, a tepid holiday forecast and "bad news" for paid subscriptions.

Here's how the connected fitness company did in its first fiscal quarter compared with what Wall Street was anticipating, based on a survey of analysts by LSEG, formerly known as Refinitiv:

• Loss per share: 44 cents vs. 34 cents expected
• Revenue: $595.5 million vs. $591 million expected

The company's reported net loss for the three-month period that ended Sept. 30 was $159.3 million, or 44 cents per share, compared with a loss of $408.5 million, or $1.20 per share, a year earlier.

Sales dropped to $595.5 million, down from $616.5 million a year earlier.

For its holiday quarter, Peloton is expecting revenue of between $715 million and $750 million, an 8% drop at the midpoint compared to the year-ago period. That falls short of the $763.2 million analysts had expected for the company's fiscal second quarter, according to LSEG.

It expects paid connected fitness subscriptions to be between 2.97 and 2.98 million, which falls short of the 3.03 million that analysts had expected, according to StreetAccount.

Peloton has been working to launch a series of new strategies in its quest to reclaim its pandemic-era heyday but so far, the results have been mixed.

One bright spot has been its rental service, also known as fitness as a service, which CEO Barry McCarthy called a "big growth opportunity" in a letter to shareholders. Peloton ended the quarter with 54,000 rental subscribers in the U.S. and Canada and expects to end the year with 75,000 subscriptions. During the quarter, rentals represented 33% of bike sales.

Still, the company is seeing higher-than-expected membership churn once again. It ended the quarter with 2.96 million connected fitness subscriptions, below the 2.99 million that analysts had expected, according to StreetAccount and a drop off of about 30,000 memberships compared to the prior quarter. Churn came in at 1.5%, which has higher than the company had expected.

Earlier this year, Peloton launched a new tiered pricing strategy for its app — a key part of its growth strategy — that included a free tier. The idea was users would fall in love with Peloton's content and spring for a paid membership, which comes with a far wider variety of classes, but that bet is yet to materialize.

"With limited marketing support, we saw more than one million consumers download the free version of our App. Our brand relaunch was successful in continuing to resonate with our core demographic, and it also attracted more male, GenZ, Black, and LatinX groups than before the relaunch. That's the good news," McCarthy said in a letter to shareholders.

"The bad news is we were less successful at engaging and retaining free users and converting them to paying memberships than we expected."

In response, the company shifted its marketing spend to focus on the company's paid offering, which drove a higher mix of premium priced subscribers than it expected. Second, it worked to improve the user experience to make it easier to find classes.

It ended the quarter with 763,000 paying Peloton app subscribers, 65,000 fewer than the prior quarter. Churn for its paid app subscription came in at 6.3%, lower than what the company had expected.

Users of Peloton's app are engaging with it and taking longer classes and more class types than they were a year ago. Engagement, measured by time spent on the platform, was up 6% during the quarter.

In late September, the company announced a five-year partnership with former rival Lululemon that brought Peloton's prized fitness content to the apparel retailer's exercise app. The partnership marked the first time that Peloton was willing to share its content with another company as it looks to woo Lululemon's 13 million members and convince them to sign up for its subscriptions. 

The day before announcing its partnership with Lululemon, Peloton revealed that it was parting ways with its chief product officer and co-founder Tom Cortese, who helped start the company alongside ousted founder John Foley. With Cortese's departure, just two executives from Peloton's early days remain in its C-suite: Jennifer Cotter, the company's chief content officer, and Dion Camp Sanders, its chief emerging business officer.

A few weeks later, the company announced a multi-year partnership with the NBA and WNBA, which agreed to name Peloton as an official fitness partner of the sports leagues. As part of the partnership, NBA league pass – the league's live game subscription service – will be available to stream across Peloton devices. The company also has plans to develop NBA- and WNBA-themed fitness classes. 

When it comes to hardware, Peloton is now selling its Row machine in Canada and its Bike and Bike+ in Austria, its fifth market outside of the U.S., as it looks to boost sales of its connected fitness products, which have been on the decline. 

All of the strategies are part of McCarthy's goal to return the company to growth and boost membership so it can eventually find a path to profitability. During the previous quarter, Peloton saw higher than expected churn that the company suspects was related to the recall of its Bike seat post, along with seasonality. 

The post, which had a tendency to detach and break unexpectedly during use and left some riders injured, was recalled in May and impacted more than 2 million bikes. During the previous quarter, the recall cost the company $40 million, far more than it had expected.