Clothes in a Peloton store in Palo Alto, California, United States on Monday, August 5, 2024.
David Paul Morris | Bloomberg | Getty Images
Peloton It made a surprise profit in the fourth quarter of Thursday and outlined new CEO Peter Stern's strategy. Stocks rose before trading, swinging between 5% and 15% gains.
The connected fitness company, known for its fixed bikes and treadmills, has a net income of $21.6 million, while the full-year earning period is $30.5 million. This is thanks to better than expected, and Peloton's efforts to cut its operating expenses, which Stern said in a letter to shareholders is still too high.
The company plans to reduce spending on operating interest rates from July starting in fiscal 2026, with half of the cuts coming from overhead, with half of the cuts coming from renegotiating contracts with suppliers, but the other half will come from 6% of its employees.
“Our operating expenses are still too high, which hinders our ability to invest in the future,” Stern wrote in a letter to shareholders. “We are developing a cost restructuring plan that aims to achieve at least $100 million in operating interest rate savings by reducing the size of our teams around the world, reducing indirect spending and relocating some of our work. This is not a decision we make lightly because it affects many talented members, but we believe it is necessary for the health of our long-term business.”
The latest round of layoffs comes a year after the company announced plans to reduce its workforce by 15%.
In the most recent quarter, Peloton beat Wall Street expectations on top and bottom lines. According to LSEG's survey of analysts, the company's performance in its fourth fiscal quarter was as compared to Wall Street's expectations:
- Earnings per share: 5 cents, estimated 6 cents
- income: $607 million vs. $580 million expected
The company reported net income of $21.6 million, or 5 cents per share, for the three months ended June 30, compared with a loss of $30.5 million, or 8 cents per share a year ago.
Sales fell to $607 million, down about 6% from the same period last year.
Since the height of the pandemic, Peloton has been working to reduce costs, stabilize its business and generate free cash flow to ensure its business survives. Stern's eight-month term as Peloton's latest executive, and these efforts began to fruition.
Throughout the year, the company generated $320 million in free cash flow before its internal expectations, and its guidance means a path to revenue growth in the middle of a year. Overall, operating expenses fell by 25% in fiscal 2025, meaningful cuts to sales and marketing as well as R&D, metric investors and analysts have long said it was too high for the size of Peloton's business.
In the fourth quarter, operating expenses fell 20%, sales and marketing expenses fell 28%, R&D costs fell 20%, generally down 33%, and administrative costs fell 33%.
Peloton has also made progress in reducing debt, and last year it restructured to avoid an imminent liquidity tightening. In fiscal 2025, its net debt fell 43%, or $343 million, while the annual debt maturity was $459 million, when cash and cash equal value subtracted approximately $1.5 billion from its total debt.
The road to profitability
For Peloton's current quarter, sales are expected to be between $525 million and $545 million, weaker than analysts' forecast of $560 million, according to LSEG. However, sales for the full year ranged from $2.4 billion to $2.5 billion, in line with the expected $2.41 billion, according to LSEG.
This quarter is expected to be worse than expected, mainly because it tends to stop subscribing and withdraw new workout gear during the summer. But the remainder of the year means an improved sales model in the coming quarters.
In the latest quarter, Peloton sold more bikes and treadmills than Wall Street expected, with its connected fitness revenue of $186 million, far ahead of $170.3 million analysts. Subscription revenues were slightly $411 million, lagging behind $411 million, according to StreetAccount.
Improved top-line metrics, allowing Peloton to better utilize its fixed costs, thus increasing gross margin of 5.6 percentage points, which was 54.1% in the quarter compared to 48.5% before the year.
It is worth noting that its hardware segment has long been making efforts on peloton's performance, and it has steadily earned profits. Peloton's hardware gross margin was 17.3%, up 9 percentage points from the same period last year due to the transfer to more profitable products and lower service and repair, warehouse and transportation costs.
The company's subscription gross margin grew by 3.7 percentage points to 71.9%, but helped with a one-time balance sheet associated with music royalties. In addition to this earnings, the subscription gross margin will be 69.2%.
Peloton's gains in boosting its profits are expected to continue, but the new 50% tariff imposed by the Trump administration on products made in aluminum and other responsibilities that touch the company's supply chain will be hampered. The company expects tariffs to affect free cash flow in the coming year, so it is expected to generate $200 million in free cash flow in fiscal 2026, lower than revenue in fiscal 2025.
In Stern's letter to shareholders, there are no clear plans to increase the price of subscriptions or hardware, but he said the company will reuse the promotion and “adjust the price” to reflect its high costs.
“For example, we will introduce optional expert assembly fees to reflect the actual cost of installing our equipment, while extending free self-installation to include our tread and rows, thus retaining member selection and control,” Stern wrote.
Now that cash flow and some metrics are starting to stabilize, Stern is ready to talk about growth and outlines his vision of getting there in his letter to shareholders. To offset the high cost of acquiring customers online, Peloton is returning to physical retail, but this time, it will open a micro store instead of an early showroom. In fiscal 2025, it closed 24 retail showrooms, and by the end of the fourth quarter, its footprint of larger stores dropped from 37 retail stores to 13.
Stern said Peloton plans to expand its micro stores from 1 to 10 and expand the secondary market for its second-hand hardware. He added that it also plans to triple the appearance of coaches in face-to-face events this year with the goal of increasing it 10 times in fiscal 2027.
Stern said the company will also work with the fitness company Precor, founder John Foley, by creating a “uniform business unit.” He also said the company will begin developing a plan to expand internationally – a goal that has long been but has failed to make a profit.
“Internationally, we plan to use local teaching, AI voiceover and more flexible music approaches to deliver musical approaches to thousands of lessons to deliver a local language experience,” Stern wrote. “Through partnerships, we aim to introduce the Peloton brand and experience to millions of people around the world. We believe that these actions lay the foundation for the future, with a cost-effective launch of all Peloton products in the new geography.”