What happened
Shares of connected fitness company Peloton Interactive (PTON 9.43%) fell another 12% in March according to data provided by S&P Global Market Intelligence. Investors have been pessimistic about Peloton stock, and it dropped along with the market in the wake of the banking crisis. However, it was rising steadily throughout the year, and it's already on its way back, up 3% so far in April.
So what
Peloton was a top pandemic stock that benefited from closed gyms. It posted triple-digit sales growth for several consecutive quarters, and management made a few mistakes along the way as it dealt with the unexpected surge. The stock then came crashing down as demand melted when gyms reopened, and the business was left with unneeded inventory and infrastructure, as well as machines that had to be recalled.
The company brought in a new CEO last year to get it back on track, and so far the results have been promising.
In the 2023 fiscal second quarter (ended Dec. 31), CEO Barry McCarthy noted many improvements made in his first year in the top role. Free cash flow improved from negative $747 million last year to negative $94 million this year, and stripping out some one-time cash flows, it was positive $8 million. That is certainly an improvement of note, and demonstrates that his turnaround plan is bearing fruit.
Beyond that, there was a complete overhaul of operations. Peloton cut headcount by more than half, from 9,000 to 4,000, and switched from some in-house production and delivery to outsourcing to cut more costs. It also cut inventory by $580 million.
It released new content, launched a new product called fitness as a service, and brought back live studio classes in New York and London. It also began to offer hardware sales through third-party vendors Amazon and Dick's Sporting Goods.
Now what
McCarthy also laid out his goals for the next year. Revenue declined 30% year over year in the second quarter, and the first goal is to return to increasing revenue. Then there are incremental steps to return to profitability, including reducing more inventory and optimizing the warehouse and delivery network. The company also plans to generate growth by getting more people to sign up for a trial app membership and by expanding partnerships.
Peloton stock is up 48% this year as investors embrace this new direction. It's trading at a very low valuation of only 1.3 times trailing-12-month sales. But the risk is still significant here, and investors should keep it on their watch lists for now.
