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"Cash Is Oxygen": In Sweeping Restructuring Peloton Announces Third Round Of Layoffs, Raises Bike Prices

Tyler Durden's Photo
by Tyler Durden
Friday, Aug 12, 2022 - 05:35 PM

The darling stock of the covid era, Peloton, is cutting even more muscle to extend its cash-incinerating existence now that Americans are back to being their jolly old fat selves, making glorified coathangers with superglued iPads even more superfluous, and according to Bloomberg, Peloton - which has repeatedly slashed guidance in the past year - will embark on a sweeping restructuring that includes cutting nearly 800 jobs, raising prices for its Bike+ and Tread machines, and outsourcing functions such as equipment deliveries and customer service to outside companies.

The changes, which were disclosed in a Friday memo to employees, also includes gradually closing many of its retail showroomsm, a process that will get underway next year. It’s the most wide-ranging shake-up yet under CEO Barry McCarthy, a tech veteran who took the helm in February, and who has been tasked with finding a buyer for the melting ice cube.

As Bloomberg notes, Peloton hopes to turn around a business that thrived during the early days of the pandemic but suffered a crushing slowdown in the past year with declining sales, mounting losses, and a stock price that is down nearly 90% over the past 12 months. The latest moves are an attempt to reinvigorate sales, boost efficiency and restore some of Peloton’s former cachet.

“We have to make our revenues stop shrinking and start growing again,” McCarthy said in the memo provided to Bloomberg, adding that the changes are essential to making Peloton cash-flow positive again. “Cash is oxygen. Oxygen is life.”

Some more details on the latest cost-cutting effort:

In its third known set of layoffs this year, the company will fire 784 employees across its distribution and customer service teams. Peloton will stop using in-house employees and vans to deliver equipment and shutter 16 warehouses across North America. Instead, it will rely on providers of third-party logistics, or 3PL, to set up bikes and treadmills at customer homes.

Peloton already uses third-party shipping companies JB Hunt Transport Services Inc. and XPO Logistics Inc. for some deliveries and will offload its remaining in-house distribution to those firms. The company acknowledged that such a change might not be loved by all buyers, as some have complained that the third-party delivery services aren’t on par with Peloton’s own efforts.

“This has been a challenge,” McCarthy told staff. “We won’t fix it overnight, but we have no choice but to make it work, so we’re leaning into it and proactively managing our 3PL relationships. We are confident in the plan we’ve put in place and we’re encouraged by the progress we’re making.”

Peloton is also cutting about half of its customer support team, which is mainly located in Tempe, Arizona, and Plano, Texas. The company will use third-party firms to handle support requests as needed to augment the staff it is keeping. “These expanded partnerships mean we can ensure we have the ability to scale up and down as volume fluctuates while still continuing to provide the level of service our members have come to expect,” McCarthy wrote.

The winding down of in-house deliveries, distribution and warehouses will eliminate 532 jobs, while another 252 will be culled from support teams. Peloton said last month it would cut about 570 employees in Taiwan as part of a move away from in-house equipment manufacturing. In February, it fired nearly 3,000 employees across the company.

McCarthy said the company will continue to hire in key areas, including its software engineering group. “I share this so you won’t think we’re driving with our foot on the gas and the brake at the same time,” he said.

But in the most mind-boggling twist, instead of cutting prices, Peloton is about to lose even more market share by raising the price of its flagship Bike+ to $2,495 from $1,995 and its Tread treadmill to $3,495 from $2,695. The increases are a reversal as the Bike+ was priced at $2,495 prior to cuts in April. The new Tread price is higher than it was four months ago, rising by $800.

Good luck with that.

McCarthy acknowledged the about-face, saying that the April price cuts were necessary to more quickly move units and generate cash flow. “I probably wouldn’t have messed with the prices at all if I had been confronted with different inventory states back when we lowered the pricing,” he said in an interview.

We would ask the CEO to take a wild guess what will happen to the cash flow now, but he will find out on his own eventually.

The price cuts “cheapened at least the perception of the brand,” he said. “So this is a return to historical positioning.”

Which of course is sheer idiocy since historical positioning for the company to its pre-covid roots is, well, an exercise bike with an ipad superglued to the front. Let's be honest here: that combo costs about $200, not $2000.

As Bloomberg reminds us, Peloton already moved away from in-house device manufacturing before the latest pivot, shifting the production of its bikes to third-party partners in Asia. The company also implemented a leasing program that could lower the cost of equipment ownership and hiked the price of its content subscription service by $5 to $44 per month.

Peloton is making other changes, including a return to in-person work. Office employees will have to come in at least three days a week starting Sept. 6, McCarthy said Friday. That’s in line with the approach used by other tech companies, such as Apple Inc., but marks a twist for a company that benefited from the work-from-home lifestyle.

So far, Wall Street has been skeptical of Peloton’s comeback. The shares continued to slide after McCarthy took the job and remain down about two-thirds in 2022. Management is betting that improving Peloton’s fixed costs and raising prices will boost investor sentiment.

“I continue to be optimistic about the future of Peloton,” McCarthy said in the memo. “That doesn’t mean there won’t be challenges ahead. There will be, and there will be unforeseen setbacks. That’s the nature of turnarounds. But I’m confident we can overcome the challenges because we’ve come so far in just the last four months, which feeds my optimism about our ability to engineer our long-term success.”

In kneejerk response, PTON stock, which has lost more than 90% of its peak covid value, moved 8% higher on the day.

 

 

 

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