Peloton on Thursday said it made money on its pricey connected fitness products for a second quarter in a row, but the company expects fresh challenges ahead after it failed to meet key goals in its turnaround effort.

The retailer posted mixed results for its holiday quarter, as it lost slightly more money than Wall Street expected but beat revenue estimates. Peloton also forecast weaker sales and a bigger loss than expected in its current quarter.

Peloton shares plummeted about 20% in morning trading Thursday.

Here’s how Peloton did in its fiscal second quarter compared with what Wall Street was anticipating, based on a survey of analysts by LSEG, formerly known as Refinitiv:

• Loss per share: 54 cents vs. 53 cents expected  
• Revenue: $743.6 million vs. $733.5 million expected 

The company reported a net loss for the three-month period that ended Dec. 31 of $194.9 million, or 54 cents per share, compared with a loss of $335.4 million, or 98 cents per share, a year earlier. 

Sales dropped to $743.6 million, down from $792.7 million a year earlier. 

The company issued dismal guidance for the current quarter and a tepid full-year sales outlook. 

For its fiscal third quarter, Peloton expects sales to be between $700 million and $725 million, compared with a Wall Street estimate of $754 million, according to LSEG. The company expects its adjusted EBITDA loss to be between $20 million and $30 million, compared with analyst estimates of a loss of $2 million, according to StreetAccount. 

“Our outlook is tempered by uncertainty surrounding our ability to efficiently grow Paid App subscribers and the performance of other new initiatives, as well as an uncertain macroeconomic outlook,” finance chief Liz Coddington wrote in a letter to shareholders. 

Peloton’s connected fitness subscription guidance came in higher than expected. The company also said it saw strong sales at retail partners like Dick’s Sporting Goods and Amazon, and demand for its Tread+ was “significantly stronger” than expected. 

For the second quarter in a row, Peloton managed to eke out a gross profit on its connected fitness products, which have long been a money-losing business. Peloton’s gross margin for its connected fitness products came in at 4.3%, compared with a Wall Street estimate of 3.4%, according to StreetAccount. 

Nearly two years into CEO Barry McCarthy’s tenure, Peloton is showing some signs of progress, but is still falling short on his key targets.

In a letter to shareholders last February, McCarthy set a goal of returning the company to revenue growth within a year but Peloton fell short of that. The company now expects to reach that milestone in June at the end of the current fiscal year. 

McCarthy also set a goal of reaching sustained positive adjusted EBITDA within a year, which also failed to happen. He now expects Peloton will generate positive free cash flow during its fiscal fourth quarter, which concludes at the end of June. 

During a call with analysts, Coddington said Peloton is again expecting soft sales of hardware products in the quarters ahead, which is hurting its free cash flow. Its Bike rental program has also cut into free cash flow because it doesn’t receive the full payment for the product up front.

However, Peloton reached a number of other goals that McCarthy set for it, including expanding its corporate wellness and commercial partnerships, selling its Ohio manufacturing facility, and restructuring its retail store footprint.

In a letter to shareholders, McCarthy outlined a series of initiatives he spearheaded since taking the helm and explained which ones were working, and which ones weren’t. 

On the positive side, McCarthy said Peloton’s retail partnerships with companies like Dick’s Sporting Goods and Amazon were performing well. 

“We saw exceptionally strong sales growth through these channels this holiday season, with Y/Y unit growth of 74% in Q2,” McCarthy said. “Our key learning from these holiday results is that we can better optimize our sales and marketing tactics going forward so that sales from these partners are even more incremental, yielding a better margin mix for Peloton.” 

The top executive said Peloton’s Bike rental program was also performing well, and the company is forecasting 100% year-over-year revenue growth for it in fiscal 2024.

“The underlying economics continue to be attractive, given the current churn and buyout rates for Bike and Bike+. The Bike rental program is attracting a more diverse, more female, and younger customer than it was 6 months ago,” McCarthy said. “Bike rental is growing quickly with attractive economics, and we are leaning into new opportunities aggressively to drive that growth.” 

Demand has also been strong for its Tread+, which was recalled in 2021. Sales for the entry-level Tread have also outperformed the company’s expectations. 

“The overall treadmill market is about 2x larger than the stationary bike market. So our newly found momentum in the treadmill category, and the diversification of our hardware sales beyond Bike/Bike+, is good news for Peloton’s future growth, provided we sustain our momentum,” McCarthy said. 

But during a call with analysts, McCarthy said he is unsure what demand for the Treads will look like in the quarters ahead, and whether the company will be able to fulfill it. Peloton has “limited” experience selling the products and even less of a track record selling them at full price without discounts or promotions, he said.

In his letter to shareholders, McCarthy said if the company isn’t failing on some projects, “we’re not being aggressive enough testing new initiatives.” 

Over the summer, Peloton announced a partnership with the University of Michigan that included selling co-branded Bikes in the school’s colors, but sales to alumni and boosters came in far lower than expected. Peloton had planned to roll out similar initiatives with other universities, but now expects to end the program.

Peloton also came up short on improving customer service, another goal McCarthy had set for the company last year. 

“This past holiday season was particularly taxing for Members. The Member Support experience has tarnished our brand, and we simply must do better,” McCarthy wrote. “The team is currently in the middle of a reboot. New leadership. New systems. New third party vendors. New training. New staff. I’m confident we’re on the right path this time. I’m confident in the new leadership, and I’m confident that in the next few months our Members will be receiving the level of service they deserve and expect and that we can be proud of.”

Read the full earnings release here.

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