Dive Brief:
- After announcing the initiative in late August, Peloton is discontinuing its co-branded bike experiment with the University of Michigan. The fitness company will no longer launch additional co-branded bikes in other school colors and will instead “end-of-life this hardware initiative.”
- “Notwithstanding the football team’s success winning the national championship, we sold substantially fewer Bikes to alumni and boosters than we expected,” CEO Barry McCarthy said in the company’s second-quarter shareholder letter.
- The announcement came as the fitness brand reported mixed results for its second quarter. Second-quarter revenue fell 6% year over year to $743.6 million, with connected fitness products revenue falling 16% and subscription revenue increasing 3%.
Dive Insight:
The decision to end its partnership with the University of Michigan less than six months after announcing it came as Peloton reported declining sales and shrinking memberships.
The brand’s member portfolio fell 4% year over year to 6.4 million, while its ending paid connected fitness subscriptions inched up 1%. Peloton’s ending paid app subscriptions decreased 16% from the year-ago period.
The brand narrowed its losses during the quarter: Operating loss was $187.1 million from $331.3 million last year, while net loss was $194.9 million compared to $335.4 million in the year-ago period. Peloton’s gross profit also increased 27% year over year to $299.4 million.
In addition to its University of Michigan partnership not producing the intended results, McCarthy also pointed to its customer service falling short of expectations during the important holiday quarter.
“This past holiday season was particularly taxing for Members. The Member Support experience has tarnished our brand, and we simply must do better,” McCarthy said, noting that the brand’s support team is undergoing a “reboot” with new leadership, staff, training and systems. “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.”
As the brand tries to find ways to reach new customers and continue to grow, Peloton in recent months has introduced a number of initiatives, including partnerships with Lululemon and TikTok. The brand in late September announced a five-year strategic partnership with Lululemon in which Peloton became Lululemon’s exclusive digital fitness content provider, while Lululemon became Peloton’s primary athletic apparel partner. And earlier this month, Peloton announced that it would develop content for TikTok through a partnership with the social media platform.
“While we continue to outperform the connected fitness market, our biggest challenge continues to be growth, at scale. Those of you who have followed the business know we've launched a number of new growth initiatives over the last two years. Overall I'm extremely pleased with the new muscles we have developed in this regard. We'll strengthen these muscles as we continue to explore ways to ignite growth across multiple vectors. Several of these new initiatives have performed strongly. Some have not,” McCarthy said. “If we're not failing, we're not being aggressive enough testing new initiatives.”
Looking ahead, Peloton expects third-quarter ending paid connected fitness subscriptions to be flat year over year and ending paid app subscriptions to decrease about 13%. The brand expects revenue to be between $700 million and $725 million, representing a 5% year-over-year decline at the midpoint, and gross margin to increase 642 basis points at the midpoint. Peloton projects adjusted EBITDA to be down around 34% from the year-ago period.
The company also updated its full-year guidance: ending paid app subscriptions are now expected to fall around 9% year over year, versus a previously projected decline of 6%. Full fiscal year revenue is projected to be between $2.68 billion and $2.75 billion, down about 3%, versus previous guidance of down 2% year over year.
