Fitness product purveyor Peloton did all it could in its latest quarter to justify the 30% surge in its share price this year.
Peloton (PTON) earnings came out Wednesday after the market close and smashed Wall Street’s sales and operating profit forecasts as a quarantined nation sprung for Peloton’s $2,000-plus bikes with gyms closed indefinitely. There was a lot to like about the quarter and forward-looking commentary.
For starters, Peloton added an insane 1.1 million users to its digital fitness platform from March 16 to April 30, amid a free trial promotion. The thinking here is that Peloton could convert these free trials into paying memberships, and eventually into a bike or tread.
Speaking of hardware, Peloton said it saw a “significant” increase in demand for its bike in the latter stages of its fiscal third quarter. The momentum for bikes has continued into the current quarter, Peloton said. In the meantime, the company’s current quarter guidance calls for adjusted operating profits of $55 million to $65 million. The Street had been looking for a $60 million loss.
“I think [the COVID-19 situation] accelerated the 10-year trajectory [of Peloton]. It pulled in the inevitable by a year or two, I would say. I mean, it hasn't changed our strategy, we're still doing the exact same stuff. But I think people's interest in working out at home and avoiding the gym has increased and has just accelerated more people getting Peloton,” explained Peloton founder John Foley in an interview with Yahoo Finance.
Added Foley, “I think people are going to be slow to rush back to crowded gyms and boutique fitness facilities.”
Peloton shares rose 18% in pre-market trading on Thursday.
Here is how Peloton performed compared to Wall Street estimates and the fiscal third quarter.
Net Sales: $524.6 million vs. estimates for $488.5 million
Ending Connected Fitness Subscribers: 886,000 (712,005 in 2Q)
Total members: 2.6 million (2 million 2Q)
Gross margin: 46.8% vs. estimates for 43.78%
Adjusted Operating Income: $23.5 million vs. estimates for a loss of $52.7 million
Diluted Loss Per Share: $0.20 vs. estimates for $0.18
Fiscal Year 2020 Guidance:
Ending Connected Fitness Subscribers: 1.04 to 1.05 million (920,000 to 930,000 previously)
Net Sales: $1.72 billion to $1.74 billion ($1.53 billion to $1.55 billion previously)
Adjusted EBITDA: $30 million to $40 million (not provided previously)
By no means is Peloton’s quarter squeaky clean.
Peloton still lacks visibility into when it will begin shipping its pricey Tread again after halting deliveries in mid-March due to COVID-19. Foley tells Yahoo Finance it may be several months before tread shipments restart.
The spike in bike sales for the fourth quarter will have higher costs associated with it as Peloton scrambles to meet demand. That will come at the expense of profit margins. Peloton’s 97 retail showrooms will remain closed for a few more weeks. And, the company continues to not issue an adjusted EPS figure for direct comparison to Street estimates which may cause initial unwarranted volatility in the stock.
It’s not totally clear how the Street will absorb some of the negatives.
But all in all, Peloton gave the bulls more than enough to justify their longer term optimism. Peloton’s total addressable market will clearly expand due to the COVID-19 pandemic (gyms are going under; people want to workout from home more due to health concerns, etc). And management appears to be executing well to address that new interest in products and services. Liquidity isn’t an issue, either.