A lot of people are going to rethink their fitness routine: Analyst

Exercise company Peloton posted its third quarter earnings report, detailing a 66% surge in revenue amid the coronavirus pandemic. James Hardiman, Wedbush Securities Managing Director, joins Yahoo Finance's On The Move to weigh in.

Video Transcript

- One of the other companies came out with its numbers, of course, was Peloton. That was also after the close. Those shares have been surging. The company saw sales rise by 66%. With a lot of people stuck at home, they're looking for different ways to work out, and some of them are just subscribing to the app, some of them are actually buying the bike and the treadmills. James Hardiman is joining us now. He is Wedbush Managing Director of leisure and travel equity research. He covers Peloton. So James, as we look at these numbers, and one of the things I was curious about was retention. Particularly because one of the things that Peloton is offering for people who don't own a bike or treadmill is free trial periods for the app subscription, and I wonder how many of those folks are going to hang on when all of this is said and done.

JAMES HARDIMAN: Yeah, it's a great question. They had 1.1 million people download their app since they made it free for 90 days starting in mid-March in conjunction with a lot of the gym closures. Nobody really knows how many of those people are ultimately going to sign on once that 90 day free trial expires, but in terms of their full subscription rate, the connected fitness subscription that people are paying $40 a month for, we saw the lowest churn rate, right, the lowest number of people leaving in four years, less than half of a percent on a monthly basis, 0.46%. That's a really good number.

Obviously if your options are limited, you're going to be a heck of a lot less likely to leave Peloton during the stay at home phase. That number is unsustainably low, but nonetheless, all along, Peloton's churn rate has been really impressive. People that use the product tend to really like the product and tend to use it for an extended period of time.

ADAM SHAPIRO: James, it's Adam Shapiro, and I'm curious. Before COVID-19, I think that people would have had no problem going to the gym, but afterword, unless you're a diehard gym devotee, and you're going to be cleaning and wiping everything off, this is going to be a big plus for the likes of Peloton and the stay at home workout companies, isn't it?

JAMES HARDIMAN: Yeah, I think that's right. You know, you talk to the gym companies, and Planet Fitness also reported two nights ago. They seem to think that their customer base is going to come back in droves. I think there's going to be this in-between period, right, before a vaccine is made available where you've got some people that don't have a problem going back to their traditional gym, but I do think a lot of people are likely to stay home. I guess one of the questions for the gym chains becomes whether they take the extra step of canceling. But I do think that in the post-COVID world, right, whether that's six months from now or a year and a half from now, I think a lot of people are going to rethink their fitness routine, and Peloton pointed to some consumer data that suggested about 25% of traditional gym goers are ultimately not going to-- are unlikely to go back to those traditional gyms and that maybe another, call it 20% of people, are up in the air as to whether they might go back. Those are some significant numbers given that there's, you know, 90 million gym goers in Peloton's market, US, Germany, UK, Canada. Those all become incremental potential consumers for a company like Peloton.

MELODY HAHM: Hey, James. Melody Hahm here. When you think about the macro-trends at play, of course, we're talking unemployment numbers, initial jobless claims, this is a hefty price tag, right? Even the $39 a month for some folks is quite high for the digital subscription. How do you anticipate kind of the boutique fitness space shaping out as we enter this recession, depression, and tough times for the American public?

JAMES HARDIMAN: Sure. Yeah, it's a great point. So the biggest bear case against Peloton is that this is not a cheap product, right? The bike itself is $2,200, and then you've got the 40 dollar subscription. I think that's not the way most people look at it. I think most buyers look at it as how much am I paying per month, and I think the basic plan is you pay $100 a month, and your whole family can use this thing, and that includes the programming.

While not cheap, that favorably compares to-- to your point-- the boutique fitness chains that might be, you know, if you're paying monthly, could be $100 or $200 a month in like a chain like Equinox, for example. And if you're paying per class might be $30 per class. Having said that, there is a certain income level that I think you need to realistically afford a Peloton, and if you're looking at significant unemployment, I think that hurts, but I do think there is going to be a trade down factor that offset some of that, right? Some people actually saving money as they get into a Peloton subscription versus their previous gym option.

ADAM SHAPIRO: James, you know, we talk about the economy going forward, and a lot of people are out of work right now. The price of these, you mentioned, can be onerous for most people to put it lightly. I guess once you get past the folks who do purchase the bike, or do purchase the treadmill, or do the digital subscription, where does Peloton go from here? What other products can they possibly put out that people would be comfortable purchasing?

JAMES HARDIMAN: Sure. So obviously as we sit here today, the vast majority of their sales come from the spin bike, the exercise bike. They've got a treadmill. It's north of $4,000. The penetration of that, I think, has been fairly underwhelming. I think by all accounts, the next big introduction is going to be a significantly cheaper tread, so much more of a mass market tread. I think you're probably going to see something closer to the bike price, so more in that $2,000 range. So essentially they could be cutting their treadmill cost or price in half, which I think would open the door to a lot more consumers.

And as you can imagine, the treadmill market is a significantly larger market than the exercise bike market, and that's the market that they think that they can ultimately dominate, so that's a huge end market that they feel like they're just getting their feet wet. I think the other possibility, or likelihood really, is a rower, and rowing machines have increased in popularity in the last couple of years. Orangetheory Fitness, that is a focal point of what they do in the popularity of those gyms. I think by all accounts, Peloton is likely to put out a rower. We previously said sometime in 2020, obviously with the coronavirus outbreak, development plans, new product development has been slowed, so it's not real clear how that shifted the timetable, but I think you can eventually expect both of those things, the cheaper treadmill, a rower, and ultimately maybe even a cheaper bike down the line.

- Well, I definitely saw Dan Howley's ears perked up when you said rower, James. Thanks for joining us, James Hardiman of Wedbush talking to us about Peloton. Appreciate it.