Peloton has ‘an internal conflict’ in its turnaround plan: Analyst

BMO Managing Director Simeon Siegel joins Yahoo Finance Live to discuss Peloton's turnaround plans, which include appointing a new CEO, cutting 2,800 jobs and costs, as well as the outlook for the company moving forward.

Video Transcript

BRIAN CHEUNG: Well, obviously, the big story of du jour remains Peloton, the stationary bike, which shares are currently up right now after the news that broke this morning, alongside earnings, that the CEO, John Foley, will be stepping down. Barry McCarthy, a former Spotify CFO, to replace him. So let's get a little bit more color on exactly what's going on here. There's a lot of angles to attack.

Simeon Siegel, BMO managing director, joins us now live to break down the news. Obviously, a big shakeup in the C-suite at this very beleaguered company over the past few days, even. Just your initial thoughts on the management change, and do you think this staves off any sort of M&A chatter that was building over the past few days?

SIMEON SIEGEL: Like a coffee talk. Just discuss. Like just throwing something out there. A lot of news, obviously. I think what we're seeing is we're seeing Peloton adopt this restructuring focus, adopt a focus on cost cutting, which is, unfortunately, because there's real people involved, probably the right decision from the health of the business. I think the interesting question we have to ask now is on that conference call, you saw the numbers, but you heard optimism.

And the problem when you first started restructuring, there's not that much room to already internalize growth. So I think right now, there's still a lot of questions going out there and trying to figure out where are they taking the future right now. It's a great product. It's a phenomenal community. We all know that. The question is, what's the right size of the business?

AKIKO FUJITA: And Simeon, that seems to be sort of your base case, right? It's not so much that your case for Peloton is change. It is the very issue that executives raised on the call today, which is that they just became too big too quickly. And the valuations just soared beyond that on the expectation that what we saw over the last two years can continue when it couldn't.

SIMEON SIEGEL: Yeah, I think it's a great point. Listen, you and I have talked about different brands going too far too quickly. There's the multiple. So there's the stock price. And that's what you've addressed. Then there's also decisions that actually impact the business. There's the notion of spending a lot of capital intensive costs to build an incredible manufacturing facility. Inventory was around a billion five this quarter. That's a lot of product for a product that is now seeing demand falter and wane.

So I think this idea, it's more than just the stock price. It's also figuring out what's the right reset, what should the company optimize. And I think that's where this element that we've been talking about through the pandemic, did this company use pandemic strength to extrapolate for the future, was this a pull forward of demand or an expansion of it. It increasingly seems like it's a pull forward. And the question I think we all have to ask today is that that announcement sounds like an acknowledgment that it was a pull forward.

But it's very quickly followed up with, but the growth will resume. The TAM, the addressable market hasn't changed. There's an internal conflict there that I think we need to get a little bit more comfortable with because it's easy to hear the excitement and say, let's bring Peloton back to the heyday. But if the whole point of it, if you're taking out $800 million in charges, what suffers from that?

BRIAN CHEUNG: Well, Simeon, I guess the question, though, is a refocusing of your top line revenue. We know that they're planning on handling the expenses with this major shakeup. But at the same time, it seems like there's been a loss of who the primary demographic is here because it used to be a high margin, right, high income clientele that they were able to sell very expensive bikes to. And then when they realized that the pandemic at some point was going to end, they wanted to scale. They tried to decrease the price of the bike, and then everything just got lost in the sauce. So what do you think is the winning formula for them for top line growth in this next chapter?

SIMEON SIEGEL: So it's ironic because you and I have talked about other companies like Under Armour and Victoria's Secret as being too large. And the answer was they had to shrink to grow. They had to sell less and charge more. I think it's the same situation. I think when a brand goes beyond their core, it becomes expensive. Whether we call it CAC, because it's a tech company, or whether we call it promotional discounts because it's a retailer, it's the same idea.

And so your point is such a perfect one. This company needs to figure out what their core audience size should be because they did a phenomenal job at reaching them initially. And then what they probably should focus on is elevating the price. They probably should focus on ensuring that they're getting the most out of this community that's willing to pay, likely more than $39 a month.

What that means, though, is this should not be a mass rollout. This should not be the expectation that this growth happens to the moon. And I think that whether the growth comes later, right now, today is a day of resetting. Today is a day of cost cutting. That's not normally followed immediately by the same breath. But I think the growth is still there. And that's where the confusion, that's where the danger comes from. I think that's what we'll have to keep an eye on. But I agree with everything you just said.

AKIKO FUJITA: And Simeon, the larger question is, does Peloton see this grow through as an independent company our under the umbrella of another company? There's been a number of names that have been floated around. I know you cover Nike as well. You've said you don't think that's a natural target. What about a name like Amazon or Apple, another one of those names that have been floated around to say, look, maybe they'd want to bring Peloton into the fold. Is that something that would make sense?

SIMEON SIEGEL: This is funny. It's like those two companies you mentioned sit on opposing sides of everything we were just talking about, right? Brand elevation, high margin price, versus mass distribution, logistics supply, et cetera. And the question is, where does Peloton, right, this little Peloton-- and I don't say that in a mean way. Peloton has done a phenomenal job. But is Peloton big enough to matter to either of the two largest companies in the world?

And if so, which is the direction they want to go in? Are they going to follow the Apple? Are they going to follow-- do they make more sense for a brand enhancer margin story, or do they make more sense for try to sell as many and get this in the hands of as many people as you can? So I think that from Peloton's perspective, there's an interesting decision. But ultimately, from the acquisition's perspective, what are you really getting? And do those two companies that you mentioned-- and I obviously am not close to those two companies.

Those two companies that you mentioned, what were they thinking at the beginning of the pandemic when Peloton was the hottest item in the world, right? Were they running their numbers then? Because if you think about it, do the largest companies in the world want an incredible growth story that will have access to tremendous engagement in data, or do they want a fixer upper that's now trying to stave off and stabilize its slowing engagement and its slowing demand? I think we have to ask that question.

BRIAN CHEUNG: Simeon, quickly here, what's the significance of fully staying on as executive chairman?

SIMEON SIEGEL: That's an excellent question. And understanding titles and understanding the role of the executives there, I mean, Barry was not on the conference call today, so I think we have yet to hear the true plan. But listen, to his credit, John Foley created something truly special. He created a community, created a product that has changed people's lives. And give him all the credit he's due. I think that line, the fact that he's executive chairman does make-- you have to ask the question of, what just changed? I think that is a very fair question.

AKIKO FUJITA: And we'll be watching to see what the progress looks like. Simeon, always good to get your takes here. Simeon Siegel, BMO managing director.