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Peloton President on recent delivery delays: ‘We see light at the end of the tunnel’

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Peloton President William Lynch joins Yahoo Finance’s Brian Sozzi to discuss how the company is handling the surge in demand.

Video Transcript

BRIAN SOZZI: Welcome back to "Yahoo Finance Live." Peloton shares are under some pressure following the company's latest earnings report. While Peloton continued its blistering pace of growth as people worked at home during the pandemic, it warned that it will have to invest even more money to catch up with that blistering pace of demand. I caught up with Peloton president William Lynch earlier this morning to discuss the company's outlook.

WILLIAM LYNCH: It is a big investment, Brian, but we feel like it's the right thing to do for the member experience. It's what the company's been built on is the experience. And unfortunately, some-- some of our new members have had to wait for their biker tread.

So what we're spending on is expedited ocean freight to shorten the time from when someone orders to when they get their biker tread. And then we're actually putting bikes on airplanes. And our feeling is these unprecedented times require unprecedented action to deliver for the members. And so with the kind of growth we've been experiencing, we made the decision about a month ago to start investing in this kind of investment in the member experience.

BRIAN SOZZI: What exactly is the issue? Is it port congestion? Is it you just can't make components of the bike? Walk us through it.

WILLIAM LYNCH: Well, it's changed. If you would have asked me five months ago-- first of all, you start with the kind of growth Peloton's having, which is the company's in rarefied air with the demand for our products is we've seen triple digit growth now for the last for-- for the last four years. And so you overlay that pandemic, and it creates an incredibly difficult operating environment.

So it used to be we couldn't make enough bikes. So every day, we'd get orders in, and we'd make a certain amount of bikes, and we'd create a backlog because the orders were bigger than the amount of bikes made. Now, we've ramped up manufacturing 6X. So we're in a great place, and it's been logistics and port congestion.

It's been actually getting bikes and treads over from our Taiwanese manufacturing facility into homes. And so that's been largely out of our control. But we're not victims here, so we're taking-- taking action what the expedited shipping investment.

BRIAN SOZZI: Sure. Will this issue be fully resolved in calendar 2021?

WILLIAM LYNCH: We have said we believe our order to delivery is going to come down. This investment certainly will help. Yeah. We see light at the end of the tunnel, Brian, for sure. With these manufacturing ramps, we've added two new factories in Taiwan over the last four months alone. And so we feel like we're in a good place with manufacturing and sourcing.

We expect continued accelerated growth, which is exciting for us and excited for the community as it builds. So we do see a light at the end of the tunnel. Yeah. We do expect it to get better in the spring.

BRIAN SOZZI: When will you start making bikes from the Precor manufacturer-- manufacturing sites in the US?

WILLIAM LYNCH: In the back half of this year, later this year.

BRIAN SOZZI: And so the delays, you're actually seeing very strong demand with your new tread in the UK. I saw it was so strong that you are now delaying it in the US?

WILLIAM LYNCH: Right. So we launched late last year. We launched our new tread product, which we believe delivers the best workout maybe in all of fitness. And so we launched it in the UK. Orders have surged, and demand is great for that product.

The customer reviews are, too, which is probably most exciting for us. And so we're launching Canada next week. Neither of those markets had the tread. They didn't have the Tread platform at all.

We have Tread+ here in the US, so we decided to launch in those two markets. And we've pushed out the US launch two months. It'll be in late May now just to make sure those markets are properly supplied, and the member experience is great in all three.

BRIAN SOZZI: As part of that $100 million investment, are you investing at all in customer service? I'm surprised to see some Facebook pages voicing their concerns about product delays, people tweeting about this. Are you adding members to your team?

WILLIAM LYNCH: We've over doubled the amount of member experience reps that we've got. And if you look at, we did have some challenges coming out of the holiday with the port congestion and reschedules. But if you look at what-- we track our KPIs, like CSAT and as well as whole times, and those have returned to normal. So we have very high standards on member experience and how quickly we're servicing members. And those feel like they're settling in close to what is our typically very high standard.

BRIAN SOZZI: So since we last spoke, a lot of folks in the US have finally started to get their COVID-19 vaccinations. It's great. And more will be doing so in the months ahead. Have you seen any change in your engagement? Have you still, have you seen any change in the levels of demand quarter-over-quarter?

WILLIAM LYNCH: No. We've-- demand is still through the roof. We feel like the move to connected fitness in the home is a secular shift from gyms and boutiques. It's just a better workout at a better value at a more convenient place. And we don't think that changes with COVID.

Engagement, we had 98 million workouts in Q2, Brian, which that's really what drives our company and our team. We want people working out more. That was up over 300% year-on-year. And that's helping people deal with the anxiety they've got at home, et cetera.

So we've added more content. We added Pilates late last year. We've added more meditation, obviously boot camp, et cetera. What we've seen is engagement go through the roof. And people are working out on average 21 times a month for each subscription. So that probably has us most excited.

BRIAN SOZZI: What's next on the content front?

WILLIAM LYNCH: We'll have a lot, a lot more of everything. Our true north is how do we continue to add more value into that all access membership. So a lot of floor, a lot of bike. Boot camp has now over two million workouts on Bike Boot Camp. That might be one of our best workouts where you get that cardio and strength.

So you'll see a lot more out-- as we get in the spring-- more outdoor running. If you haven't taken an outdoor running class, that's phenomenal. Just put your Air pods or whatever, go for run outside with one of the world's best instructors.

We love pumping out content. We think we're pumping out more original content than maybe any streaming service. And you'll see us do a lot more of that.

BRIAN SOZZI: Strength hardware, you sort of teased it on the earnings call. What are you working on there?

WILLIAM LYNCH: We're working on a lot of strength. We see so-- we think we offer the best cardio experience if you look at bike and tread. And then strength is another pillar for us, Brian. As you've noted, we have a lot of strength programming now.

We've got a lot that we're working on in the R&D lab and strength, and so stay tuned for that. But we will win strength. That's important for Peloton as we build the global connected fitness leader. And so a few different offerings we're looking at.

BRIAN SOZZI: Last but not least, what has this past six months been like for you? I still don't think a lot of folks know that you were the CEO of Barnes Noble. You have led-- you've really worked in a lot of pressure cooker type of environments. On a personal level, how's it been like for you?

PAUL TOM: Well, it's been fun, you know? No complaints and the team's been great. We've been adapting and trying to serve as customers as much as we can. We're growing, which is phenomenal.

We understand what's going on globally. People are suffering, whether it's with the pandemic or economically. And so we have a lot of heart for that, and we're glad we can provide a great service to help.

But it's been exciting. I've been at the forefront of a lot of disruptive new categories-- mobile computing with Palm, eReading with Barnes & Noble NOOK, and now, Peloton. And it's just-- it's really fun to see what's going on in connected fitness and being part of a company that's leading it.

BRIAN SOZZI: You still have all your hair. Looking good.

WILLIAM LYNCH: [LAUGHS]

BRIAN SOZZI: [LAUGHS]

WILLIAM LYNCH: My wife would argue with that, Brian, but thank you.

BRIAN SOZZI: All right. Fair enough. William Lynch, stay safe. Always good to talk to you. And we'll talk to you soon.

WILLIAM LYNCH: Thanks for having me on, Brian. It's great to talk to you.

BRIAN SOZZI: 'Appreciate it.

And the real-- and the big number here, Myles and Julie, is $100 million. And I think that's why we're seeing the stock react negatively here. That's not something that was, as analysts would say, baked into their cakes or their models here on Peloton.

$100 million to help address these-- just the lack of capacity that they still have. The fact that they're trying to get boats-- I mean, trying to get bikes off of cargo containers. Now they're putting bikes on airplanes.

And it's a lot of cost. This stuff does not come cheap. But again, it's a high-class problem to have. You have all these orders coming in for a product clearly people continue to want.

MYLES UDLAND: Yes. That was a really interesting conversation. And I think Peloton is at a point in its corporate history that-- and William Lynch talked about this-- hardly any company ever gets to this point where you have had multiple years of triple digit growth. You cannot keep up with current demand fast enough.

But you know, they are-- they're clearly facing this dynamic that I think started to take some shape back in the spring, which was their stock has gone up so much. Expectations for reinventing the fitness category are so high it puts a lot of pressure on management.

And they did go out and make one acquisition, but it puts so much pressure on management to execute against a mission that the market has priced in. And you say $100 million to speed up deliveries. I'm thinking, that's it?

Like, we're not borrowing billions and trying to spend into some of that growth? It's such a tricky position, Julie, for a company when the market cap, again, goes up 3, 4, or 5X in this short time period. How you execute against that?

It's kind of a junior version of what does like, GameStop's management do? I mean, it's-- the stock didn't go that crazy, but the stock price can put you in a tough position when there is so much optimism baked in.

JULIE HYMAN: Well, and I think that one of the big questions for Peloton is, and maybe why it doesn't want to throw more money at this, is what happens when gyms open back up? And how much will people then go to gyms and not be ordering bikes instead, even though, of course, we saw consistent demand even when gyms were open? You know, I'm vastly in the minority on this. But I keep wondering with Peloton how long this is going to last?

How many of these bikes become furniture when people get sick of riding them? That's what's happened with most fitness trends over the past several decades. Will it happen with Peloton at some point? I don't know. Brian's never getting off his bike, so.

BRIAN SOZZI: [LAUGHS]

MYLES UDLAND: Well, he's not getting-- he's not getting off it for us. Sozzi, you know something that we were chatting about as the interview was playing was the strength equipment comment. You look at Tonal, which is like this in-wall, it adjusts to you. I don't know, I guess it's like really expensive resistance bands.

You know, it's funny because once you get into like plates and barbells and racks and stuff like that, that's a very analog business. But that's-- you go to Titan Fitness. You go to RET Fitness, Rogue Fitness; you can't get any of this stuff at any of these places right now. And I wonder how much Peloton looks at that kind of old school equipment as an opportunity for them, you know, as this pandemic starts to level off?

BRIAN SOZZI: Yeah, that was an interesting comment that they buried on their earnings call last night. Hence, that's why I asked William Lynch about it. But you talk to a lot of folks on Wall Street, as I have on Peloton, and a lot of them point to what Tonal is doing as a truly innovative product, now a well-capitalized company.

We've had the founder on before just right after they raised their latest round of capital. That is an interesting product. And you have to wonder at what point does Peloton say, you know what, instead of trying to build a device let's go use some of our $2.1 billion in cash, and let's go buy a Tonal?

Let's bring it into the Peloton community before you see Lululemon come out here and try to buy a Tonal and added to the mirror product that they purchased for, I don't know, about $500 million last year. But again, a topic we will continue to watch in the months ahead. All right--