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Peloton Interactive, Inc. (NASDAQ:PTON) is a global fitness brand synonymous with innovation that aims for the gold as it merged cutting-edge workout equipment with digital technology that pushes boundaries. But on Thursday, it reported its revenue growth in its fiscal fourth-quarter slowed dramatically, posting a wider than expected loss as costs from recalls mounted, causing shares to drop 7%.

Fiscal Q4 Figures

For the quarter that ended on June 30th, Peloton generated revenue of $936.9 million that grew 54%. Although it exceeded the Wall Street estimate, the pace of growth slowed from the third quarter, when sales exceeded $1 billion and more than doubled from year-ago figures. Topline translated to a net loss of $313.2 million, or $1.05 per share. What a difference compared with last year's net income of $89.1 million, or 27 cents a share.

Recalls of Tread and Tread+ treadmill products in May played a part as well as the temporary halt in sales with the date of resuming Tread+ still unknown whereas the less expensive Tread is scheduled for next week.

The company also separately disclosed it found a problem with the way it has been accounting for inventory as the audit discovered a "material weakness" in the internal controls but it will not result in the restatement of any of its past results.

Failures

Seen by many as a luxury brand, mainly due to the hefty price tag of its devices, Peloton's professional home workout app has made it into a global brand. However, its marketing efforts were not always well received.

Many saw sexist undertones in the brand's 2019 ‘Peloton Wife' Christmas commercial. However, the pandemic came to its rescue, despite forcing it to halt its marketing campaign efforts until the lockdown was eased. The following campaign focused on 9 intimate portraits to showcase its diverse mix of subscribers and users to amplify its universal appeal. But a tragic incident that resulted in the death of a child, along with 70 reported injuries, by using one of the brand's treadmills resulted in the recall of 125,000 treadmills. But, it is responding by setting new standards in the exercise equipment industry.

The Olympic Games Success

The company pedaled to success as it saw a way around Rule 40 that claims on Olympic sponsors cannot use official athletes or participants in their ads, campaigns, or promotions from several days before the games begin until after the event has ended. It threw its marketing resources in the latest Olympic Games—in epic style by simply avoiding any direct mention of the event. The company merely used big names of world-famous Olympic competitors who led its workouts, and by doing so, it created the world's most intimate virtual Olympic workout experience.

Subscriptions

At the end of the quarter, the connected fitness subscriber base amounted to 2.33 million which is a 114% increase from a year earlier. These users both own a Peloton device and pay a monthly fee to access the digital workouts. Digital subscriptions which don't require equipment but do a great job in building the brand's value were up 176% to more than 874,000. The increase was fueled by free trials.

Churn Rate Went Up

A low churn rate has always been one of the measures of Peloton's success as it reflected the great job it is doing in retaining its connected fitness subscribers. But this time, it went up from 0.52% in the last year's quarter and 0.31%from the previous quarter to 0.73%. Average monthly workouts per connected fitness subscriber fell from 24.7 a year earlier to 19.9 due to seasonal trends, such as people spending more time outdoors and going on vacations.

A Disappointing Outlook

Peloton cautioned its shareholders that earnings will be hurt in the near term due to a 20% lower price of its original bike, something that Wall Street did not see coming, along with heightened commodity costs and freight prices, as well as increased marketing spending.

The business mix is also being shifted back toward treadmill sales, which are less profitable than those of its cycles.

For its fiscal first quarter, sales guidance is $800 million. The company anticipates 2.47 million connected fitness subscriptions by the end of the quarter, with an average monthly churn rate of approximately 0.85%. Last-mile delivery costs are expected to hit profit margins in the first quarter which is a historically low quarter. As for full-year figures, sales are expected to be about $5.4 billion, topping consensus estimates of $5.27 billion whereas the connected fitness subscriber base is expected to reach 3.63 million.

Headwinds

Competition is rising from other at-home and connected fitness businesses, such as Hydrow, Tonal and Lululemon Athletica Inc (NASDAQ:LULU) owned Mirror. The pandemic was a powerful headwind as it fueled home workouts but as restrictions are being lifted across the globe, more consumers are opting to head back to the gym or take in-person classes.

But the bottom line is that Peloton's road to success has been filled with innovative initiatives, begging from cutting-edge exercise gear to an app-based subscription platform that includes tailored classes, educational content, workout guides, and celebrities. As long as it continues being responsive and forward-thinking it was until now, it proved it is capable of pedaling ahead of others.