Here’s how Peloton CEO Barry McCarthy’s turnaround plan is unfolding

Barry McCarthy speaks during an interview with CNBC on the floor of the New York Stock Exchange (NYSE), October 28, 2019.

Brendan McDermid | Reuters

Platoon investors are fleeing after the company’s discouraging fourth quarter. But CEO Barry McCarthy is trying to convince them to stay for what he says is a comeback story.

Shares fell nearly 20% on Thursday, erasing the gains the company posted on Wednesday after announced a merger with Amazon to sell some of its equipment.

Platoon reported Thursday morning that its losses in the three months ended June 30 were $1.2 billion, and sales fell about 28% from year-ago levels. Its fitness-related gross margins eroded as inventory piled up and transportation and storage expenses increased.

Peloton has managed to moderate its cash burn, but it doesn’t expect to break even in cash flow on a quarterly basis until at least the second half of fiscal 2023.

Peloton’s gloomy outlook for the current period and its lack of a full-year forecast prompted Jefferies analyst Randy Konik to say in a note to clients Thursday that “the gyms are back in full force.”

There are many Peloton members who no longer use the bike but still pay the monthly subscription,” Konik said. “These marginal users are likely to cut the cord in the months and years to come, more so as the monthly sub-prices are increased by the company. .”

When McCarthy took over the CEO role from company founder John Foley, he said he didn’t realize the depth of some issues. Now, McCarthy is cutting costs and trying to grow higher-margin subscription revenue so it outpaces hardware sales.

“We happen to be sitting right in the middle of the pivot,” said the former netflix and Spotify executive told analysts on a conference call. “We have made substantial progress in addressing all of the headwinds related to enterprise infrastructure, and now is the time to get back to enterprise.”

Here are three things Peloton is testing to gain new users and increase sales:

1. “Fitness as a service”

Peloton’s so-called fitness as a service strategy is still in its infancy. It’s McCarthy’s idea to drive subscription growth and lower the barrier to entry for people who are afraid to commit to buying any of Peloton’s products.

Currently, customers can pay $89 a month to rent Peloton’s original bike and also get access to its live and on-demand workout classes. These customers can then return their bikes as soon as they have finished using them.

McCarthy told analysts on Thursday that Peloton has yet to fully market the option to the masses, as it is gradually rolling it out in the United States and also testing it with its more expensive Bike+ for $119 per month. He said Peloton is on track to have between 30,000 and 40,000 of these rental customers each year. A win, he says, would be to get closer to 125,000 to 150,000.

Though encouraged by early usage statistics, McCarthy said he needed to figure out if he had “created a nuke” or was putting Peloton “on the way to the promised land.”

Peloton also toyed with the sale of used bikes, which management said sold like hot cakes in trials earlier this year.

2. Develop the Peloton digital app

Following Foley’s lead, McCarthy said he believes one day Peloton could have 100 million members. That’s a huge leap from the roughly 6.9 million it has today. The company’s mobile app will be key to this growth.

Peloton said Thursday that awareness of its digital app was only around 4% today, leaving it with considerable upside potential. It ended the last quarter with 980,000 app-only subscribers, up 12% from a year earlier.

McCarthy announced that Peloton now wants to create tiered price offers in the app, so users can pay extra to access more content and other special features. Currently, all users who don’t have a Peloton product at home pay $12.99 per month to access everything in the company’s app.

The CEO drew an example from his time at Netflix. McCarthy said Netflix was able to outlast Blockbuster in the movie rental wars because it gave customers so many options.

“We’ve dramatically accelerated the pace of innovation, testing and risk-taking,” McCarthy said.

3. ‘Freemium’ model?

Peloton is also preparing to test something it calls a “freemium” strategy, which will also be tied to the app. The company said it wanted people to be able to access Peloton courses from anywhere.

That would mean users could pair their smartphone with third-party workout gear via Bluetooth, then access Peloton’s content library from there. Even if it is a competing device.

“We’ll be happy for people to use our content on someone else’s material,” McCarthy said during Thursday’s conference call. Ultimately, it’s another way for Peloton to continue to grow its membership base, he said.

But, like some of Peloton’s other ideas, this is still in its infancy. Piper Sandler analyst Ed Yruma said it’s unclear what will help Peloton return to sustainable growth.

“Barry McCarthy has quickly consolidated the balance sheet…but a return to predictable growth remains to be determined,” he said in a note to clients.

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