Peloton Interactive Inc. stationary bikes are on display in the company’s showroom on Madison Avenue in New York, United States on Wednesday, December 18, 2019.

Jeenah moon | Bloomberg | Getty Images

Peloton announced Thursday that its loss had widened in the fourth quarter of its fiscal year as revenue growth slowed dramatically and costs related to a treadmill recall rose.

Stocks lost about 6% in expanded trading on the news after initially falling as much as 15%.

Peloton warned that its earnings will be impacted in the near future as the price of its original bike will be reduced by about 20%. It’s also starting to shift its business mix back towards treadmill sales, which are less profitable than its cycles.

The company separately announced that it has identified an issue with its inventory accounting. An audit of fiscal year 2021, which ended June 30, discovered a “material weakness” in the internal controls that govern Peloton’s financial reporting. However, it will not lead to an adjustment of the previous results.

Peloton offered a disappointing sales outlook for the first quarter. The company is facing increased raw material costs and freight prices and plans to increase marketing spending in the coming months.

Here’s how Peloton fared compared to Wall Street expectations for the quarter ended June 30th, based on an analyst survey by Refinitiv:

  • Loss per share: $ 1.05 vs. 45 cents expected
  • Revenue: $ 936.9 million versus $ 927.2 million expected

Peloton posted a net loss of $ 313.2 million, or $ 1.05 per share, compared to net income of $ 89.1 million, or 27 cents per share, last year. That was higher than the 45-cent loss forecast of the analysts surveyed by Refinitiv.

Total revenue increased 54% to $ 936.9 million from $ 607.1 million a year ago, beating estimates of $ 927.2 million. However, the pace of growth slowed from the third quarter, when revenue more than doubled year-over-year and topped $ 1 billion.

Growth slowed in part as Peloton recalled both its Tread and Tread + treadmill products in May and temporarily stopped selling the machines. His cheaper tread should go on sale next week. The company has not yet announced when it will resume sales of the Tread +.

However, the bike maker is also facing tougher competition from other home fitness companies like Hydrow, Tonal and Mirror owned by Lululemon. And as the pandemic restrictions are lifted, more and more consumers are choosing to return to the gym or take personal group classes.

“Last year was a turning point for the connected fitness industry with a significant rise in awareness and demand for the outbreak of the Covid-19 pandemic,” CEO John Foley wrote in a letter to shareholders.

Revenue from Peloton’s connected fitness segment, which includes contributions from the company’s acquisition of Precor, increased 35% year over year to $ 655.3 million, representing 70% of total revenue. Subscription revenue increased 132% to $ 281.6 million.

Churn rate is increasing

Peloton ended the quarter with 2.33 million connected fitness subscribers, up 114% year over year. Connected Fitness subscribers are individuals who own a Peloton product and also pay a monthly fee to access the company’s digital training content.

Digital subscriptions – which do not require devices – rose 176% to more than 874,000, boosted by free trials, the company said.

The average monthly net churn from connected fitness equipment, which Peloton uses to measure connected fitness subscriber retention, increased to 0.73% from 0.52% last year. Peloton’s churn rate had hit a six-year low of 0.31% in the previous quarter. The lower the churn rate, the less revenue Peloton generates from its user base.

The average monthly workouts per connected fitness subscriber decreased from 24.7 in the previous year to 19.9. The company said the decline was due to seasonal trends, such as more people vacationing or spending extra time outdoors during the summer months.

Going forward, Peloton said it will no longer forecast average monthly churn rates on a quarterly or yearly basis. Management said it was still an important metric, even if it was getting harder and harder to gauge.

Disappointed outlook for Q1

For the first fiscal quarter, Peloton is forecasting sales of $ 800 million, reflecting a price cut for its bike and a “modest” contribution to sales from the Tread.

The forecast is well below the analyst estimate of $ 1.01 billion. However, Wall Street was unaware that the company would cut the price of its bike by about 20%.

For some, the move signals that demand for its products may decline and Peloton will need to spend more to make more money.

“The competition in networked fitness is increasing,” said Simeon Siegel, an analyst at BMO Capital Markets. “Peloton is discounting the bike and increasing marketing is a clear signal that the cost of customer acquisition is rising after being the only player on the market last year.”

Peloton expects 2.47 million connected fitness subscriptions by the end of the quarter with an average monthly churn rate of approximately 0.85%.

The company also expects last mile delivery costs to hit profit margins in the first quarter, which is historically a slower three-month period for Peloton.

For the year, Peloton sees revenue of $ 5.4 billion and an increase in affiliate fitness subscribers to 3.63 million. That’s above the consensus estimate of $ 5.27 billion.

Peloton said it expects to be profitable again by fiscal 2023, though its investments, including investments in its supply chain, will wear off.

Foley said the company was ready to bring new products to market, but didn’t say what they might be.

By 2023, Peloton plans to manufacture bicycles and treadmills from its first U.S. manufacturing facility in Troy Township, Ohio. The company invested $ 400 million to build the website to expedite delivery to its home territory.

Find the full press release on Peloton’s results here.