Earnings Results: Peloton sales triple as pandemic surge continues, but the stock is falling as supply issues worsen

The results continued a gush of sales for Peloton during the COVID-19 pandemic, which has resulted in closures of gyms across the country and forced many to shelter-in-place, which has amped-up demand for at-home fitness equipment. Peloton roughly doubled its sales and subscribers in the fiscal year that ended June 30, produced its first profit in the final quarter of that year, and predicted similar growth in this new fiscal year.

The fast growth is causing issues for the company as it attempts to field and fulfill orders, however, which may have contributed to a decline in Peloton stock Thursday afternoon. A Thursday letter to shareholders began with in-depth descriptions of issues Peloton has hit as it ramps up to meet increased demand while introducing new products.

“We were incredibly proud to launch the Peloton Bike+ and to announce the new Peloton Tread, an exciting milestone in our history. However, it drove call volumes and unacceptably long wait times, well beyond our expectations, to reach our sales and support teams, which impacted our customer experience,” the letter reads. “Also, as we rapidly scale our organization to meet the extraordinary demand for our products, we realize that some of our members have faced extended delays associated with receiving our products or having support requests fulfilled.”

In its previous report, Peloton said it would be working through an order backlog through at least the second quarter of 2021, but updated that language Thursday to say the company “will be operating under supply constraints for the foreseeable future.”

On a conference call later Thursday, Chief Executive John Foley said that Peloton is adding manufacturing capacity, expediting deliveries and adding customer-support personnel in hopes of trimming delays.

“While these actions result in higher than typical logistics costs, we feel that incurring these incremental expenses in the short term is the right tradeoff to improve our member experience,” Foley said.

Chief Financial Officer Jill Woodworth said that Peloton’s spending on those initiatives are what led to fiscal second-quarter gross-margin guidance of 39%. Peloton’s gross margins have mostly been in the mid-40s, dipping lower than 40% in only one quarter since the end of 2017. In the fiscal first quarter, Peloton reported gross margin of 43.4%.

The stock declined about 5% in after-hours trading Thursday following the release of the earnings report, after closing with a 6.9% gain at $126.63. Shares have enjoyed phenomenal gains as sales and subscribers have surged, rising more than 340% so far this year, as the S&P 500 index SPX, +1.94% has gained 6.6%.

In Thursday’s report, Peloton said that subscribers increased 137% to 1.3 million, hitting the top end of the company’s forecast. The number of connected workouts that subscribers used grew 306% from a year ago, after growing 333% in the previous quarter.

For the holiday quarter, Peloton predicted revenue of $1 billion and subscribers of roughly 1.63 million. Analysts on average were forecasting sales of $936 million and 1.6 million subscribers for Peloton’s fiscal second quarter, according to FactSet.

Peloton also increased its annual guidance to revenue of $3.9 billion or more, after previously stating $3.5 billion to $3.65 billion, and adjusted Ebitda of $300 million or more, from previous guidance of $200 million to $275 million.