Connected fitness giant Peloton (NASDAQ:PTON) reported fiscal second-quarter earnings last week, and investors didn’t seem too impressed overall, as shares dipped as much as 9% on Friday. In no uncertain terms, the headline figures were outstanding: Revenue surged 128% to $1.06 billion, Connected Fitness subscriptions soared 134% to 1.67 million, and Digital Subscriptions skyrocketed 472% to 625,000. The company now has over 4.4 million members.
The primary concern among investors was an ongoing issue that Peloton has been grappling with in recent quarters: The company has been struggling to keep up with demand. While that’s a good problem to have, it can still be a problem nonetheless.
$100 million to address delays
Peloton customers have been facing protracted delivery delays for new orders for months. This is nothing new, and there have been many reports detailing the frustrations. The consumer discretionary company is making progress, but these types of supply chain challenges can take a while to address. Peloton is going to spend a boatload of money to help alleviate the bottlenecks.
“While we have significantly increased Bike and Bike+ production over the last several months, we remain inventory constrained with longer than acceptable wait times for the delivery of our products,” the company wrote in its letter to shareholders. “To directly address this situation, we will be incrementally investing over $100 million in air freight and expedited ocean freight over the next six months in order to improve our order-to-delivery windows.”
That will put a dent in profitability in the near term, but it will ultimately be worth the up-front costs since Peloton fosters long-term relationships with its members, who pay monthly subscription fees. More importantly, this is what the $420 million acquisition of Precor is all about. Announced in December, the deal will give Peloton a domestic manufacturing base to help streamline its logistics operations while also allowing the company to expand into the commercial market.
The acquisition has not yet closed yet, but it is expected to be completed in early 2021. Even after it does, it will still take a little bit of time to revamp the manufacturing infrastructure to produce Peloton’s products. Peloton expects that Precor’s facility in North Carolina will start producing Peloton equipment by the end of 2021.
“Our acquisition of Precor will allow us to produce Peloton products here in the U.S. and fast-track our ability to build a large domestic manufacturing footprint over time,” CEO John Foley said on the conference call with analysts. “Importantly, Precor has deep manufacturing and R&D expertise, which will help us bring new hardware products to market more quickly and better position us to serve our North American member base over time.”
Additionally, Foley confirmed that the delays were not hurting demand in any meaningful way. Peloton is facing some short-term challenges, but the long-term thesis remains solidly intact.
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