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Amazon Can't Get Peloton Back on Track

Amazon started selling Peloton's basic stationary bike in late August, one month before the end of the equipment company's fiscal first quarter. This can be a great help to Peloton, as the e-commerce giant has a large reach.

November 25, 2022
6 minutes
minute read

The Everything Store can only do so much. Even though it has a wide range of products, there are still some things it cannot do. For example, it cannot provide everything for every customer.

Amazon started selling Peloton's basic stationary bike in late August, one month before the end of the equipment company's fiscal first quarter. This can be a great help to Peloton, as the e-commerce giant has a large reach.

Amazon's customers seem to be really excited about the Peloton Bike! The company called it out as one of the bestselling products in its Prime Early Access Sale event in mid-October. And on Peloton's earnings call earlier this month, CEO Barry McCarthy said the relationship "has outperformed our expectations for sure."

This is good news for Peloton's holiday season, as the company will be selling its products through retail partners for the first time. Peloton has typically sold and distributed its products directly, either online or through dedicated showrooms. However, with the increased demand for home-based workouts due to the pandemic, Peloton has been unable to keep up with demand. Selling through retail partners will help Peloton meet the increased demand for its products.

Sales of Peloton products cooled quickly as the world began to recover from the pandemic. Prior management's missteps exacerbated the problem of unsold gear taking a long breather on the company's books. Peloton ended the calendar year of 2021 with inventory of a little over $1.5 billion—three times the level from the same point the prior year.

Even fitness professionals need help slimming down sometimes, but Amazon's help won't come cheap. The deal is a wholesale relationship, which means Amazon buys the bikes from Peloton then sells them at a markup. According to data from Visible Alpha, analysts estimate that Peloton's average selling price hit $1,780 in the September quarter, down 16% year-over-year and the lowest for the company in at least three years.

As of the day before Thanksgiving, Amazon was offering the Peloton Bike for 21% off the regular price as part of its Black Friday sale. That comes on top of earlier price reductions. On Friday morning, the original Peloton Bike was $1,145 on Amazon compared with $1,745 early in 2022, according to price comparison site Pelobuddy.com.

Peloton's hardware revenue for the quarter was $204 million, which was 8% below analysts' projections. This indicates that Wall Street didn't fully take into account the discount that Amazon was offering. In Peloton's most recent earnings call, Mr. McCarthy admitted that using outside retail partners like Amazon "comes at the cost of some margin."

It could still be worth it for Peloton if it helps them bring inventory under control and expand their subscriber base—something that is very important to Mr. McCarthy. Simeon Siegel, from BMO Capital Markets, said in an interview that “this deal shows that Peloton is looking to move units, and Amazon is the best mover of units.”

Peloton has become almost as famous as Zoom during the pandemic, but many of Amazon's customers are already aware of the service and have chosen not to sign up.

"The days of posting your Peloton proudly on social media are behind us," Mr. Siegel said. "At the end of day, I don't know that selling on Amazon creates demand."
Peloton needs to create more value. It has been burning cash for the last two years and its subscriber growth has slowed to a trickle. The company added just 13,000 connected fitness subscribers in the last two quarters combined, which is only about 6% of its average additions per quarter over the previous four periods.

In the most recent report, Mr. McCarthy said that he expects free cash flow to reach "near break-even" in the second half of the fiscal year that ends in June 2023. He also expects Amazon to play a key role in the evolution of the company's business model "from mostly fixed to mostly variable costs."

Peloton says it is working to slim down its own retail footprint; it had 135 such “showrooms” as of June 30. Wall Street doesn’t expect Peloton’s annual adjusted earnings before interest, tax, depreciation and amortization to be positive until fiscal 2024. Amazon can help work off some holiday weight, but Peloton’s health still lies in its own hands.

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Eric Ng
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