Peloton CEO Barry McCarthy will step down, company will lay off 15% of employees as it looks to refinance debt

Peloton announced Thursday that CEO Barry McCarthy will step down and the company will lay off 15% of its staff because it “simply has no other way to align its expenses with its revenues.”

McCarthy, former Spotify AND Netflix executive, will become a strategic advisor to Peloton by the end of the year, and Karen Boone, the company’s president, and director Chris Bruzzo will serve as interim co-CEOs. Boone most recently served as the company’s chief financial officer Repair equipment while Bruzzo was a longtime director of the Electronic Art. Peloton is looking for a enduring CEO.

The company also announced a broad restructuring plan, which assumes reducing global employment by 15%, or approximately 400 employees. It plans to continue closing retail stores and making changes to its international sales plan.

The press release said the moves are intended to bring Peloton’s cost structure in line with the current size of its business. It is expected to reduce annual operating expenses by more than $200 million by the end of fiscal year 2025. About half of those savings will come from payroll reductions, and the rest will come from lower marketing expenses, reduced retail store space, and reduced IT and software spending, said Chief Financial Officer Liz Coddington.

Coddington said the departments that will be most affected by the restructuring are Peloton’s research, development, marketing and international teams.

“This restructuring will provide Peloton with sustainable, positive free cash flow while enabling the company to continue to invest in software, hardware and content innovations, improve the member support experience, and optimize marketing activities to scale the business,” the company said.

Peloton shares rose more than 12% in pre-market trading but opened lower after the company’s conference call with Wall Street analysts ended. Shares closed about 3% lower.

McCarthy took the reins of Peloton in February 2022 from founder John Foley and has spent the last two years restructuring the company and working to return it to growth.

Immediately after taking over the company, he conducted massive layoffs to right-size Peloton’s cost structure, closed some of the company’s glitzy showrooms and introduced recent strategies to raise membership. He overhauled Peloton’s executive team, oversaw the company’s rebranding and created recent revenue drivers such as the company’s rental program.

The last round of cuts, affecting 500 employees, was announced in October 2022. McCarthy later said the company’s restructuring was “complete” and was instead heading toward “growth.”

“We’re done,” McCarthy said in November 2022 of the layoffs. “There are no more heads to remove from this business.”

Unlike Peloton’s founder, McCarthy has focused Peloton’s attention on its app to attract members who may not be able to afford the company’s costly bikes or treadmills but who might be interested in attending its digital classes.

In a letter to employees, McCarthy said the company must now reimplement layoffs because it would be unable to generate sustainable free cash flow under its current cost structure. Peloton hasn’t made a profit since December 2020, and it can only burn cash as long as it has more than $1 billion in debt on its balance sheet.

“Achieving positivity [free cash flow] makes Peloton a more attractive borrower, which is vital as the company focuses on the necessary task of successfully refinancing its debt,” McCarthy said in the memo.

In a letter to shareholders, the company said it was “mindful” of the maturities of its debt, which includes convertible notes and a term loan. It said it was working closely with its lenders at JPMorgan AND Goldman Sachs on the “refinancing strategy”.

“Overall, our refinancing objectives are to deleverage and extend maturities at a reasonable blended cost of capital,” the company said. “We are encouraged by the support and incoming interest from our existing lenders and investors and look forward to sharing more on this topic.”

In a press release, Boone thanked McCarthy for his contributions.

“Barry joined Peloton during an extremely challenging time for the company. During his tenure, he laid the foundation for scalable growth by continuously changing the company’s cost structure to ensure stability and achieve the vital milestone of achieving positive free cash flow.” Boone said.

“With a sturdy leadership team and the Company’s solid positioning, the Board has determined that now is the right time to seek Peloton’s next CEO.”

On a conference call with analysts, Boone said Peloton’s board is looking for a leader who can “design and lead the next phase of the company’s growth.”

Also on Thursday, Peloton reported fiscal third-quarter results that fell compact of Wall Street expectations for earnings and profit. Here’s how the combined fitness company performed compared to Wall Street forecasts, based on a survey of analysts conducted by LSEG:

• Loss per share: 45 cents against an expected loss of 37 cents
• Income: USD 718 million against the expected USD 723 million

The company’s net loss for the three months ended March 31 was $167.3 million, or 45 cents per share, compared with a loss of $275.9 million, or 79 cents per share, a year earlier.

Sales fell to $718 million, down about 4% from $748.9 million a year earlier.

Peloton has tried a little bit of everything to get the company back to sales growth. It removed the free membership option from its fitness app, expanded its corporate wellness offerings and partnered with mega brands like Lululemon raise membership, but none of the initiatives were enough to raise sales.

For the ninth straight quarter, Peloton’s revenue declined in the fiscal third quarter compared to the year-ago period. As of December 2021, when the company’s exercise bikes were still in high demand and many had not yet returned to gyms due to the Covid-19 pandemic, there was no raise in sales compared to the same quarter last year.

The company continues to lose money and has not made a net profit since December 2020.

For the current fiscal year, Peloton lowered its forecasts for paid fitness subscriptions, app subscriptions and revenue. It reduced its Connected Fitness subscription forecast by 30,000 members, or 1%, to 2.97 million for the current quarter, which is typically the hardest because people tend to exercise less during the spring and summer months.

“Our Connected Fitness paid subscription guidance reflects updated equipment sales outlook based on current demand trends and expectations for seasonally lower demand,” the company said.

Peloton now expects app subscriptions to decline by 150,000, or 19%, to 605,000.

“We maintain our disciplined approach to in-app media spend as we evaluate our app tiers, pricing and refine the path to acquisition of paid app subscriptions,” the company said.

As a result of expected declines in subscription sales, Peloton now forecasts full-year revenue of $2.69 billion, a decline of approximately $25 million, or 1%. That’s less than the expected $2.71 billion, according to LSEG.

However, the company raised its full-year outlook for gross margin and adjusted EBITDA. It now expects total gross margin to raise 50 basis points to 44.5% and adjusted EBITDA to raise $37 million to negative $13 million.

“This raise is largely due to improved results since the third quarter, combined with lower utility expenses and cost reductions related to the restructuring plan announced today,” the company said.

Last February, McCarthy set a goal to return Peloton’s revenue growth within a year. When it failed to meet that milestone, McCarthy pushed back the decision and said he now expects the company to return to growth in June, at the end of the current fiscal year.

McCarthy also expected Peloton to achieve positive free cash flow by June – a goal the company said it achieved at the start of the third quarter. This is the first time Peloton has achieved this mark in 13 quarters. In a letter to shareholders, Peloton said it generated $8.6 million in free cash flow, but it’s unclear how stable that number is.

Last month, CNBC reported that Peloton had failed to pay its suppliers on time, which could temporarily tank its balance sheet. Data from business analytics firm Creditsafe showed Peloton’s overdue payments to suppliers spiked in December and again in February after improving in January.

The company didn’t provide specific guidance on what investors can expect from free cash flow in the coming quarters, but said it expects to “deliver modest positive free cash flow” in the current quarter and fiscal 2025.

“While we clearly intend to return the company to growth, with the cost reductions announced today, we are lowering our cost base and seeing a path to positive free cash flow without having to significantly improve growth to achieve it,” Coddington said in an interview on a conference call. “I also want to make clear that we have carefully reviewed these cost metrics to ensure we continue to be able to invest in innovation so the company can grow profitably.”

One reason Peloton has failed to achieve positive free cash flow is simply not selling enough of the equipment, which is costly to produce and has become less popular since the Covid-19 pandemic ended and people returned to gyms.

“Looking at the numbers in more detail, the biggest problem lies in the part of the business where Peloton first made its name: exercise equipment. “Revenues from connected fitness products fell 13.6% last year, which means consumers are still cooling off on equipment that, while aesthetically pleasing and technically satisfactory, is very costly,” GlobalData managing director Neil Saunders said in a note. “Many people who want Peloton equipment already have it and likely won’t be upgrading any time soon; the rest of the market is either not interested or needs a lot of persuasion to buy Peloton.”