Peloton (PTON) is scheduled to report results of its third fiscal quarter after the market close on Thursday, May 6, with a conference call scheduled for 5:00 pm EDT. What to watch:
1. TREAD RECALLS: On Wednesday, Peloton two separate recalls related to its treadmill products. The U.S. Consumer Product Safety Commission and Peloton announced two separate voluntary recalls of Peloton's Tread+ and Tread treadmills. Consumers who have purchased either treadmill should immediately stop using it and contact Peloton for a full refund or other qualified remedy as described in the press releases below, the agency said in a statement. Peloton has also stopped sale and distribution of the Tread+ and continues to work on additional hardware modifications. In the United States, the Tread was only sold as part of a limited invitation-only release from about November 2020 to about March 2021 and the company is currently working on a repair to be offered to Tread owners in the coming weeks.
After announcing the recall, Peloton CEO John Foley said in a statement: "The decision to recall both products was the right thing to do for Peloton's Members and their families. I want to be clear, Peloton made a mistake in our initial response to the Consumer Product Safety Commission's request that we recall the Tread+. We should have engaged more productively with them from the outset. For that, I apologize. Today's announcement reflects our recognition that, by working closely with the CPSC, we can increase safety awareness for our Members. We believe strongly in the future of at-home connected fitness and are committed to work with the CPSC to set new industry safety standards for treadmills. We have a desire and a responsibility to be an industry leader in product safety."
Peloton had previously fought the recall after disclosing that one child died and others were injured in accidents on its treadmills.
2. 'A CLEAR NEGATIVE': KeyBanc analyst Edward Yruma said the voluntary recall of Peloton's Tread and Tread+ is a clear negative. Yruma told investors in a research note that he thinks that the solution on Tread may be simpler while the high running surface of the Tread+ may require a more substantive fix, and will negatively impact the timing of the broader rollout of Tread, which was previously scheduled for May 27. Truist analyst Youssef Squali said Peloton's recall of all Tread and Tread+ products following the injuries and death of a child will likely result in significant near-term one time financial costs and operational disruption, with potential reputational damage. The analyst, who estimates that Tread+ sales are less than 10% of revenue, also feels the move will effectively delay the official launch of the new Tread, scheduled for May 27.
Peloton's voluntary recall of both the Tread and Tread+ treadmills change his "upside thesis," Bank of America analyst Justin Post said. The analyst noted that his biggest concern on the news is not the potential loss of Tread+ subscribers but the potential impact on the launch of the new lower-priced Tread, which he had previously anticipated would be a significant growth driver in full year 2022.
3. 'BUY THE DIP': Baird analyst Jonathan Komp sees a "compelling trading opportunity" with Peloton Interactive shares lower following the treadmill recalls. The analyst added a "Fresh Pick designation" on Peloton and keeps an Outperform rating on the shares with a $175 price target. While the recalls "raise slight risk" of delayed sales, the impacts are likely temporary and the direct financial impact likely equates to less than 1% of Peloton's current enterprise value, Komp told investors in a research note. With the stock down over 25% since mid-April, the analyst "would more aggressively buy the dip."
Stifel analyst Scott Devitt said this "seems akin to similar overblown issues in the history of other consumer franchises" and he believes this will be looked back on as a buying opportunity. While he can't yet quantify the near-term impact on Peloton's business, he argues this recall will likely "have an infinitesimal long-term impact" and "is likely to prove to be a gift to patient long-term investors."
4. GUIDANCE: In February, Peloton forecast Q3 revenue of $1.1B, against current analyst estimates of $1.11B, with ending connected fitness subscribers of 1.98M. The company raised its fiscal 2021 revenue guidance to $4.075B "or more" from $3.5B-$3.65B, against current analyst estimates of $4.1B, with 2.275M ending Connected Fitness Subscriptions, increased from prior estimates of 2.05M-2.1M.
At the time, MKM Partners analyst Rohit Kulkarni warned that Peloton's guidance implies declining hardware gross margin trend and its churn rates have trended higher.
Peloton
+1.57 (+1.90%)