Peloton internal docs show it slashed 2022 sales goals for apparel unit

The peloton briefly announced its private label clothing line outside a storefront in the SoHo neighborhood of New York City.

Source: Kevin Stankiewicz, CNBC

The peloton has cut back on sales forecasts for 2022 for its apparel business, according to internal documents obtained by CNBC. The momentum in the unit, which is run by CEO John Foley’s wife, looks set to wane in the next year after clothing sales more than doubled to over $ 100 million from 2020 to 2021.

This in-depth look at Peloton’s clothing arm, though the division is a small fraction of the overall business, provides yet another insight into how the affiliated fitness company was driving on a wave of increased demand amid the Covid-19 pandemic. But that demand has begun to normalize and the Peloton now has to reset.

In the fiscal year ending June 30, 2020, Peloton’s apparel business generated about $ 41 million in revenue by selling 800,000 units, according to an internal presentation dated November 2021. Peloton reported total revenue for the year of $ 1.8 billion.

In the fiscal year 2021, Peloton said in the presentation, it saw a huge growth in clothing due to Covid-related comfort trends – so much so that it did not have enough supply to keep up with demand. According to the proposal, it drew in $ 107 million in revenue and sold just under 2 million units of clothing. Peloton’s total revenue was $ 4 billion in the fiscal year ending June 30, 2021.

But for the fiscal year 2022, with five months left, the company may have been too optimistic, Peloton’s presentation suggests. Initially, Peloton had predicted that its apparel division would have more than $ 200 million in annual revenue, but now they expect to look closer to $ 150 million in apparel sales, saying several “macro factors”, including supply chain constraints, created challenges for the company , according to the presentation.

It is unclear whether these revenue figures were revised or whether the 2022 projections have been adjusted since the presentation date.

A Peloton spokeswoman declined to comment, saying the company is in a quiet period ahead of the announcement of its earnings on February 8th.

The figures provide some context for a segment that Peloton does not break out of its total sales. Instead, clothing revenue is included in its affiliated fitness department, along with its bikes and its treadmills, which it calls Treads. Clothing is also a segment in which Peloton has increased investment in recent months under the supervision of Jill Foley. Her role in the company has recently received criticism from an activist investor.

In an effort to build its own brand, Peloton cut ties to a number of national clothing brands that it had worked on on its clothing line. Then it was a matter of designing and manufacturing his own leggings, sports bras and sweatshirts internally. It also started marketing the clothing line independently of its equipment line.

John Foley told attendees at a Goldman Sachs conference on Sept. 22 that the move would increase profits. The CEO said Peloton’s goal was to sell its own clothing, “which is now much higher than it was yesterday,” to households that are existing Peloton customers.

Last fall, the Peloton increased the marketing of its private label clothing with ads primarily spread across New York City’s storefronts, subway stations, and in some malls. Now, however, there are dozens of these items sold at a price reduction on Peloton’s website as the company tries to sell through older lots of fixtures.

The peloton said in the November presentation that despite its push to sell more private label clothing – as opposed to merchandise from brands such as Lululemon and Nike – sales have been “slower than expected.” As a result, the company said it adjusted its forecast for the apparel department “carefully”.

“When people leave their homes, part of consumers’ wallets move towards’ going out ‘clothing as opposed to’ staying home ‘for leisure,” reads a slide in the presentation. “As Peloton’s membership growth becomes softer, organic clothing can move in locking steps.”

Athleisure sales are still growing

During the company’s most recent earnings conference, held on November 4, the CEO spoke about how difficult it has been for Peloton to project demand and keep costs in check as consumer habits develop.

“Our visibility into our future performance has become more limited,” said John Foley. “From predicting consumer demand to accurately predicting logistics costs, our teams have never seen a more complex operating environment where they can guide our expected results this year.”

John Foley, Founder and CEO of Peloton Interactive Inc.

Chris Goodney | Bloomberg | Getty Images

However, the so-called athleisure category is still growing as consumers increasingly incorporate things like leggings, joggers and other comfortable pieces into their daily wardrobe. An analysis by Coresight Research and Euromonitor showed that sales of leisure activities in the United States, which include clothing and footwear that can be used for athletic purposes or for leisure, grew by about 20% year over year to $ 132.7 billion in 2021.

Coresight still expects the category to grow in the coming years, just not at a double-digit pace. It sees sales of leisure activities in the US increase by around 7% in 2022 and an increase of 6.5% in 2023. The largest retailers in the category are Nike, Adidas, Lululemon and Under Armor, the research firm said.

“We expect a sustained shift toward casualization over the next three years, with consumers choosing to wear casual clothing while working more at home and workplaces increasingly relaxing dress codes,” said Coresight founder and CEO Deborah Weinswig .

Increased fire awareness

Jill Foley, vice president of Peloton Apparel, told CNBC during a Zoom interview on October 13 that Peloton switched to making more garments internally because they wanted to have full control over sizes and styles. She said her team had grown to 26 people. She also said at the time that her biggest obstacle to moving forward was making sure consumers knew Peloton was selling clothes beyond its bikes and treads.

“My biggest barrier, as I’ve said before, is awareness … people are not aware that the Peloton sells great clothes and swag,” said Jill Foley, about a month before the date of the internal presentation that CNBC has seen.

Jill Foley added that her division’s main goal is to sell more clothing to people who already own Peloton products and pay for a monthly subscription to its on-demand content. However, she said clothing can also be a way for non-Peloton owners to shop into the brand.

“More and more, we’re seeing non-hardware owners buy clothes … just because the brand has a fun energy for what people like,” she said. “And especially since we’ve gotten into minor logo processing.”

On January 24, John Foley was criticized for making his wife a director of the company. Activist investor Blackwell’s Capital, which owns less than 5% of the shares in Peloton, used this as an argument for why John Foley should be replaced, in a letter sent to Peloton’s board.

Peloton’s focal point for making more of his own clothing has also resulted in a feud with an athletic garment. In late November, Lululemon filed a patent lawsuit against Peloton, in which it claimed that Peloton had infringed six of its patented designs. It happened a few days after the Peloton sought a court declaration that it had not in fact infringed any of Lululemon’s patents.

CNBC also got a footage of a call that took place in December, which included McKinsey employees as well as Tim Shannehan, the global sales manager and CEO of Peloton’s North American business. The talks were part of “Project Fuel”, an internal code name for Peloton’s review of the cost structure.

“Clothes are a really fun area because it’s just … the dynamics are a little awkward with Jill and John,” said a manager identified as Shannehan, according to a person familiar with the details of the call. “[Apparel] the penetration in our member base is so low. How do we get more revenue from our existing membership base? “

John Foley, Jill Foley and Shannehan did not respond to CNBC’s requests for comment.

“Peloton is not a clothing brand”

BMO Capital Markets analyst Simeon Siegel said the peloton may have gone too far in believing it could be a clothing company as well as an affiliated fitness company.

“The peloton is not a clothing brand,” he said. “Peloton was a successful fitness community brand, and all fitness brands – most gyms – have clothing. Most communities have swag.”

“The question is, is the swag a way to showcase what makes you special? Is the swag a way to showcase the Peloton community? Or is it the revenue generator?” said Siegel. “The conversations may have gotten a little mixed when people [at Peloton] began to believe that swag would become its own conglomerate or its own mega-business. “

A banner image seen on Peloton’s website showing its private label clothing line.

Source: Peloton.com

To get back on track, Peloton said in the presentation obtained by CNBC that it needs to be “more aggressive” in terms of driving demand for clothing. It said it might potentially be necessary to increase liquidation efforts. Some initiatives that the company said it was investigating include adding a link to the clothing page on Peloton’s website when customers receive email confirmations of their equipment purchases.

In early November, the Peloton lowered its expectations for 2022 sales and subscribers. It sees connected fitness subscribers of between 3.35 million and 3.45 million, a decrease from previous prospects of 3.63 million. It expects revenue of between $ 4.4 billion and $ 4.8 billion, down from $ 5.4 billion.

In recent weeks, however, analysts have said that these estimates are likely to be lowered again. Some have cited SimilarWeb data showing that visits to the company’s website fell in the quarter ending in December, compared to the year before.

On January 20, Peloton announced preliminary results for the second quarter after CNBC revealed in a series of reports in the same week that the company was considering layoffs, store closures and reduced production. The peloton also sent a separate note to employees, saying it would be “right size” of production and “consider all options” for cost savings.

The peloton set its second-quarter sales at $ 1.14 billion, which is within the $ 1.1 to $ 1.2 billion range it previously estimated. However, subscriber growth is expected to fall short. The peloton said it will end the quarter with 2.77 million connected fitness subscribers, against a forecast of 2.8 million to 2.85 million.

The peloton did not revise its annual forecast at the time, but it could when it reports earnings next week.

Analysts expect the Peloton to post an annual loss of $ 2.90 per share on a sale of $ 4.27 billion, according to Refinitiv. Since Nov. 5, a day after Peloton reported first-quarter results, 15 analysts have cut their profit estimates and 28 analysts have reduced their sales expectations, Refinitiv said.

Peloton’s stock has lost about $ 1.9 billion in market value since the news first came on Jan. 16 about the company’s more urgent need to reduce costs. In trading Friday, it hit a 52-week low of $ 22.81, but ended the day up nearly 7% to $ 25.64. The stock continues to be volatile, with more and more analysts raising new questions about the overall demand for Peloton’s products, which the company has not yet addressed specifically.

On Monday, Peloton shares rose nearly 5% in trading.

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