A Peloton Bike inside a showroom in New York, USA, on Wednesday, November 1, 2023. Peloton Interactive Inc. is scheduled to release earnings data on November 2.
Michael Nagle | Bloomberg | Getty Images
Peloton is no longer facing an imminent liquidity crisis after a massive debt refinancing, but the company still has a long way to go to fix its operations and return to profitability.
In late May, the fitness-related company secured a new $1 billion term loan, raised $350 million in convertible notes and received a new $100 million credit line from JP Morgan and Goldman Sachs. All of this is due in 2029.
The refinancing reduced Peloton’s debt from about $1.75 billion to about $1.55 billion and pushed up the looming maturity dates of loans it likely wouldn’t have the cash to repay.
Before the refinancing, Peloton would need to pay about $800 million of its debt by November 2025. If it were to pay that, about another $200 million would have to be paid about three months later. The term loan would mature in May 2027.
For Peloton, which hasn’t posted a net profit since December 2020 and seen sales decline for nine straight quarters, the debt pile posed an existential threat and fueled investor concerns about a possible bankruptcy.
Now that it’s refinanced, Peloton has eased investors’ concerns about liquidity and has the breathing room it needs to try to turn its business around.
The fact that it was able to secure those loans signals that investors have faith in its ability to justify its operations and eventually repay them, restructuring experts told CNBC.
“This refinancing now puts us in a much better position for sustainable, profitable growth and a much stronger financial footing than we were before, and our investors saw that,” chief financial officer Liz Coddington said in an interview with CNBC. “I think they believe in the story. They believe in what we’re trying to do, as we do, and in transforming the business. And so it was just a big vote of confidence in the future of Peloton.”
Peloton faces dangers ahead
While the refinancing may have bought Peloton some time, it’s far from a panacea. Under the terms, Peloton will now spend about $133 million a year in interest, up from about $89 million previously. It will make Peloton’s efforts to maintain positive free cash flow more difficult.
Coddington acknowledged on CNBC that higher interest costs will “impact” free cash flow, but said that’s partly why the company began cutting costs in early May. The plan is expected to reduce annual spending by more than $200 million.
Even with the higher interest payments, Coddington expects the company to be able to maintain positive free cash flow without the business having “significant growth in the near term.”
“The cost reduction plan made us much more comfortable with that,” Coddington said.
While Peloton insists investors bought its refinancing because they believe in its strategy, some could be trying to put themselves in a better position if the company fails.
Two of Peloton’s biggest debt holders, Soros Fund Management and Silver Point Capital, are known to sometimes invest in troubled companies. Since the Peloton loans they invested in are secured, they are near the top of the capital structure. If Peloton can’t turn around its operations and ends up in a position where it considers or files for bankruptcy, its creditors will be in a strong position to take control of the company.
“I would describe this refinancing cutback as kind of opportunistic,” said Evan DuFaux, CreditSights special situations analyst and distressed debt specialist. “I think it’s just a smart, opportunistic and sophisticated move.”
Silver Point declined to comment. Soros did not respond to a request for comment.
Are more cost cuts coming?
Peloton is in a much better cash position than it was a few months ago, but the company still has to deal with Ask for issues that have plagued it since the end of the Covid-19 pandemic and find out what kind of business it will be in the future.
“It’s really a kick the can down the road exercise because the refinancing itself buys time but doesn’t actually fix any of the underlying problems at Peloton,” said Neil Saunders, CEO of GlobalData Retail. “These are very different issues than refinancing.”
With former CEO Barry McCarthy gone and two board members, Karen Boone and Chris Bruzzo, now in charge, Peloton has a decision to make: it’s a content company, like Netflix for a gym or is it a hardware company that needs to develop new strategies to sell its expensive equipment?
So far, the interaction of both has proved unsuccessful.
“They’re going to have to make some decisions about what parts of the model can survive, what parts can’t, or things they can do moving forward without losing the great value of the brand that they still have right now, especially with faithful after what they have,” said Scott Stuart, CEO of the Turnaround Management Association and an expert on corporate restructuring.
“Money doesn’t fix everything, and the issue becomes the more money you get and the more you refinance … the more problematic it becomes,” he added.
Simeon Siegel, retail analyst for BMO Capital Markets, said Peloton can begin to address its problems by forgetting about trying to grow the business for now and instead focus on “hugging” its millions of loyal customers. her brand name.
He pointed out that the company earns about $1.6 billion in recurring revenue from high-margin subscriptions and sees more than $1.1 billion in gross profit from that side of the business.
“The problem is they’re losing money. How do you lose money if you’re generating a billion in recurring gross profit?” Siegel said. “So you take all that gross profit and spend it to try to chase new growth.”
He said Peloton could generate about $500 million in EBITDA if it cuts research and development, marketing and other corporate expenses. For example, Peloton’s marketing budget is about 25 percent of annual sales, and if the company were to drop that to even 10 percent, it would still be in the “upper echelon of most brands,” Siegel said.
“Their debt is scary for a company that’s burning cash, their debt is not scary at all for a company that can do half a billion dollars of EBITDA,” he said. “They have a business that generates a huge amount of cash. They need to stop spending it.”
In May, Peloton announced it would cut 15% of its corporate workforce, but it may be more reluctant to scale back its growth strategy. Peloton founder John Foley set a goal of growing to 100 million members, and McCarthy adopted the goal when he took over. As of late March, Peloton had about 6.6 million members — woefully behind that long-term goal.
Since the company announced its cost-cutting plan, McCarthy’s departure and another disastrous earnings report in early May, Peloton has been largely mum on its strategy. He said he is looking for a new permanent CEO, and the person he hires will provide clues about the company’s direction.
If he hires another “hyper-growth tech CEO” like McCarthy — who had stints at Netflix and Spotify – then Peloton will likely face the same problems, Siegel said. But if it hits someone different, it could signal a change in strategy.
Content magic
One notable change in Peloton is its live scheduling program. The company currently offers live streaming classes from its New York studio seven days a week, but starting Wednesday, that will change to six. Last month, his London studio moved from seven days of live streaming classes to five.
“We’re all going to continue to create, create social content, drop new classes,” Peloton Chief Content Officer Jen Cotter told CNBC. “I think we’re just going to use the brain space that would have been spent on live classes that day to come up with new programs, new ways to distribute wellness content, new business categories like nutrition and rest and sleep, which we haven’t really done that much deep as we intend to do.’
He added that the change will save the company money, but is more of an opportunity to make better use of its production staff than a cost-cutting measure.
For example, the company in May partnered with Hyatt Hotels as it tries to generate new revenue and diversify revenue streams. As part of the deal, hundreds of Hyatt properties will be outfitted with Peloton equipment, and guests will have access to special Peloton classes on their hotel room televisions at approximately 400 locations. Adjusting the schedule will allow staff to be available to create content for projects like the Hyatt partnership.
The change comes after three Peloton trainers – Kristin McGee, Kendall Toole and Ross Rayburn – decided not to renew their contracts with the company. The news sparked concerns among Peloton’s rabid fans that trainers, one of its key assets, were leaving in droves.
Cotter insisted the split was amicable – and the door is open should the athletes want to return.
“All I can say is they’ve decided they want to leave. All the trainers have been offered contracts and I mean it when I say we have a deep respect and appreciation for what they’ve contributed, and if they want to try something new, that’s fine Cotter said.
“As much as we will miss them, we are like a professional sports team,” he added. “Athletes leave the team and you still love the athlete and you still love the team and so hopefully this change will allow our members to understand that that’s okay, and yes, we’re going to miss them, but yes, it’s okay to people to go try other things.”
McGee, Toole and Rayburn all left when Peloton was in the process of renewing their coaching contracts.
Some instructors may be teaching fewer courses as part of the live content pullback. It’s unclear if any instructors took pay cuts as a result, or if McGee, Toole and Rayburn left because of disputes over compensation.
When asked, Cotter declined to answer.
