Peloton Financial Statement Analysis

Peleton Financial Statement Analysis
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Profitability
To evaluate Peloton’s profitability for the last three financial years- 2020, 2021, and 2022, revenue growth, operating expenses growth, net income growth, gross margin, and operating margins will be considered (Peloton, 2022). The listed elements will provide an indication of the company’s profitability for the last five years.
Revenue Analysis
Peloton’s revenues and gross profit have been considerably volatile. In 2020, the company experienced significant revenue growth of 120.26% compared to the previous year, which can be attributed to the COVID-19 pandemic and increased demand for at-home fitness equipment. However, in 2021, Peloton's revenue growth slowed down significantly, with revenue decreasing by 10.93%. The decline can be attributed to a significant decline in revenues generated by the company in Connected Fitness Products, with the revenues from the segment decreasing from $3.1 billion to $2.2 billion. Comparatively, the company’s subscription business continued expanding within the same period, although at a lower rate. 2020-2021 saw the subscription revenue grow by 140 percent, compared to the 70 percent recorded by the company in FY 2022.
Notably, the decrease in revenue can be attributed to the product recall of Tread+ and Tread products. Peloton estimates that it recorded a US$ 139.9 million revenue reduction due to the recall because the recall was accompanied by the decision to stop the sale of Tread+ and Tread products until the products were upgraded.
Expenses Analysis
The company has also experienced significant growth in operating expenses over the last three years. In 2022, the company's total operating expenses were $3.43 billion, which is an increase of 109.1% compared to the financial year 2021. The increase can be attributed to higher sales and marketing expenses, as the company invests in advertising and promotional campaigns to attract new customers. Due to the increased operating expenses, the company's net loss has increased significantly in the last three years. In 2022, Peloton reported a net loss of $2.83 billion, which is a significant increase compared to the previous year's net loss of $189 million. This increase can be attributed to higher operating expenses and significant investments in growth initiatives, such as expanding its product offerings and expanding its global footprint.
To minimize the risk of uncontrolled operating expenses, Peloton has introduced a restructuring plan that is intended at enabling the company to achieve an operational focus that will support the company’s growth. The restructuring plan saw the company incur a charge of US$ 611.3 million in FY 2022. The charges consisted of US$ 109.1 million in severance pay, 15.4 million in consultation charges, US$ 373.8 million in non-inventory asset write-downs, US$ 56.5 million in stock-based compensation, and US$ 56.4 million in inventory markdown. The implementation of the restructuring plan is one of the factors that led to a significant increase in the company’s expenses.
Another significant contributor to the company’s rising expenses was the voluntary recall program announced in May 2021 for the Tread+ and Tread products. The recall resulted in US $39.9 million in expenses for FY 2021 and US $40.8 million in FY 2022.
Gross Profit Analysis
Peloton's gross profit has also fluctuated over the last three years. In 2021, the company reported a gross profit of $698.3 million, which is a decrease from the previous year's gross profit of $1.45 billion. The decrease can be attributed to higher costs of revenue, which increased by 160% compared to the previous year. From the calculations, the company’s gross margin has been in decline for the past three financial years. The margin has declined from 46% in 2020 to 19% in 2022. This indicates that Peloton is generating less profit per sale after accounting for the costs associated with manufacturing and delivering its products. A declining gross margin suggests that the company is facing increased costs of manufacturing and delivering its products, which are eroding its profits. Notably, supply chain disruptions due to the COVID-19 pandemic may be considered a potential factor leading to higher manufacturing and shipping costs. The declining gross profit margin could also be attributed to increased competition in the at-home fitness equipment market. The company faces competition from established players like NordicTrack, as well as newer entrants like Echelon and Tonal. This has put pressure on Peloton to maintain its pricing despite the increasing cost of goods.
A further review of the company’s gross margin based on its offering generates interesting trends. The Connected Fitness Products gross margin has decreased significantly from 29.0% in 2021 to a negative margin of -11.3% in 2022. This indicates that the cost of manufacturing and delivering Peloton's fitness equipment has exceeded the revenue generated from sales, resulting in a net loss. This decline in the gross margin for Connected Fitness Products is a result of supply chain disruptions, increased competition, and rising costs of production. On the other hand, the gross margin for Peloton's Subscription offerings has increased from 62.1% in 2021 to 67.7% in 2022. This implies that the revenue generated from subscriptions has been growing at a faster rate than the associated costs. The trend indicates that the company's Subscription offerings are becoming more important to the overall profitability of the company. As the gross margin for Connected Fitness Products declines, Peloton may need to shift its focus toward its Subscription offerings to maintain profitability.
. Peloton’s operating margin has experienced a decline from -4% in 2020 to -79% in 2022. This indicates that Peloton is not generating enough revenue to cover its operating expenses, which have grown significantly over the past year. The negative operating margin implies that Peloton is currently operating at a loss and is indicative of the company’s inability to generate sufficient revenues to cover its expenses. While revenue growth has been strong in recent years, the significant increase in operating expenses and decline in gross margin have resulted in negative profitability ratios (Salmi & Martikainen, 1994). Notably, the increasing operating expenses can be traced to the company’s heavy investment in research and development to expand its product offerings and enhance its digital platform.in addition, the company has been making significant investments in sales and marketing campaigns to attract new customers.
The decline in Peloton's gross and operating margin is a cause for concern, as it indicates that the company's profitability is being eroded by increasing costs. Peloton will need to address the factors contributing to the decline in gross margin, such as improving its supply chain and managing its operating expenses, to restore profitability. Additionally, the company may need to consider adjusting its pricing strategy or introducing new products and services to remain competitive and enhance its revenue streams. By addressing these challenges, Peloton can work towards improving its profitability and positioning itself for long-term success in the highly competitive at-home fitness equipment market.
Cashflow Analysis
In addition to evaluating Peloton’s profitability, it is essential to consider its cash flow. The cash flow analysis allows one to determine the liquidity of a company and facilitates the identification of cash flow issues before they turn into significant problems for the company.
Cash Flow Analysis
Operating cash flow is one of the critical indicators of the company’s ability to generate cash from its core operations. In 2020, Peloton generated $376.4 million in net cash from its operating activities, indicating a strong cash-generating capacity. However, in 2021, the company experienced a significant decline in operating cash flow, with a net cash outflow of $239.7 million. The negative cash flow suggests that Peloton may have struggled to fund its operations during this period. In 2022, the operating cash flow situation worsened, with a net cash outflow of $2,020.0 million. This substantial decline in operating cash flow over the past three years raises concerns about the company's ability to fund its day-to-day expenses and indicates potential financial difficulties.
Investing in cash flow is also another essential indicator of a company's financial health. In 2020, Peloton experienced a net cash outflow of $741.3 million in investing activities. The trend of substantial investments continued in 2021, with a net cash outflow of $585.1 million in investing activities. The sustained cash outflow indicates that Peloton remained focused on expanding its operations and investing in projects that the company believed would contribute to its long-term growth. In 2020 and 2021, Peloton invested heavily in marketable securities, with cash outflows of $1,199.6 million and $449.1 million, respectively. Marketable securities are short-term investments that can be easily converted into cash and typically have a lower risk profile compared to long-term investments like capital expenditures and acquisitions.
In 2022, there was a noticeable shift in the company's investing cash flow, with a positive cash flow of $153.3 million. Notably, the company did not invest in any marketable securities, which contributed to the positive investing cash flow for the year. The cash inflows from the sale of marketable securities ($306.7 million) and maturities of marketable securities ($211.0 million) played a significant role in boosting the investing cash flow. Peloton still experienced negative cash flows from capital expenditures, including software ($337.3 million), business combinations ($11.0 million), and asset acquisitions ($16.0 million), indicating that Peloton continued investing in its core business operations and expansion efforts. While the sale and maturity of marketable securities provided a short-term boost to the investing cash flow, Peloton must continue monitoring the performance of its capital expenditures and acquisitions to ensure they are generating adequate returns and contributing to the company's long-term growth strategy.
Financing cash flow measures the cash generated or used in financing activities, such as issuing shares, paying dividends, and borrowing or repaying debt. In 2020, Peloton had a net cash inflow of $1,240.2 million from financing activities, indicating that the company was actively raising funds to support its operations and investments. The trend continued in 2021, with a net cash inflow of $916.8 million. In 2022, the company again raised a significant amount of cash from financing activities, with a net cash inflow of $2,015.1 million. The consistent positive financing cash flows suggest that Peloton has been using financing activities to fund growth and address any liquidity challenges.
Changes in Working Capital
Over the past three fiscal years, Peloton has experienced fluctuations in its working capital, with significant changes in its inventories, accounts receivable, and accounts payable. In 2020, the company's cash flow was positively impacted by a $272.3 million increase in customer deposits and deferred revenue. However, in 2021, this figure decreased by $212.7 million, negatively affecting cash flow. In 2022, inventories increased by $398.6 million, while accounts payable and accrued expenses decreased by $168.6 million. The changes suggest that the company may not be efficiently managing its working capital, which could be impacting its cash flow.
Free Cash Flow Analysis
Analyzing Peloton's free cash flow for the financial years 2020, 2021, and 2022 reveals significant changes and trends in the company's financial performance. In 2020, Peloton generated a positive free cash flow of $220 million. This indicates that the company was able to generate sufficient cash from its operations to cover its capital expenditures, which is a sign of financial strength. During this period, Peloton had the flexibility to reinvest in the business, pay down debt, or return capital to shareholders. The positive free cash flow suggests that the company was effectively ...