A Peloton Post-Mortem... and an Update on Warby Parker

When the story of home fitness company Peloton (PTON) is written, it'll be a doozy. Or in the least, a good case study... Somewhere in here is a management team that for whatever reason (and you can let your imagination run wild) blindly produced more product than it realistically could ever sell – especially after […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] A Peloton Post-Mortem... and an Update on Warby Parker By Herb Greenberg When the story of home fitness company Peloton (PTON) is written, it'll be a doozy. Or in the least, a good case study... Somewhere in here is a management team that for whatever reason (and you can let your imagination run wild) blindly produced more product than it realistically could ever sell – especially after pulling forward years of revenue. When news leaked last week that management was curtailing production, with an eye on costs, Peloton's already-battered stock was clobbered even further. All in, it's down more than 80% from its stay-at-home pandemic highs, exaggerated by the market meltdown... but with this kind of news, it likely would have been pounded regardless.  And it shouldn't be surprising. As veteran retail analyst [Faye Landes]( put it in a weekly note that she sends to investors, executives, and friends (of whom I am one)... Forecasting demand is important. This is not a newsflash, but a company suspending production – or close to it – for a prolonged period because of excess inventory [is] extremely unusual. The obvious question, of course, is... why is Peloton only dealing with costs now? The company has been flashing signs of trouble for months. In fact, as far back as September, my former firm – Pacific Square Research – warned that things at Peloton were likely to get worse. In Pacific Square's view, it was all in the numbers – something that in the craziness of the mania everybody seemed to stop paying attention to. The latest news, however, was the final straw... prompting Faye, now a retail consultant to emerging consumer and retail companies, to put together a list of lessons she thinks can be learned from the pummeling of Peloton. --------------------------------------------------------------- Recommended Links: [Drop everything and do this TONIGHT]( Tonight, at 8 p.m. Eastern time, four of the top investment minds in the world are going to show you how to navigate 2022 – a year that could spell doom for many investors. [Click here to reserve your spot for free](. --------------------------------------------------------------- [Wall Street Legend reveals his FIVE favorite Metaverse stocks]( Whitney Tilson, who's appeared twice on 60 Minutes, has just revealed his top-five list of Metaverse stocks to buy. [He's even giving his No. 1 pick away for free](. --------------------------------------------------------------- Among them (in Faye's words, which I've slightly edited)... - Pay attention to customer acquisition costs... Even before the pandemic, while it was losing money, Peloton was spending heavily on marketing. As the company turned marginally profitable, the pandemic-driven lockdowns and gym closures created a perfect storm for the company, in a positive way. During that quarter, the company continued to plow money into marketing, even though it probably wasn't necessary. Was anyone in the company ever attending to these costs? - Opening stores is something that should be done very prudently, if at all... According to the 10-K, as of June 30 the company had 123 stores in the U.S. and Canada, mostly "in upscale malls, lifestyle centers, and premium street locations." Now, with the announcement of likely store closures, Peloton Facebook groups are flooded with comments from people saying that they love their bike but did not buy their bike in a store. I think it's unclear why the company needs any stores, and 123 in high-rent locations is a huge expense. - Don't confuse current customers liking your product with prospects... At the recent ICR retail conference, the at-home rowing company Hydrow shared their data showing that Peloton's Net Promoter Score, or "NPS," was a solid 73. Peloton's NPS score is quite good, though not off the charts. But what does it tell you about purchases going forward? Not much, if anything... especially if so many people in your target market – maybe even most – have already bought the product. - The subscription business – the core of Peloton's "connected fitness" model – isn't necessarily the Golden Egg it's cracked up to be... Early and subsequent investors were very focused on Peloton's extremely low churn, which has and continues to be great. That said, when your sales stall and your costs don't, you have a problem. - Be very careful with line extensions... Peloton is far from the first company whose first product is its most successful. Its treadmill, which it calls the Tread, is a perfect example. I always thought it was a problematic concept. On a treadmill, people usually watch TV or listen to something, and seem to be managing just fine without instruction. Contrast boutique fitness, where spinning is one of the biggest categories, and where instruction is integral to the experience. The same is true for yoga and other categories where Peloton has excellent content that does not necessitate owning a piece of equipment. The leaked memo indicates that Peloton is suspending production of the Tread for six months because of excess supply. Again, how were they doing forecasting? - The fashion business is tricky... This too is far from a newsflash, and I learned this week that my thoughts on Peloton's prospects in apparel are somewhat controversial, but I still maintain that... 1. No fitness concept has had enormous success in apparel. 2. When you work out at home and shower shortly after, the signaling value of the logo is greatly diminished. 3. There are a lot of great fitness apparel brands out there already. - And Faye's personal favorite... As an investor, beware of distorted metrics. Peloton reports "classes taken," rather than "minutes used." As one of the many millions of Americans who bought a Peloton bike early in the pandemic, I have noticed that not only has the company shifted its offerings away from 45-minute and 60-minute classes to 15-, 20- and 30-minute classes, they actively encourage you to "stack," i.e., take two or more classes consecutively. Guess what? According to the way the company reports metrics, two 20-minute classes this year counted as two-times one 45-minute class last year. That's what happens when metrics of choice start going the wrong way, and that gets to my personal favorite... Beware of companies that have experienced a burst of growth and do a large acquisition in the middle of the mayhem... With these companies, especially if their stocks are flying, you just know investment bankers are knocking down their doors with possible deals. That sounds like a real possibility of what may have happened with Peloton... With its stock hovering at the highest level it would ever go, the company announced it was spending more than $400 million to acquire Precor, a manufacturer of elliptical trainers and other equipment, with a big presence in gyms. Precor itself was being shopped and sold by a Finnish company that had been acquired by a Chinese company, which said Precor no longer fit its growth profile. (Hint – it's not growing.) Here's the problem... In the best of circumstances, acquisitions can be a drain on management. For a company growing as quickly as Peloton, it can be an outright disaster. And while no outsider can know for sure, could it be that management simply had too much on its plate and was distracted by having just made a big acquisition? Would that help explain why management appears to have been caught so off guard with costs and other obvious lapses in judgement? Or... could Peloton be a classic case that management knew how bad things were but somehow thought the company could get from here to there before anybody noticed? Now that Peloton is the focus of an activist who wants to kick out the CEO, maybe we'll find out. Moving on, a quick update on Warby Parker (WRBY)... [On Friday]( I wrote about lack of disclosure at the eyewear brand, with a focus on how the company doesn't disclose the amount it doles out to charity. (It would seem that Warby Parker should, since charity is a big part of the marketing story to investors.) I also pointed out that unlike most retailers, Warby Parker doesn't disclose same-store sales. One thing I didn't point out, which is equally if not more interesting... Before it went public last year, in its draft initial public offering ("IPO") filing with the U.S. Securities and Exchange Commission ("SEC"), Warby Parker disclosed same-store sales for 2019. The SEC told the company to revise the filing to include sales per square feet for 2020. Instead, Warby Parker responded, saying that it would "delete" the 2019 number rather than also give the 2020 number. From its correspondence with regulators... The Company has revised this disclosure to include its average retail store targets for these metrics, which it believes is useful for an investor's understanding of its retail store level economics. The target as of pre-IPO filings was $2,900 per square foot. Or as Warby Parker worded it in its filings... Our retail stores are highly productive and we have historically targeted, and continue to target, Four-Wall Margins of 35% and Average Sales Per Square Foot of $2,900. Since Warby Parker's IPO in September, that disclosure has disappeared. There may be a simple reason: the company's same-store sales don't appear to be anywhere near $2,900. Based on what Warby Parker does disclose, they appear to be closer to $1,300, give or take. Good luck putting that in context with prior years... now that the company has gone out of its way to make sure you can't. And finally, it's your last reminder for the big event tonight... At 8 p.m. Eastern time, I'm joining my colleagues Whitney Tilson, Enrique Abeyta, and Berna Barshay for Empire Financial Research's Prediction Summit 2022... It'll be the first time the four of us will be on camera together. With inflation soaring, uncertainty over interest rates, and the COVID-19 pandemic, the stakes for investing are high in 2022... So we're bringing out the big guns to address the deepest concerns of the coming year. If you want to know the best way to manage your wealth in the upcoming months and beyond, you won't want to miss this event. It's completely free to attend, but you must reserve a spot in advance – register [right here](. As always, feel free to reach out via e-mail by [clicking here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Herb). And if you're on Twitter, feel free to follow me there at [@herbgreenberg](. My DMs are open. I look forward to hearing from you. Regards, Herb Greenberg January 25, 2022 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2022 Empire Financial Research. All rights reserved. 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