Peloton CEO Barry McCarthy to step down, company to lay off 15% of staff as it looks to refinance debt

• Peloton announced Thursday that CEO Barry McCarthy will be stepping down just over two years after he took over from founder John Foley.
• Along with the CEO change, the company is laying off 15% of its staff, or about 400 employees, to bring spending in line with revenue.
• Peloton also announced fiscal third-quarter results that fell short of Wall Street’s expectations on the top and bottom line.

Barry McCarthy, president and CEO of Peloton Interactive, walks to a morning session at the Allen & Company Sun Valley Conference on July 06, 2022 in Sun Valley, Idaho.

Peloton announced Thursday that CEO Barry McCarthy will be stepping down and the company will lay off 15% of its staff because it “simply had no other way to bring its spending in line with its revenue.”

McCarthy, a former Spotify and Netflix executive, will become a strategic advisor to Peloton through the end of the year while Karen Boone, the company’s chairperson, and director Chris Bruzzo will serve as interim co-CEOs. Jay Hoag, another Peloton director, has been named the new chairperson of the board. Peloton is seeking a permanent CEO.

The company also announced a broad restructuring plan that will see its global headcount cut by 15%, or about 400 employees. It plans to continue to close retail showrooms and make changes to its international sales plan.

The moves are designed to realign Peloton’s cost structure with the current size of its business, it said in a news release. It’s expected to reduce annual run-rate expenses by more than $200 million by the end of fiscal 2025.

“This restructuring will position Peloton for sustained, positive free cash flow, while enabling the company to continue to invest in software, hardware and content innovation, improvements to its member support experience, and optimizations to marketing efforts to scale the business,” the company said.

Shares surged more than 12% in premarket trading.

McCarthy took the helm of Peloton in February 2022 from founder John Foley and has spent the last two years restructuring the business and working to get it back to growth.

As soon as he took over, he began implementing mass layoffs to right size Peloton’s cost structure, closing the company’s splashy showrooms and enacting new strategies designed to grow membership. Contrary to Peloton’s founder, McCarthy redirected Peloton’s attention to its app as a means to capture members who may not be able to afford the company’s pricey bikes or treadmills but could be interested in taking its digital classes.

In a letter to staff, McCarthy said the company needed to implement layoffs because it wouldn’t be able to generate sustainable free cash flow with its current cost structure. Peloton hasn’t turned a profit since December 2020 and it can only burn cash for so long when it has more than $1 billion in debt on its balance sheet.

“Achieving positive [free cash flow] makes Peloton a more attractive borrower, which is important as the company turns its attention to the necessary task of successfully refinancing its debt,” McCarthy said in the memo.

In a letter to shareholders, the company said it is “mindful” of the timing of its debt maturities, which include convertible notes and a term loan. It said it is working closely with its lenders at JPMorgan and Goldman Sachs on a “refinancing strategy.”

“Overall, our refinancing goals are to deleverage and extend maturities at a reasonable blended cost of capital,” the company said. “We are encouraged by the support and inbound interest from our existing lenders and investors and we look forward to sharing more about this topic.”

In a news release, Boone thanked McCarthy for his contributions.

“Barry joined Peloton during an incredibly challenging time for the business. During his tenure, he laid the foundation for scalable growth by steadily rearchitecting the cost structure of the business to create stability and to reach the important milestone of achieving positive free cash flow,” Boone said.

“With a strong leadership team in place and the Company now on solid footing, the Board has decided that now is an appropriate time to search for the next CEO of Peloton.”

In a joint statement, Boone and Bruzzo said they are looking forward to “working in lockstep” with the company’s leadership to ensure it “doesn’t miss a beat while the CEO search is underway.”

Also on Thursday, Peloton announced its fiscal third-quarter results and fell short of Wall Street’s expectations on the top and bottom line. Here’s how the connected fitness company did compared with what Wall Street was anticipating, based on a survey of analysts by LSEG:

• Loss per share: 45 cents vs. a loss of 37 cents expected
• Revenue: $718 million vs. $723 million expected

The company’s reported net loss for the three-month period that ended March 31 was $167.3 million, or 45 cents per share, compared with a loss of $275.9 million, or 79 cents per share, a year earlier.

Sales dropped to $718 million, down about 4% from $748.9 million a year earlier.

Peloton has tried a little bit of everything to get the company back to sales growth. It removed the free membership option from its fitness app, expanded its corporate wellness offerings and partnered with mega-brands like Lululemon to grow membership, but none of the initiatives have been enough to grow sales.

For the ninth quarter in a row, Peloton’s revenue fell during its fiscal third quarter, when compared to the year-ago period. It hasn’t seen sales grow compared to the year ago quarter since December 2021, when the company’s stationary bikes were still in high demand and many hadn’t yet returned to gyms amid the Covid-19 pandemic.

The business is continuing to bleed money and hasn’t turned a net profit since December 2020.

For its current fiscal year, Peloton lowered its outlook for paid connected fitness subscriptions, app subscriptions and revenue. It reduced its connected fitness subscription outlook by 30,000 members, or 1%, to 2.97 million as it looks toward its current quarter, which is typically its toughest because people tend to work out indoors less in the spring and summer months.

“Our Paid Connected Fitness Subscription guidance reflects an updated outlook for hardware sales based on current demand trends and expectations for seasonally lower demand,” the company said.

The company now expects app subscriptions to drop by 150,000, or 19%, to 605,000.

“We are maintaining our disciplined approach to App media spend as we evaluate our App tiers, pricing, and refine the Paid App subscription acquisition funnel,” the company said.

As a result of expected downturns in its subscription sales, Peloton now expects full year revenue to come in at $2.69 billion, a reduction of about $25 million, or 1%. That’s below expectations of $2.71 billion, according to LSEG.

However, the company raised its full year outlook for gross margin and adjusted EBITDA. It now expects total gross margin to grow by 50 basis points, to 44.5%, and adjusted EBITDA to grow by $37 million, to negative $13 million.

“This increase is largely driven by outperformance from Q3, combined with lower media spend and cost reductions from today’s announced restructuring plan,” the company said.

Last February, McCarthy set a goal of returning the company to revenue growth within a year. When it failed to reach that milestone, McCarthy pushed it back and said he now expects the company to be back to growth in June, at the end of the current fiscal year.

McCarthy had also expected Peloton to reach positive free cash flow by June — a goal the company said it reached early during its third quarter. It’s the first time Peloton has hit that mark in 13 quarters. In a letter to shareholders, Peloton said it generated $8.6 million in free cash flow but it’s unclear how sustainable that number is.

Last month, CNBC reported that Peloton hadn’t been paying its vendors on time, which could temporarily pad its balance sheet. Data from business intelligence firm Creditsafe showed that Peloton’s late payments to vendors spiked in December and again in February after improving in January.

The company didn’t provide specific guidance on what investors can expect with free cash flow in the quarters ahead but said it does expect to “deliver modest positive free cash flow” in its current quarter.

Part of the reason why Peloton had failed to reach positive free cash flow is because it’s simply not selling enough of its hardware, which is costly to make and has become less popular since the Covid-19 pandemic ended and people returned to gyms.

Shortly after McCarthy replaced Foley, he implemented numerous rounds of layoffs that impacted thousands of employees. The last round of cuts, affecting 500 employees, were announced in October 2022. He later said the company’s restructuring was “complete” and it was instead pivoting to “growth.”

“We are done now,” McCarthy had said in November 2022 of the layoffs. “There are no more heads to be taken out of the business.”