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Peloton To Slash Costs By Shuttering ‘Significant’ Number of Stores, All Its Warehouses

Exercise Equipment Maker Plans To Lay Off Nearly 800 Workers
Peloton is continuing to cut costs. (Getty Images)
Peloton is continuing to cut costs. (Getty Images)
CoStar News
August 12, 2022 | 8:14 P.M.

Beleaguered Peloton Interactive is slashing its brick-and-mortar footprint, shuttering a "significant" number of its stores and closing its warehouses as well as laying off nearly 800 employees.

The New York-based company, which makes high-end stationary exercise bikes and treadmills, informed workers of the latest round of cost-cutting measures on Friday. CEO Barry McCarthy in a memo to workers outlined the coming changes. Several media outlets first reported on the looming cutbacks, and CNBC obtained and published a copy of the memo.

Peloton has 86 stores, and it plans "a significant and aggressive reduction of its retail footprint" across North America, according to McCarthy.

"We will provide future updates on which operations will be impacted by this decision in the coming months," he told workers. "We do not anticipate closing retail locations in calendar 2022, but the timing is uncertain as we begin negotiations to exit our store leases."

Peloton, which didn't immediately respond to an email from CoStar News seeking comment, is still reeling from a slowdown in sales after the peak of the pandemic in 2020. The company was riding high early in the pandemic, back when gyms were closed and people had little access to exercise equipment. Peloton ramped up manufacturing and its supply-chain network as a result. But then demand evaporated when people were able to return to gyms, driving down the company's stock and financial results.

"Peloton’s latest round of cuts is a continuation of the company trying to rightsize itself after grossly overestimating post-pandemic demand for its products," Neil Saunders, managing director of GlobalData, said in a note. "While Peloton has already taken some corrective action, its losses are spiraling out of control and there is a desperate need to course correct to stabilize the balance sheet and restore investor confidence."

Peloton needs to "rebalance our e-commerce and retail mix to drive efficiencies," according to McCarthy.

Stores Too Expensive To Keep Visible

Saunders said Peloton's retail strategy wasn't well-thought-out or executed.

"The decision to shut many stores will make Peloton a less visible brand, but it is arguably correct given that those stores are costly to run and do not add all that much to the sales line relative to their expense," Saunders said. "This is especially so because Peloton elected to open in successful malls and shopping centers where rents are high. In theory the outlets should have captured a lot of footfall, which was Peloton’s original intent in opening them. However, the very niche nature of the offer and the extremely limited range meant that they suffered from a dearth of customers."

In hindsight, "the stores now seem more of an exercise in vanity to boost Peloton’s image and brand than being based on carefully calculated commercialism," according to Saunders.

"With the consumer economy becoming more sluggish, demand for non-essential and big-ticket goods falling, and people returning to gyms and workout classes, the already-thin returns from stores are likely be eroded still further," he said. "Peloton simply cannot afford to keep them."

In February, McCarthy replaced Peloton co-founder and CEO John Foley. At that time, the company said it would restructure to save $800 million in annual expenses, in part by laying off 2,800 people. At that time, Peloton also said it was trimming its network of owned-and-operated distribution centers and selling a $400 million factory it was constructing in Ohio.

CBRE is the listing broker for that 1.2 million-square-foot facility at 10 Eastwood Drive in Luckey, outside of Toledo.

On Friday, McCarthy went a step further. Peloton is now restructuring its last-mile delivery capabilities by expanding its relationship with third-party logistics firms.

"As a result, we are eliminating our North American field ops warehouses, resulting in a significant reduction in our delivery workforce teams," McCarthy said.

That change will reduce Peloton's per-product delivery costs by 50%, according to the CEO.

Peloton's net loss for its fiscal third quarter increased to $757.1 million compared with a loss of $8.6 million in the year-ago period. The company is slated to release its fourth-quarter results on Aug. 25.

Peloton also said it will be increasing the price of some of its bikes and treadmills, as well as laying out new mandates for office-based employees. They are being asked to return to the workplace three days a week starting Sept. 6, the day after Labor Day, if possible. As of Nov. 14, return to the office will be mandatory, according to McCarthy.

"For those of you who don't want to return to the office, we respect your choice," he said. "We hope you choose to stay, but we understand not everyone will."

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