A previous version of this article incorrectly said product recalls contributed to $51.8 billion in legal costs for Peloton last year. The cost was $51.8 million. The article has been corrected.
Peloton had been one of the pandemic’s business success stories, seeing demand for its stationary bikes and treadmills soar during the work-from-home tech boom in 2020 when many in-person gyms were closed. Its stock price rocketed more than 600 percent. Its online fitness classes were lauded by fans and lampooned on “Saturday Night Live.”
But the company appeared to struggle as many people resumed their pre-covid routines last year, and maintaining sales growth became difficult.
The restructuring plan announced Tuesday is estimated to shave some $800 million in annual costs, in large part through layoffs that the company said would affect “nearly all of our operations and across almost all levels.” The company is also scrapping plans for a new production facility in Ohio.
Foley, Peloton’s co-founder, described this as “a humbling time” for the company in a letter to shareholders announcing the changes.
Foley will move out of the CEO job to become executive chairman, according to the letter. He will be replaced by Barry McCarthy, a tech executive who held senior leadership roles at Spotify and Netflix. William Lynch, who served as president of the company, will also step down.
Foley’s departure illustrates the challenges faced by some company founders when their creations confront new challenges after early success, said Bernie McTernan, a senior analyst at Needham & Company.
Uber co-founder Travis Kalanick was forced out of his CEO role in 2017. Zillow’s Spencer Rascoff stepped down from leading the home-buying platform in 2019 as it struggled to expand into new areas.
McTernan credited Peloton’s executives for taking steps to address the problems.
“They did a good job explaining they messed up and this is them being held accountable,” he said.
The removal of Foley comes after activist investor Blackwells Capital acquired a stake in the company and criticized his “repeated failures to effectively lead Peloton” in a public letter to the company’s board of directors. Blackwells now wants Peloton to sell itself to the highest bidder, arguing that the company is chronically mismanaged and cannot generate enough value as a stand-alone company. The Wall Street Journal reported Friday that it had drawn interest from multiple suitors including Amazon.
Even as its financial projections have been repeatedly edited downward, Peloton’s executives argue that the company still has promising long-term growth prospects. They are banking on the idea that the pandemic has permanently changed how consumers approach fitness, and they say they believe Peloton’s new products will keep it at the forefront of a fast-growing connected fitness industry even as competitors enter the market.
In a call with investors Tuesday, executives admitted the company’s recent performance has “fallen short of expectations,” as Chief Financial Officer Jill Woodworth put it. But she emphasized that demand for connected fitness products is still significantly higher than where it was before the pandemic.
“We know that consumers coming out of covid are more predisposed to want to work out at home than they ever were before covid,” Woodworth said.
The company has staked its future on a range of workout products that it hopes can capture a market beyond its traditional stationary bicycles. Subscribers with a Bike+ can turn the screen outward and take a boxing class, for example. In April, it will be rolling out Peloton Guide, a suite of strength-training projects that includes a smart camera to track members’ bodily movements for “metric-driven accountability.”
Executives say they believe the company’s connected treadmill product, called Tread, could eventually offer an even larger market than the signature Bike, noting that treadmills have traditionally sold more widely than stationary bikes.
Tread has had problems of its own, however. In April, Foley led Peloton’s aggressive fight against federal safety regulators over whether to recall its $4,300 Tread+ treadmill.
The Consumer Product Safety Commission wanted Peloton to pull the product off the market after a 6-year-old boy was sucked under the treadmill and killed. But Foley refused until a public backlash led the company to reverse course and issue a public apology.
The CPSC eventually discovered the treadmill was connected to at least 39 incidents involving children, objects and one pet being trapped under the machine. Product recalls cost Peloton roughly $27.5 million last year and contributed to $51.8 million in legal costs.
Problems could continue to mount as Peloton slashes costs, increasing the likelihood that the company sells itself to a rival, said Wedbush managing director Dan Ives.
“If Peloton tries to go alone ahead, not sell, there are cautionary tales of troubled consumer products in cost-cutting mode that have been down this path, with Fitbit and GoPro coming to mind in darker stories,” Ives said.
It will be up to McCarthy, an executive with a track record in building subscription-based tech businesses, to chart a path forward.
The company’s stock price opened at $30.25 per share, up roughly 2 percent from the previous day’s close, before surging 20 percent throughout the morning, closing just above $37 per share. Even with the gains, it is down more than 60 percent over the last six months.