Peloton shares rebound after CEO says he needs ‘right size’ production levels

Peloton shares rose nearly 12% on Friday after the company said it was resuming production levels and considering layoffs to make its business more “flexible.”

CEO John Foley sent a note to the workers it was also released publicly late Thursday night after CNBC reported earlier in the day that Peloton was temporarily halting production of its bikes and treadmills. Separately, CNBC reported Tuesday that Peloton is working with McKinsey & Co. looking for opportunities to cut costs.

“We are in the midst of a once-in-a-hundred-year event with the COVID-19 pandemic, and what we expected to happen within three years happened within a few months during 2020 and into 2021,” Foley said in memorandum.

“We are feeling good about scaling our production properly, and as we move towards more seasonal demand curves, we are resetting our production levels for sustainable growth,” he added.

Foley said rumors that the company is stopping “all production” are false.

CNBC has received internal documents outlining Peloton’s plan to suspend bike production for two months, from February to March. The documents suggest he already stopped production of the more expensive Bike+ in December and will do so until June. According to the plan in the documents, Peloton will not produce its Tread treadmill for six weeks starting next month. According to the documents, the company will not produce Tread+ machines in fiscal year 2022. Peloton had previously stopped production of the Tread+ following a product recall last year.

Peloton declined to comment on these details. In his memo, Foley said the media lacked context for Peloton’s plans.

In terms of job cuts, Foley said Peloton is currently evaluating its organizational structure and the size of its team. “We are still considering all options to make our business more flexible,” he wrote.

On Thursday evening, Peloton preliminarily announced its financial results for the three-month period ending Dec. 31 and said revenue will be in the previously forecast range. However, over the last period, the company has added fewer subscribers than expected.

Shares shed nearly 24% in Thursday trading, hitting an intraday low of $23.25. Even with Friday’s gains, the stock closed at $27.06, meaning Peloton shares remain below its IPO price of $29.

Loop Capital Markets analyst Daniel Adam said in a note to clients Thursday night that even if Peloton doesn’t have equipment to sell going forward, “the subscription alone is worth significantly more than the company’s current market value.”

At the end of the first fiscal quarter, Peloton had 2.49 million connected fitness subscribers. These are people who own a Peloton product like Bike+ or Tread and pay a monthly fee to access Peloton’s digital workout content.

Adam has a buy rating on the stock and a price target of $90.

Separately, BMO Capital Markets analyst Simeon Siegel cut Peloton’s share price target to $24 from $45. Notably, Siegel maintained the lowest target among analysts covering the company.

“Peloton is on the edge of an important abyss; a significant strategic reset will likely be needed to stop significant money burning and volatile demand,” Siegel said in a research note Thursday night. “However, improving profitability requires sacrificing revenue. Connected fitness is in its infancy, but we think Peloton’s ratings still feel inflated.”

“We are concerned that the bad news is not yet fully priced in and the road to recovery remains long,” he added.

By Friday morning, at least eight analysts had lowered their Peloton price targets.

Read the full memo Peloton CEO John Foley sent out to employees here..