Peloton's debt is a major concern. How are they managing it?

Peloton Interactive (PTON) has reportedly hired JPMorgan to help it raise $850 million in a new loan sale to settle its debts. The fitness equipment brand was once considered to be a "pandemic darling" when consumers were stuck at home at the beginning of the COVID-19 pandemic in 2020.

BMO Capital Markets Managing Director and Senior Analyst Simeon Siegel comments on Peloton's ability to manage its current debt and where it should focus its attention to retain consistent consumers.

"Some of these companies take a breath and they say, 'okay, we need to restructure,' but in the same sentence they say 'but we're still going to grow,'" Siegel tells Catalysts. "That's dangerous and it rarely works. There's a time when companies are supposed to grow, and there's a time when they're supposed to focus on value and improving their brand and restructuring. I think Peloton is very much in that latter phase, and that's not a problem given where the stock is today. I think you could make that conversation, that argument, but they need to want to do it."

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This post was written by Luke Carberry Mogan.

Video transcript

Simeon, you also cover Peloton and that company, as you know, reportedly hired JP Morgan to raise $850 million through new loan sale.

That's aimed at helping the company tackle their debt at this point.

Do you think Peloton can tackle their debt on their own?

So it's, it's an interesting segue because it's an interesting dynamic where Peloton still does.

And historically, I've, I've had a fairly um concerned view when, when talking to you about this company, I think right now, we do have to acknowledge that there's 3 million subscribers, which means almost 6 million people, but there's 3 million subscribers paying $44 a month with a very healthy profit flow through.

And so Peloton to me is running two separate businesses, they're running their existing business, which is actually an incredibly profitable cash flowing business that could service debt.

And then there's the chase for the new customers, which seems to take all that money and plow it and, and actually essentially flush it down the toilet.

And so I think what my suggestion would be and has been as you bear hug your brand loyalist, you focus on the fact that there is a very healthy business with incredible cash flow that could deal with the 1.7 billion of debt.

And then figure out whether to pay it down or to refinance it to your question.

But to do that, you have to acknowledge you're not an uber growth business.

And again, that's why it's an interesting segue from Under Armour.

I think some of these companies take a breath and they say, OK, we need to restructure but in the same sentence, they say, but we're still going to grow, that's dangerous and it rarely works.

There's a time when companies are supposed to grow and there's a time when they're supposed to focus on value and improving their brand and restructuring.

I think Peloton is very much in that latter phase and that's not a problem given where the stock is today.

I think you could make that conversation, that argument, but they need to want to do it.

So I mean, how long do you think it's going to take for this turnaround story for a Peloton to take place?

I, so it's a great question because I'm not leading the company.

So, so I think that it depends.

I think that it's rare that you have a gift that the answer lies in management's hands.

I think certain things under armor we're talking about, there is some externality.

There's the macro when the argument is to shrink your business, it's actually under your control, but you have to want to do it.

And so I believe that if Peloton wanted to just focus on that core, existing user base, I don't even have to grow into a cash flowing business.

I have it again.

They, they convince people in their homes to get on a piece of equipment and pay $44 a month.

That's a beautiful margin.

All they need to do is focus on that and stop trying to believe that there's massive growth.

And I think that turnaround happens really quickly.

The problem is you and I have been talking about this for years where it's not what they wanted to do.

And we've watched the stock and the cash bleed because of it.

I think what they need to protect, they need to make sure they don't bleed their existing users.

If they churn their existing users, if they don't bear hug those loyalists, then everything I just said is out the window.

But if they decide we're going to use our dollars to focus on making sure people don't leave the system because those people are incredibly profitable instead of using our dollars to try and fight others and subsidize new members.

I think the turn happens quickly if they don't, I don't think it happens at all.

And I think that's kind of what we're, what we're grappling with and figuring out what is the new management going to do when they are brought in all Right, Sime, we gotta leave it there, but thank you so much for joining us, really appreciate it.

That was Simeon Siegel.

He is BMO Capital Markets managing director and senior analyst.