Peloton Keeps Climbing a Steep Hill​

By Jake Rickman​

What do you need to know this week?

Peloton — the company known for its sleek indoor exercise bikes — has been peddling up a steep, steep hill in the first quarter of 2022.

Compared to the first three months of 2021 (in what is called a year-on-year, or YoY comparison), Peloton’s total revenue is down 24% from $1.26bn to $964.3m. You can verify this yourself on page 3 of its most recent earnings.

Peloton’s shares have fallen even further from when we last covered the company, now trading at an all-time low and down more than 85% from its 2021 high.

Why is this important for your interviews?

As BBC Business observes, Peloton’s cashflow generation is deteriorating. That is, it is burning through cash at a rate far quicker than it can generate. If this pattern continues, Peloton may later find it impossible to pay off its debts, though it is not there yet. Nonetheless, this is an instructive opportunity to explore the commercial implications of cashflow.

“Cashflow” refers to the ability of a company to generate enough revenue (sales) to pay expenses as they become due, ideally with some left over afterwards. While it sounds obvious, having cash on hand is a necessity for any business. Even the most valuable company will fold if it cannot find cash to make payments to suppliers, lenders, and employees.

As Peloton’s management discloses on page 5 under the heading “Liquidity”, one of the primary drivers of its underperformance is a “higher inventory payment”. This is accountant-speak for “unsold inventory”, which implies that Peloton produced more bikes than it was able to sell.

Familiarising yourself with the basics of financial accounting is one of the best ways to push your commercial awareness to the next level. This is because evaluating a company’s financial performance (which is all accounting is at the end of the day) demonstrates to interviewers that you can simultaneously deal with the granular and the big-picture.

As an exercise in commercial analysis, you may want to ask yourself why Peloton was not unable to offload its inventory and meet its sales target. If you are interested, the company tries to answer this throughout the investor letter we keep linking to. Have a look around! As you familiarise yourself with company accounts, they will make increasing sense.

How is this topic relevant to law firms?

Peloton’s declining performance suggests that it will have to undergo a turnaround of some sort, which in the business world can mean anything from a serious strategy change to a corporate restructuring. In all cases, it will need a legal team.

If Peloton seeks to raise additional debt financing through loans or bonds, it will seek the advice of a debt capital markets team. If it decides to sell off some of its assets or business divisions, it will seek an M&A team with sell-side experience. Finally, if it needs to restructure its debts, it will instruct a corporate restructuring team.