Peloton Still Struggling, but Lululemon Apparel Is Bright Spot

The once high-flying Peloton is still struggling to right the ship but sees apparel — particularly its deal with Lululemon — as a potential bright spot.

Despite reporting earnings in the first quarter that fell below Wall Street expectations, Peloton executives continue to focus on the positives, with chief executive officer Barry McCarthy writing in a shareholder letter Thursday morning that the company is expecting a return to revenue growth in the second half with positive adjusted earnings before interest, taxes, depreciation and amortization and “substantial positive free cash flow.”

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He pointed to collaborations that have been revealed so far this fiscal year as revenue drivers. They include collaborations with the Liverpool Football Club, the University of Michigan, Lululemon, New York Road Runners, the NBA and WNBA. Although the deals are new, in the earnings call Thursday, chief financial officer Elizabeth Coddington said the company is expecting $10 million in subscription revenue in the second quarter as a result of the Lululemon deal alone.

The five-year deal with Lululemon, which was unveiled at the end of September, includes a line of co-branded fitness apparel, sales of which have “far exceeded our forecasts,” McCarthy said Thursday. In addition, the deal allows Lululemon Studio members to access Peloton’s digital fitness content, affording Peloton the “opportunity to introduce the Peloton app to millions of Lululemon fitness enthusiasts.”

Jen Cotter, Peloton’s chief content officer, said she started working on the company’s apparel offering last summer and spent a lot of her time talking to members to find out what they wanted from the company. The apparel had formerly been spearheaded by Jill Foley, wife of Peloton founder John Foley. He left the company in early 2022 and his wife, who had served as vice president of apparel, exited as well.

In the past, the company had created a private label collection and also partnered with several apparel companies on co-branded collections. These included Adidas, Athleta, Spiritual Gangster and Foulaps, among others.

But as the founders exited and the new management team took over, the apparel strategy was revamped and led to the deal with Lululemon under which Peloton becomes the exclusive digital fitness content provider for the apparel company and Lululemon becomes the primary athletic apparel partner for Peloton.

Cotter said Peloton had previously worked with Lululemon but the relationship ended when the apparel company got into the fitness space by purchasing Mirror, a competing digital fitness brand, in 2020. Lululemon has said it will discontinue selling Mirror before the end of the year allowing for the conversation with Peloton to restart.

“When it comes to apparel, Lulu was an obvious for us because they’re best in class,” Cotter said. “And our members missed our partnership with Lulu. As soon as they said they wanted to get out of the business, we started talking again about apparel, and then it grew into a larger strategic partnership. Lulu has the same mission: they want to help people live better lives.”

Pelton cycling instructor Erik Jager in men's looks from the Lululemon line.
Pelton cycling instructor Erik Jager in men’s looks from the Lululemon line.

Although the bulk of the apparel will be Lululemon, Cotter said the relationship is not exclusive and Peloton will continue to work with other, smaller labels such as Spiritual Gangster and Varley, a British brand. But these will be “small capsules,” she stressed.

Several of the highest-profile instructors have apparel deals outside of Peloton such as Olivia Amato and Alex Toussaint, who work with Puma, and Kendall Toole, who has a capsule with Spiritual Gangster. Cotter said with all its instructors, Peloton tries to support them in any way it can, and in certain instances, will offer some of that merchandise in its own assortment, but as a result of the new deal with Lululemon, it is “less likely now.”

Overall, Cotter said when it comes to apparel, Peloton is competing for share of wallet with all the big athletic brands, but its devoted members are still willing to buy fitnesswear with the Peloton logo on it. Among the opportunities going forward, she said, are accessories and menswear. “There are places we can grow.”

As an example, she pointed to the partnership with the accessories brand Little Words Project, that has created beaded bracelets featuring the catchphrases of several of its marquee instructors such as Jenn Sherman. And there are water bottles featuring the signatures of the instructors, along with Peloton backpacks, belt bags and other pieces, all designed to further connect with the members.

The apparel strategy going forward will be under the watch of Cedric Fletcher, who joined Peloton in September as senior vice president of apparel and accessories. He was formerly chief product officer for True Classic and also worked for Nike.

Cotter said his appointment “speaks to our investment in apparel.”

And while apparel will never represent the bulk of Peloton’s business, it can still be sizable, the company believes.

“We make a lot more money when people buy treadmills than when they buy sports bras,” Cotter said. “So within Peloton, I would say it’s a smaller business. But we are excited about growing Peloton apparel and seeing where this can take us and how big it can get.”

But meanwhile it has work to do among its core subscriber base, as Peloton reported a drop in its expected subscription rate in the first quarter, and is projecting a less-than-robust holiday season.

In the period ended Sept. 30, the net loss was $159.3 million, or 44 cents a share, compared to the $408.5 million, or $1.20 per share loss, in the prior year. Sales fell to $595.5 million from $616.5 million compared to the first quarter of fiscal 2023.

For the holiday period, the company is expecting sales to fall 8 percent to between $715 million and $750 million, short of analyst projections of $763.2 million, according to CNBC.

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