Peloton internal docs show it slashed 2022 sales goals for apparel unit after segment revenue more than doubled last year

Peloton has slashed 2022 sales projections for its apparel business, according to internal documents obtained by CNBC. Momentum in the unit, which is run by Chief Executive John Foley’s wife, seems to be fading heading into the next year, after apparel revenue more than doubled to over $100 million from 2020 to 2021.

This internal look at Peloton’s apparel arm, though the division is a small fraction of the overall business, gives yet another glimpse into how the connected fitness company rode a wave of heightened demand in the midst of the Covid-19 pandemic. But that demand has started to normalize, and Peloton now has to reset.

In the fiscal year ended June 30, 2020, Peloton’s apparel business brought in roughly $41 million in revenue by selling 800,000 units, an internal presentation dated November 2021 shows. Peloton reported total revenue for the year of $1.8 billion.

In fiscal 2021, Peloton said in the presentation, it saw tremendous growth in apparel due to Covid-related comfort trends — so much so that it didn’t have enough supply to keep pace with demand. According to the presentation, it drew in $107 million in revenue, selling just under 2 million units of apparel. Peloton’s total revenue was $4 billion in the fiscal year ended June 30, 2021.

But for fiscal 2022, with five months left to go, the company may have been too optimistic, Peloton’s presentation suggests. Initially, Peloton had forecast that its apparel division would have more than $200 million in annual revenue, but now it expects to see closer to $150 million in apparel sales, saying multiple “macro factors,” including supply chain constraints, created challenges for the business, according to the presentation.

It’s unclear whether these revenue figures were audited or whether the 2022 projections have been adjusted since the date of the presentation.

A Peloton spokeswoman declined to comment, saying the company is in a quiet period ahead of the release of its earnings on Feb. 8.

The numbers offer some context for a segment that Peloton does not break out from its overall sales. Instead, apparel revenue is included in its connected fitness division, along with its Bikes and its treadmills, which it calls Treads. Apparel is also a segment where Peloton has ramped up investments in recent months, under Jill Foley’s supervision. Her role within the company has recently drawn criticism from an activist investor.

In an effort to build its own brand, Peloton cut ties with a number of national apparel brands it had worked with on its clothing line. Then, it pivoted to designing and manufacturing its own leggings, sports bras and sweatshirts in-house. It also started marketing the apparel line independently from its equipment line.  

John Foley told attendees at a Goldman Sachs conference Sept. 22 that the move would boost profit margins. The CEO said Peloton’s goal was to sell its own apparel, “which is now much higher margin than it was yesterday,” to households that are existing Peloton customers.

Last fall, Peloton ramped up marketing for its private-label clothing, with ads splattered primarily across New York City storefronts, subway stations and in some shopping malls. Now, however, dozens of those items are being sold at a markdown on Peloton’s website, as the company tries to sell through older batches of inventory.

Peloton said in the November presentation that despite its push to sell more private-label apparel — versus merchandise from brands such as Lululemon and Nike — sales have been “slower than anticipated.” As a result, the company said it was adjusting its forecast for the apparel division “judiciously.”

“As people leave their homes, some share of consumer wallet is moving toward ‘going-out’ apparel as opposed to ‘stay-at-home’ athleisure,” one slide of the presentation reads. “As Peloton member rate of growth softens, organic apparel may move in lockstep.”

During the company’s most recent earnings conference call, held Nov. 4, the CEO spoke about how difficult it has been for Peloton to project demand and keep costs in check, as consumers’ habits evolve.

“Our visibility into our future performance has become more limited,” said John Foley. “From forecasting consumer demand to accurately predicting logistics costs, our teams have never seen a more complex operating environment in which to guide our expected results this year.”

The so-called athleisure category is still growing, though, as consumers increasingly incorporate items such as leggings, joggers and other comfortable pieces into their day-to-day wardrobes. An analysis from Coresight Research and Euromonitor found U.S. athleisure sales, which includes apparel and footwear that can be used for athletic purposes or for leisure, grew about 20% year over year to $132.7 billion in 2021.

Coresight still expects the category to grow in the coming years, just not at a double-digit rate. It sees athleisure sales in the U.S. rising about 7% in 2022 and up 6.5% in 2023. The biggest retailers in the category are Nike, Adidas, Lululemon and Under Armour, the research firm said.

“We anticipate a sustained shift toward casualization over the next three years, with consumers opting to wear casual clothes while working more at home and workplaces increasingly relaxing dress codes,” said Coresight founder and CEO Deborah Weinswig.

Jill Foley, vice president of Peloton Apparel, told CNBC during a Zoom interview Oct. 13 that Peloton pivoted to making more clothing items in-house because it wanted to have full control over sizing and styles. She said her team had grown to 26 people. She also said at the time that her biggest obstacle moving forward was making sure consumers knew that Peloton sells clothing in addition to its Bikes and Treads.

“My biggest barrier, as I’ve said before, is awareness … people not being aware that Peloton sells great apparel and swag,” Jill Foley said, about a month prior to the date of the internal presentation seen by CNBC.

Jill Foley added that her division’s main goal is selling more apparel to people who already own Peloton products and pay for a monthly subscription to its on-demand content. However, she said apparel can also be a way for non-Peloton owners to buy into the brand.

“More and more, we are seeing non-hardware owners purchase apparel … just because the brand has a fun energy to it that people like,” she said. “And especially as we’ve gotten into smaller logo treatment.”

On Jan. 24, John Foley was criticized for making his wife an executive at the company. Activist investor Blackwells Capital, which owns less than a 5% stake in Peloton, used this as one argument as to why John Foley should be replaced, in a letter sent to Peloton’s board.

Peloton’s pivot to manufacture more of its own apparel has also resulted in a feud with an athletic apparel behemoth. In late November, Lululemon filed a patent lawsuit against Peloton, in which it argued Peloton has infringed on six of its patented designs. That came just days after Peloton sought a court’s declaration that it has not actually infringed on any of Lululemon’s patents. 

CNBC also obtained a recording of a call that took place in December and included McKinsey employees as well as Tim Shannehan, the global chief sales officer and managing director of Peloton’s North America business. The talks were part of “Project Fuel,” an internal code name for Peloton’s review of its cost structure.

“Apparel is a really funny area because it’s just … the dynamic is a little awkward with Jill and John,” said an executive identified as Shannehan, according to a person familiar with the details of the call. “[Apparel] penetration into our member base is so low. How do we drive more revenue from our existing member base?”

John Foley, Jill Foley and Shannehan did not respond to CNBC’s requests for comment.

BMO Capital Markets analyst Simeon Siegel said Peloton may have gone too far by thinking it could be an apparel company as well as a connected fitness business.

“Peloton is not an apparel brand,” he said. “Peloton was a successful fitness community brand, and every fitness brand — most gyms — have apparel. Most communities have swag.”

“The question is, is the swag a way to showcase what makes you special? Is the swag a way to showcase the Peloton community? Or is it the revenue generator?” Siegel said. “The conversations may have gotten a little mixed up when people [at Peloton] started to believe the swag would become its own conglomerate or its own mega business.”

To get back on track, Peloton said in the presentation obtained by CNBC, it needs to be “more aggressive” in driving apparel demand. It said it could potentially need to ramp up liquidation efforts. Some initiatives the company said it was exploring include adding a link to the apparel page on Peloton’s website when customers receive email confirmations of their equipment purchases.

In early November, Peloton cut its expectations for 2022 sales and subscribers. It sees connected fitness subscribers amounting to between 3.35 million and 3.45 million, down from a prior outlook of 3.63 million. It projects revenue of between $4.4 billion and $4.8 billion, down from $5.4 billion. 

In recent weeks, though, analysts have said those estimates will likely be lowered again. Some have cited SimilarWeb data that shows visits to the company’s website dropped in the quarter ended in December, compared with the prior year.

On Jan. 20, Peloton released preliminary second-quarter results, after CNBC revealed in a series of reports that same week that the company was considering layoffs, store closures and reduced production. Peloton also sent a separate memo to employees that said it would be “right-sizing” production and “considering all options” for cost cuts.

Peloton put its second-quarter sales at $1.14 billion, which is within the range of $1.1 billion to $1.2 billion that it previously estimated. Subscriber growth, however, is expected to come up short. Peloton said it will end the quarter with 2.77 million connected fitness subscribers, versus a forecast of 2.8 million to 2.85 million.

Peloton did not revise its annual forecast at that time, but it could when it reports earnings next week.

Analysts are anticipating Peloton will post an annual loss of $2.90 a share on sales of $4.27 billion, according to Refinitiv. Since Nov. 5, a day after Peloton reported first-quarter results, 15 analysts have cut their profit estimates, and 28 analysts have slashed their sales expectations, Refinitiv said.

Peloton’s stock has lost roughly $1.9 billion in market value since news first broke on Jan. 16 about the company’s more pressing need to cut costs. In trading Friday, it hit a 52-week low of $22.81, but ended the day up nearly 7% at $25.64. The stock continues to be volatile, with more and more analysts raising fresh questions around overall demand for Peloton’s products, which the company has yet to address specifically.

On Monday, Peloton shares rose nearly 5% in trading.