Peloton competitor Tonal cuts 35% of workforce as it prepares for possible recession, IPO

Key Points
  • Tonal, the connected fitness equipment maker backed by Serena Williams and Amazon's Alexa fund, is trimming 35% of its workforce.
  • It is joining a list of companies, including competitor Peloton, which are reducing head count in order to slash expenses and readjust to new levels of consumer demand.
  • Tonal CEO Aly Orady said the company is trying to become profitable so that it can successfully go public.
Tonal in-home fitness.
Source: Tonal

Tonal, the connected fitness equipment maker that counts tennis superstar Serena Williams and Amazon's Alexa fund as backers, is cutting 35% of its workforce, affecting all levels of its business, CNBC has learned.

The company employs about 750 people today, compared with a little more than 110 before the Covid-19 pandemic, Chief Executive Officer Aly Orady said in an interview.

Orady also emphasized the need to be profitable, particularly as the company eyes an initial public offering. Tonal hasn't been profitable in the past, he said. But the job cuts will put the company on track to make money in a matter of months, he added.

Tonal, which sells wall-mounted workout devices for $3,495, experienced rampant growth in 2020 and 2021 as consumers were stuck at home and seeking ways to break a sweat. Tonal's brand awareness also exploded as it tapped star athletes such as LeBron James and Williams to appear in its commercials. It has raked in $450 million in funding, to date, and at one point in 2021 was valued at as much as $1.6 billion.

But for now, Tonal is tapping the brakes. It joins a list of businesses – including competitor Peloton – that are reducing head count in order to trim expenses and readjust to new levels of consumer demand for their products. Businesses are simultaneously grappling with red-hot inflation on everything from raw materials to fuel to workers' salaries, and many are preparing for an economic slowdown, even if a recession isn't certain.

"As we head into a recession — and many of us believe we're headed into a recession — it's really important that we become a business that's here for the long term," Orady said in an interview. "What we're doing is effectively going from a hypergrowth business ... to more of a sustained-growth business."

Tonal didn't disclose exactly how much money it plans to save through the layoffs. It also didn't say if its valuation has been adjusted in the private markets.

"The public markets are no longer rewarding hypergrowth when it comes at the expense of profitability. And as such, private market investors are no longer investing as many dollars or as aggressively to support businesses through hypergrowth," Orady said. "Those dollars just aren't out there the way they were a year ago."

Investors are increasingly shying away from money-losing entities, he said. It shows in the stocks of some of the publicly traded companies that fit this bill.

Shares of Peloton, for example, hit a fresh all-time low Wednesday of $8.66, having dropped more than 70% year to date. Peloton's losses in the three-month period ended March 31 widened to $757.1 from a loss of $8.6 million a year earlier.

Allbirds, a shoemaker that has booked losses since going public last year, has watched its stock price tumble more than 65% this year. Shares of eyeglasses retailer Warby Parker, which went public via a direct listing in 2021 and is also losing money, are down more than 70% year to date.

Orady said Tonal is focused on cutting customer acquisition costs, and it will do that in part by scaling back on advertising. He said he attributes any slowdown in sales in the past 90 days to Tonal pulling back on marketing, but overall demand has remained steady.

The company also recently hiked the price of its equipment by $500, to $3,495 from $2,995.

All of Tonal's employees who are impacted by the job cuts will receive a minimum of eight weeks of continued pay, the company said, as well as health-care benefits through the end of September.

Tonal also said in its memo to workers that it is offering extended equity vesting for all employees to become shareholders, including accelerated stock option vesting and an extension on the window of time that option holders have to exercise their stock options for up to four years.

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