Why Peloton's partnership with Amazon may not resolve underlying issues at the fitness company

Published Fri, Aug 26 20222:32 PM EDT

Peloton 's move to sell its bike and apparel on Amazon may help the beaten-up stay-at-home darling reinvent itself as it grapples with waning revenue and demand, but it may do little to resolve the underlying issues the fitness equipment maker is currently facing, analysts say. The bike maker announced Wednesday that it will begin selling some of its products on Amazon after long focusing on its direct-to-consumer business. Investors initially cheered the move, with the stock popping 20%. Earnings results released Thursday showed sentiment waning as shares tumbled more than 18% after Peloton reported its sixth consecutive quarter of losses . After skyrocketing in popularity during pandemic lockdowns as consumers worked out from home, Peloton in recent months has grappled with profitability issues and slowing demand as consumers return to gyms. CEO Barry McCarthy has fought to turn around the pandemic poster child since taking the helm earlier this year, instating an aggressive $800 million annual cost-cutting plan which included layoffs, price hikes, store closures and transferring delivery work to third parties. But even with McCarthy's ambitious plans underway, investors have lost faith in the stock, which closed Thursday more than 90% off its all-time high. "We didn't think that was '20% news' and it turns out that most of the gains will be returned this morning," Gordon Haskett's Don Bilson said in a note to clients following Peloton's earnings. "Glitzy AMZN news by itself isn't going to turn this ship. McCarthy knows that. He implied as much this morning." Peloton did not immediately respond to CNBC's request for comment. Demand issue or time to reinvent? Peloton's decision is a pure cost-saving play to slow its cash burn, move products and improve its balance sheet, said Allen Adamson, co-founder of brand and marketing consultancy Metaforce. However, it won't save the overall business and brand issues. Having saturated the market with buyers during the pandemic, Adamson says it's time for the company to shift gears and focus on investing in new content, software and instructors to compete with the likes of Apple's fitness platform and upscale gyms like Equinox. Gathering new subscribers is another step in that agenda, said Bernie McTernan, an analyst at Needham. Data from Peloton suggests that demand for its bikes persists, with the company telling CNBC that Amazon gets about 500,000 searches for its products every month. Still, some analysts are skeptical that the demand is as large as the company anticipates — or as big as it once was. To be sure, partnering with a strong logistics company like Amazon does have its perks. It may help Peloton move products more quickly and cut costs, says Andrew Boone of JMP Securities. Partnering with third-party delivery companies is nothing new for the bike maker, which has worked with XPO to move products, he noted. Rohit Kulkarni of MKM Partners also views the deal as a way for Peloton to store rising inventory in Amazon warehouses, potentially limiting logistics headaches. "Amazon's Prime subscriber base is an extremely attractive potential customer base for Peloton," Kulkarni said. "Plus, Prime benefits such as fast and reliable shipping and subsidized promotional spend would help Peloton in improving its customer experience and unit economics." A potential hit to brand identity The economics behind the deal — including how much Amazon is making — is unknown, but similar partnerships are no new phenomenon for the e-commerce giant. Not every initiative has found success. In 2017, Nike launched a pilot to sell some products on Amazon after years of resistance. The program was shuttered in 2019 . "The question becomes leverage," said Simeon Siegel of BMO Capital Markets. "Like big box, for a brand to sign up with Amazon is a double-edged sword and the question becomes distribution versus brand control." Dana Telsey of Telsey Advisory Group agrees that there may be some downsides to selling on Amazon. Relinquishing control over distribution could affect brand identity, plus wholesale is typically a lower margin business than direct-to-consumer. That means the company may need to recoup with additional volume and accessory sales. Some analysts also argue that selling on Amazon could potentially hurt the brand's premium reputation. The company has said its more expensive products, such as the Bike+ and treadmill machine, won't go for sale on the site. That said, the e-commerce company's ability to easily and successfully connect consumers to desired products could prove a strong advantage for Peloton going forward as it attempts new strategies to improve its business, said Oppenheimer's Brian Nagel. "It's not a silver bullet, it's not an end all be all, but it shows how the company is rethinking itself," he said. Regardless of whether this partnership proves successful, the future of the company hinges on its shareholders. "Investors need to determine whether Peloton's future success is going to be driven by hitting breakeven on cash or whether the success will be driven by growth," BMO's Siegel said. "It's hard to justify the company seeing material appreciation absent growth and the decision to move to Amazon has impacts on the brand." — CNBC's Lauren Thomas contributed reporting