Peloton produces profit for the first time amid pandemic-demand spike, stock pushes toward new record


Peloton Interactive Inc. reported fiscal fourth-quarter earnings Thursday afternoon.


MarketWatch photo illustration/iStockphoto

A year after its initial public offering, Peloton Interactive Inc. is pedaling toward new highs amid a pandemic that is forcing people into their homes and away from gyms, creating demand for at-home fitness equipment.

Peloton
PTON,
-3.75%

on Thursday wrapped up its fiscal year by reporting that sales and subscribers roughly doubled in the 12-month period, and revealed its first profitable quarter as a public company and record quarterly revenue a little less than a year after its September 2019 IPO. Shares fell 3.8% Thursday from Wednesday’s record closing price of $91.17 — more than three times the IPO price of $29 a share — but pushed back toward record highs in after-hours trading following the release of the report, with gains of more than 7%.

Peloton reported fiscal fourth-quarter profit of $89.1 million, or 27 cents a share, on sales of $607.1 million, up from $223 million a year ago. Peloton reported a net loss of $47 million in the fiscal fourth quarter a year ago, just ahead of its IPO. Analysts on average expected earnings of 10 cents a share on sales of $586 million, according to FactSet.

“It has been another staggering year of growth, and I know all parts of the organization have had to work together to do everything possible to meet the incredible demand for our products and services,” Chief Executive James Foley said in a conference call Thursday. “The strong tailwind we experienced in March as the COVID-19 pandemic took hold has continued to propel demand for our products into the fourth quarter and first couple of months of Q1 fiscal year 2021.”

While still attempting to catch up to a flood of orders amid the COVID-19 pandemic — Peloton said Thursday it does not expect order-to-delivery times to normalize until around the end of the calendar year — the company is also looking to expand its customer base. On Monday, Peloton announced that it will reduce the price of its standard exercise bike and introduce a lower-priced treadmill, which could clear a path for potential buyers who were not willing to pay the large upfront costs for its products. It will also introduce a premium bike for fans who want top-of-the-line equipment.

Wedbush analysts noted that in a previous survey of 1,200 people, they found that Peloton could “dramatically improve” sales at a lower price point, especially in treadmills.

“42% of non-Peloton owners that were interested in fitness and familiar with the brand showed some level of interest in a $2,500 Tread, compared to just 30% showing interest in the current Tread,” the analysts wrote in a Sept. 9 note, after Peloton announced its new lineup. “Among existing Peloton bike owners, the number of respondents saying they would be ‘very interested’ in owning a treadmill from Peloton doubles based on the lower price, from 14% based on the $4,295 price point to 28% assuming a theoretical (at the time) $2,500 price point.”

While lower sales prices could hurt hardware margins and average selling prices, much of Peloton’s long-term prognosis focuses on the subscriptions for interactive workout media that owners continue to pay after they have received the equipment. Peloton announced Thursday that it now has 1.09 million subscribers, nearly doubling the 511 million that it reported at the end of its last fiscal year, topping its forecast of 1.04 million to 1.05 million.

In total for the fiscal year, Peloton collected revenue of $1.46 billion from the sale of equipment and $363.7 million from subscription services, up from $719 million and $181 million, respectively, in the previous fiscal year. Combined with other revenue from merchandise and other offerings, Peloton ended the year with $1.83 billion in sales, up from $915 million.

“By the end of FY 2020 our Peloton membership base grew to approximately 3.1 million, compared to 1.4 million members in the prior year,” Peloton detailed in a letter to shareholders Thursday. “Fueled in part by the challenges associated with COVID-19, member engagement reached new highs with 164 million Connected Fitness Subscription workouts completed in FY 2020.”

For the current fiscal year, which began in August, Peloton predicted htat subscribers and revenue would roughly double yet again. The company guided for revenue of $3.5 billion to $3.65 billion, with connected subscribers swelling to 2.05 million to 2.1 million. Analysts on average were predicting revenue of $2.74 billion and subscribers of 1.78 million ahead of the report, according to FactSet.

Peloton stock has gained more than 260% since its IPO; the S&P 500 index
SPX,
-1.75%

has returned 17.7% in that time. In after-hours trading Thursday, shares topped $94 following the release of the report.



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Wine country goes back to basics — and online — as pandemic upends business


Selecting a bottle of wine to share over dinner was easy enough before the pandemic. Anyone might worry about paying too much or sounding silly when ording a fancy-sounding choice, but the ritual of picking a bottle to share, or glass to sip, had a way of making any meal out feel special.

That was until about five months ago. Now the idea of ordering wine, dining out or engaging in routine social gatherings, like birthday parties or anniversaries, involves weighing the potential risk of a run-in with the novel coronavirus, which the U.S. still struggles to tamp down.

The crisis has led U.S. households to rein in spending, hobbled entire industries and threatened the ruin of jobs. In other words, it’s the kind of public-health and economic shock that’s one for the history books. It might even be driving Americans to drink more.

The problem is they’re drinking more at home. And that’s had a sobering effect on much of the U.S. wine industry, which after a near quarter-century of growth, saw domestic wine sales drop 5% over the past 12 months to about $48 billion in June, according to data from industry research firm bw166.

Experts singled out March 20 as the day everything changed, when California, Illinois, New York and other states issued stay-at-home orders that came thundering down across the nation, forcing bars, restaurants and wine-tasting rooms and other nonessential businesses to shutter as authorities raced to control a wave of COVID-19 infections.

“When you add both the shutdowns of tasting rooms and closures of restaurants, 44% of sales fell out from underneath the wineries in one night,” Rob McMillan, an executive vice president and founder of Silicon Valley Bank’s wine division, told MarketWatch.

“It was a bad day to wake up.”

Like many other industries, wineries remain in the midst of an upheaval sparked by a global pandemic that’s been brutal on lower-income workers, but sparing Wall Street, where U.S. stock benchmarks, including the S&P 500 index,
SPX,
-0.20%
,
trade near record territory.

It’s not that consumers stopped drinking wine. Rather, diners who might in better times split a bottle at a restaurant, suddenly were rushing their carts through big-box stores and grocery aisles to fill up on necessities, including wine.

“Nationwide, retail sales blew up,” said Gary Obligacion, the general manager at the Post Ranch Inn, a luxury resort in Big Sur, Calif., that overlooks the Pacific Ocean, of the shift to at-home wine drinking at the onset of the pandemic. “People were in panic mode,” he said.

Post Ranch and its Sierra Mar restaurant recently reopened after a nearly three-month shutdown. For now, that still means only serving guests staying at the resort, who can order meals in their rooms or book at the Sierra Mar’s outdoor deck. But the restaurant’s thick, multipage wine book has been replaced by iPads that, like any wine bottles purchased for a table, are sanitized within view of diners.

“It’s all being done in a format for peace of mind around health and safety,” said Mark Buzan, Sierra Mar’s wine director, of the new protocols that make “any romantic notion about bringing a dusty, old bottle up from the cellar to present to a guest” a thing of the past.  

Two U.S. wine industries

The puzzle for smaller, premium winemakers to solve has been how to reach customers when retail sales have been booming, but mostly benefiting the nation’s wine Goliaths.

“There’s two wine industries,” McMillan said. “Roughly 75% comes through the largest 13 wineries,” he said, pointing to top sellers that include the E&J Gallo Winery, The Wine Group and Constellation Brands STZ. “They make wine, sell it to wholesalers, restaurants or grocery stores, and then it goes to the consumer,” he said. “The smaller wineries don’t get much wholesale attention.” 

What has been working, for some smaller producers, has been efforts to reach customers directly to spur sales, including online through their own websites, instead of relying on restaurants and others to create a buzz.

That’s meant repurpurposing staff and going back to the basics, including hitting the phones to drive sales. “It’s not like small wineries figured out overnight how to do outreach for online retail,” McMillan said. “For some, the only thing on their website was a shopping cart icon.”

This chart breaks down how sales have shifted at many U.S. wineries after shelter-in-place orders took hold, as producers ramped up business through wine clubs, online and over the phone.

Wine buying shift in 2020


SVB

Further into summer, as more restaurants reopened under new social-distancing rules, off-premise alcohol sales remained robust.

Spirits have led the charge higher, with sales jumping 29.3% for the week ended July 18, versus a year prior, while wine sales rose 19.7%, according to the latest data from Nielsen.

“A lot about wine is the story,” said Russ Colombo, a senior vice president at Baker Boyer, a lender in Walla Walla, Wash., focused on financing smaller wineries in the region. “The first bottle you sell or place at a restaurant is difficult enough,” he said, but after that “it’s all about momentum.”

For winemakers able to drum up their own support and sell directly to customers, a bonus is that they don’t have to pay a middleman, which can mean about twice as much profit for a producer when compared with wholesale transactions, Colombo said.

On the other hand, Colombo also called wineries “one of the toughest things to finance,” not only because of the fierce competition, but also because winemaking takes talent, a long view and probably luck.

“Winemakers are good at agriculture,” he said. “But for higher-end red wine, even before it hits the market, it could be two years. And in those two years, the world changes a lot.”

Wine Facts

One boon for smaller producers during the national tug of war over reopening, face masks and social-distancing restrictions has been visitors flocking to nearby wineries and vineyards for a bit of respite.

“Most high-end wineries that have tasting rooms are going to the reservations system,” Colombo said, adding that catering to fewer customers due to health-and-safety rules has been a positive for sales. “Winemakers, they find they can spend more time with their customers, tell their story and establish a personal relationship.”

And yet, there’s plenty of uncertainty. The earliest part of the 2020 harvest has kicked off in California’s wine country, while the state on Thursday reached the grim milestone of becoming the first state to report 600,000 COVID-19 cases since the pandemic was first detected in the U.S. earlier this year.

“What I can tell you is that it’s been an excellent growing season. The crop loads look average to high and you have to find homes for all of that fruit,” said Jennifer Putnam, chief executive at Napa Valley Grapegrowers. “But it’s a pretty intricate dance we do. You have to have a healthy workforce, good weather and people supporting Napa Valley agriculture and wines.”



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Cisco looking more to software but road is slower, due to the pandemic


Cisco Systems Inc.’s earnings had a bright spot Wednesday, but the giant shadow of coronavirus blotted it out.

Cisco
CSCO,
+1.92%

collected more revenue from software and services than hardware for the first time in its just-completed fiscal year, a milestone in the company’s transition from its legacy hardware business to a tech company suited for the new era. That transition means much less in the age of COVID-19, however, as the pandemic is accelerating the downfall of the biggest sales drivers for Cisco and putting even more pressure on the company’s newer assets.

Cisco reported that revenue dropped 9% in the fiscal fourth quarter to $12.2 billion, and predicted that sales would continue to decline at an equal or greater rate in the current period. In response, Cisco plans to cut $1 billion in costs, a supersized return to Cisco’s previous pattern of a large restructuring at the end of a fiscal year.

Chief Financial Officer Kelly Kramer revealed to MarketWatch in an interview Wednesday afternoon that Cisco’s cost cuts would start with a voluntary retirement offering, and mentioned research and development as an area that would be targeted while declining to provide a target for job cuts. Kramer also announced her voluntary retirement Wednesday, an unrelated move that will allow her to move on to more board seats (she currently has two) and investing.

Cisco’s revenue decline was led by its older networking products, with total product revenue down 13%, and declines across switching, routing, data center and wireless driven primarily by weakness in the commercial enterprise markets. Pockets of strength included the company’s more recent network and software-as-a-service offering, the Catalyst 9000, and double-digit growth in its WebEx video platform, which is seeing a surge of usage with many people working from home.

Cisco unveiled the Catalyst 9000 in 2017 as part of its strategy to become more of a software and service provider, with a subscription model that offers networking software that helps companies automate more of their IT departments. And if a company is looking at modernizing its network, with everyone working from home, they are often looking at the CAT 9000, Chief Executive Chuck Robbins said.

“Some of them are using this opportunity, with no one in their campus environments, to upgrade,” he told analysts on the company’s conference call.

The revenue from these service-focused deals is more lucrative for Cisco, Kramer told MarketWatch.

“You don’t recognize it for three years, but you are getting the revenue,” she said. “You get even more when they renew.”

But with the pandemic hurting many of its other product areas, especially its sales to large corporate customers, it’s going to be a longer, slower road to transition to even more software sales. One analyst said that he believed the company should become more aggressive in M&A to fill in the gaps, just a few days after Cisco closed its purchase of ThousandEyes. Robbins said the company will continue to be disciplined, but that it is open to ideas and has a list of potential acquisition targets that Cisco maintains on a regular basis.

Cisco indeed may have to speed up its moves to become more software- and services-focused, and could use the pandemic to score some deals. Fortunately, Kramer said she will stick around for the transition, but the restructuring may take up more focus before Cisco can start adding new entities.



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Foot Locker got a Q2 boost from government stimulus but Q3 could be a different story, analysts say


Foot Locker Inc. shares jumped 7.8% in Monday trading after the athletic retailer said it expected better-than-expected fiscal second-quarter earnings, but analysts are concerned that once the government stimulus funds dry up, so will demand.

For the second quarter ending August 1, Foot Locker
FL,
+1.78%

expects same-store sales to rise 18%. Earnings per share are expected to be 38 cents to 42 cents, and adjusted EPS is expected to be 66 cents to 70 cents.

The FactSet consensus was for a same-store sales decline of 23.6% and a loss of 40 cents per share.

“As we continued to reopen stores throughout the quarter, we saw a strong customer response to our assortments, which we believe was aided by pent-up demand and the effect of fiscal stimulus,” said Richard Johnson, chief executive of Foot Locker, in a statement.

Foot Locker is scheduled to report fiscal second-quarter earnings on August 21.

See:Versace parent Capri Holdings and Ralph Lauren slump as luxury sales takes a hit during pandemic

“While encouraged to see Foot Locker take advantage of a better near-term environment, the results directionally do not appear surprising given several tailwinds during May-to-June (pent-up demand, fiscal stimulus) which were well documented by others (Hibbett Sports/NPD Group) and seem likely to prove temporary,” wrote Baird analysts led by Jonathan Komp.

Hibbett Sports Inc.
HIBB,
+1.07%

gave a business update in July that shows second-quarter same-store sales on track for a 70% same-store sales increase.

Still, Baird analysts note a recent slowdown in sales at major retailers and brands, including Foot Locker, after a strong June and early July.

“We also are uncertain at this stage of how potential executive actions cutting the weekly federal unemployment payout to $400/week from $600/week previously and providing the option for a temporary payroll tax holiday through year-end (likely less impactful than Cares Act checks) may impact overall spending, with [Foot Locker] in our view highly sensitive to discretionary spending conditions,” Baird wrote.

Baird rates Foot Locker stock neutral with a $29 price target, up from $24.

A Stifel report also shows that athletic spending is likely tied to government stimulus over the coming months, with sports and lifestyle stocks remaining “largely rangebound” after reporting their most recent earnings.

“Underwhelming response from the market, we believe, reflects indications that the consumer recovery has hit a glass ceiling in July and August,” wrote analysts led by Jim Duffy. “Further stimulus is needed to support consumer discretionary fundamentals through an unconventional back-to-school period and holiday.”

See:The back-to-school season will be a ‘dud’ one analysts says, but the NRF is forecasting a record breaker

For the near-term, Stifel analysts favor names including Nike Inc.
NKE,
-0.38%

, Lululemon Athletica Inc.
LULU,
-2.68%

, Crocs Inc.
CROX,
+0.21%

and Yeti Holdings Inc.
YETI,
+0.04%

Raymond James analysts are more upbeat about Foot Locker’s preannouncement.

“Consumer demand is hot right now and not just in the United States due to brand strength in Nike’s basketball/running sneakers (Air Force One and Air Jordans), growing usage athleisure and comfort apparel, pent-up demand from deferred spending in March and April, stimulus checks, and other competitors remaining closed,” wrote Matthew McClintock.

“We believe Foot Locker should be the dominant beneficiary of Nike’s decision to focus on a few global key retail partners and the COVID-19 pandemic likely accelerated Nike and Foot Locker’s partnership.” 

Raymond James rates Foot Locker stock outperform with a $35 price target, up from $30.

Foot Locker stock is down 22% for the year to date while the Consumer Discretionary Select Sector SPDR ETF
XLY,
-0.36%

is up 13.5% and the S&P 500 index
SPX,
-0.98%

has gained 3.7% for the period.



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Square stock surges after ballooning bitcoin interest drives huge revenue beat


Square Inc. posted a double earnings surprise Wednesday as the payments company delivered an unexpected surge in revenue for the second quarter in a release that came out a day early due to “early external access” of its financials.

Analysts expected Square’s
SQ,
+1.50%

revenue to decline in the period as the COVID-19 crisis pressured the company’s small-merchant customer base, but instead Square saw revenue jump 64% to $1.9 billion, above the $1.1 billion that analysts surveyed by FactSet had been expecting, driven by a large spike in bitcoin-related revenue and increased usage of the Cash App mobile wallet.

Square shares were up nearly 11% in after-hours trading.

Transaction-based revenues of $683 million easily topped consensus expectations for $533 million, though they were down 12% from a year earlier, while subscription and services revenue came in at $346 million, up 38% and ahead of the consensus view of $287 million. Square also posted $19 million in hardware revenue and saw a 600% surge in bitcoin revenue, to $875 million, driven by new active bitcoin customers and increased demand for the cryptocurrency. Analysts were looking for $278 in bitcoin revenue.

Read: Disney shakes up streaming approach after losing nearly $5 billion due to pandemic

Despite that spike, Square’s bitcoin feature, which lets users of its Cash App mobile wallet buy and sell bitcoin, remains a fairly low-margin operation for the company. It generated $17 million in gross profit, though that was up more than 700% from a year ago.

Wedbush analyst Moshe Katri told MarketWatch in an email after the results that Square’s revenue was flat from a year earlier when excluding bitcoin. “The market seems to essentially ignore COVID-related challenges at Square’s Seller segment (roughly 70% of revenues ex-bitcoin), reflecting the company’s high exposure to bricks-and-mortar merchants, while focusing on the company’s hyper-growth Cash App segment,” he said.

Square broke out revenue for its seller and Cash App businesses separately for the first time this quarter, disclosing $723 million in seller revenue and $1.2 billion of Cash App revenue, or $325 when excluding the bitcoin part of the business. Seller revenue was off 17%, while Cash App revenue increased 361%, or 140% when excluding bitcoin.

See also: Venmo and Square’s Cash App were going gangbusters before the pandemic — now they’re doing even better

More than 30 million Cash App users were involved in a transaction on the service in the month of June, up from 24 million in December, as the mobile wallet saw increased use cases during the pandemic. More than 7 million people in June used the Cash Card, a debit card associated with the wallet, and Cash Card spend was up almost 50% in the second quarter from the March quarter.

Active Cash App customers were involved in more than 15 transactions a month on average during the second quarter, up 50% from a year earlier.

“While transactions per customer have steadily increased over time, we recognize that engagement during the second quarter also benefited from government funds related to the stimulus and unemployment benefits,” Square said in its shareholder letter.

Keefe, Bruyette, & Woods analyst Steven Kwok said that a key issue heading into Square’s earnings call, which has been moved to 8 a.m. ET Wednesday morning, will be “the level of benefit the company is seeing related to government stimulus programs and sustainability of operating metrics going forward.”

On the merchant side of the business, Square saw gross payment volume drop 15% from a year earlier to $22.8 billion, though the company disclosed that trends improved sequentially during each month of the quarter as pandemic-related restrictions eased. Further, seller gross payment volumes were up 5% in July compared with a year prior, which the company called “a modest improvement” relative to June.

Square posted a second-quarter net loss of $11 million, or 3 cents a share. The company said it recognized a $21 million gain related to observable price changes for non-marketable equity investments and that excluding those impacts, it would have seen a net loss of $32 million for the quarter. The company saw a net loss of $7 million a year prior.

Adjusted earnings per share rose to 18 cents for the quarter, down from 21 cents but ahead of the FactSet consensus, which was calling for a 5-cent loss.

Shares have added 115% over the past three months as the S&P 500
SPX,
+0.36%

has increased 16%.



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