I was once in a role where the company had not reviewed their inventory levels, a lot of their orders were often flagged by the warehouse of a particular item running low or the supplier calling them to offer them a discount.

The company was profitable so it was not too much of an issue, but I decided to dig a little. I wanted to know the rate of which products were selling and what they were costing in space (I used a rent & Sq space calculation for this), I was able to find that the company had some products which were moving very slowly, they put these products on sale, once they were gone, they ordered faster moving products to replace them. They were also able to get a better bulk buy discount on these items, a win all around.

I want to have a quick glance at Peloton, they were one of the companies that did well during the pandemic, according to Prophet 2022 relevant brands report, Peloton are only 2^nd to Apple.

The company has had a $1.2bn loss and is working on a turnaround, it makes it a good company to glance at.

They have growing subscribers but slowing hardware sales, considering they wish to reduce their inventory and focus more on the software side of the company; their aim is to be leaders in the ‘Fitness as a Service’ space; they are slowly heading in the right direction, but with: losses’, job cuts, product recalls, lawsuits, CEO changes, growing competition, slowing hardware sales and a crashing share price, it’s a tall order.

Let’s look at some key dates:

• Peloton Financial year is from July-June.
• 2^nd and 3^rd quarters are when their sales are highest.
• 2012, Peloton was Founded.
• Sep 2019, Peloton’s launches ‘Initial Public Offering’ (IPO) on the Nasdaq.
• Mar 2020, Pandemic causes worldwide lockdowns.
• Dec 2020, share price reaches all time high of $162.72
• May 2021, CPSC and Peloton announced the recall of circa 125,000 Tread+ treadmills after a child’s death.
• Dec 2021, Character on the show ‘And Just Like That’ has a heart attack after using a Peloton bike.
• Jan 2022, Character on the show ‘Billions’ has a heart attack after using a Peloton bike.
• Feb 2022, Barry McCarthy takes over as CEO and President with a $168M compensation package.
• Jul 2022, Fully outsource manufacturing and assembly.
• Aug 2022, Announce Peloton products will be available on Amazon.
• Sep 2022, share price reaches all time low of $6.93
• Nov 2022, Peloton executives hit with insider trading lawsuit.

I had a few thoughts based on the key dates:

• For FY20, I expected to see an increase in the inventory ratio, due to the IPO launch and the pandemic, I could see Peloton buying more stock for both scenarios as they are expecting increase in visibility & sales due to the two events.
• For FY21, I expected to see an increase in the inventory ratio because of the stock recall and with-it cancelled orders.
• For FY22, we should begin to see the Inventory ratio reduce, due to a discounted price of products and a concentrated effort by the CEO to reduce stock.
• FO FY23, I am expecting to see a decrease in the inventory ratio, as manufacturing & assembly has been fully outsourced, outsourcing is usually cheaper than doing it in house as a result I expect a cost reduction in COGS; this also will push a significant portion of WIP onto the supplier, thus reducing year end WIP. They have also partnered with Amazon in a B2B agreement, whilst Amazon will sell B2C, usually in B2B deals products are sold at a lower price but with a higher volume. And Finally, CEO Barry McCarthy has highlighted inventory as a balance sheet challenge, which leads me to believe there will be a stronger push to clear inventory and release cash.

“3Q FY2022 Shareholder Letter
The balance sheet challenge has been managing inventory. We have too much for the current run rate of the business, and that inventory has consumed an enormous amount of cash, more than we expected, which has caused us to rethink our capital structure (more on this in a moment). Fortunately, the obsolescence risk is negligible, and we believe the inventory will sell eventually, so this is primarily a cash flow timing issue, not a structural issue.
~ Barry McCarthy CEO & President”

“Q1 2023 Peloton Interactive Inc Earnings Call
So as far as the third-party retailers go, we do have a couple of different models that we use to work with them. In the case of Amazon, we have a wholesale models. Amazon will buy the inventory from us and then they will resell it, and our revenue recognition will come at the time that we actually sell the inventory to them rather than when they sell it to the customer.
~ Liz Coddington CFO”

Looking at the Inventory Ratio:
The inventory ratio shows the number of times a company has sold its entire inventory and replaced it through the year, i.e. if you get the ratio of 5, the inventory was turned over 5 times this Financial Year.
When I was in my AAT classes learning this, a good ratio was between 5 – 10, but this number varies per industry.

The calculation for the Inventory ratio is as follows.

Inventory Turnover Ratio = Cost of goods sold / Average Inventory (opening inventory + closing inventory) / 2
Where do we get this information from:  
Cost Of Goods Sold (COGS) = Income statement (profit and loss).
Closing Inventory = ‘Inventory’ figure on the current Financial Year Balance sheet.
Opening Inventory = ‘Inventory’ figure on the prior Financial Year Balance sheet.

Peloton’s Inventory Ratio
I’ve compiled the table below of Peloton Inventory ratio for the last 6 FY, I’ve also expanded the ratio and included the number of days.

To get to the number of days, you divide 365 by the Inventory ratio, using 2017 as an example. i.e., 365 / 10.96212121212121 = 33.29647546648238.

	2017	2018	2019	2020	2021	2022
Cost of Goods Sold	144.7	245.4	531.5	988.2	2,567.4	2,883.8
Opening Inventories	10.7	15.7	25.3	136.6	244.5	937.1
	+	+	+	+	+	+
Closing Inventories	15.7	25.3	136.6	244.5	937.1	1,104.5
	=	=	=	=	=	=
Average Inventory	13.2	20.5	161.9	381.1	1,181.6	1,020.8
Inventory Turnover Ratio	10.96	11.97	3.28	2.59	2.17	2.83
Number of days	33.3	30.49	111.18	140.76	167.98	129.2
Comments				IPO & Lockdowns. *Ignoring leap year	Recall of treadmills

• 2017 – 2018 FY, Inventory was being restocked at a fast rate, almost monthly, which is a good sign for sales but also signifies not enough stock was in place.
• 2019 – 2021 FY, Inventory was being restocked at a slow rate, averaging 4.7 months, for 2021, I expect this, but I’m surprised by 2020 results as we know they had a boom during lockdown, this is a bad sign for sales and signifies there is too much stock, which will also impact cashflow.
• 2022 FY, Inventory is being restocked at a slow rate, 4.3 months which is an improvement on the prior two FY and shows they are slowly heading in the right direction.
• 2023 FY, my estimation is that they will break below 100 days in stock turnover, the CEO’s focus on this area, discounted product prices, Amazon partnership, increase in subscribers, increase in brand relevance rating and the aim to move them more towards SaaS (or FaaS as they prefer to call it) leads me to believe they will be able to achieve this. It’s also worth noting that not all the stock would be Bike and Treadmills, it will be accessories and clothing as well, a quick glance on Amazon on these additional items, shows they are being received well.

@Brainthrough