today is Sep 27, 2022

To say that he has a difficult task in front of him would be an understatement.

The start of the new year has continued a very turbulent period for Peloton Interactive (NASDAQ:PTON). In addition to facing falling consumer demand that started in 2021, the connected-fitness manufacturer has halted production of its bikes and treadmills and decided to cut 20% of its workforce in an attempt to streamline operations. Shares are down 79% over the past 12 months.  

What's more, the business announced that it is bringing on Barry McCarthy , former CFO of Spotify and Netflix , as the new CEO. Former CEO John Foley will take over as executive chairman of the board.  

Peloton is certainly shaking things up to get the company back on track toward a brighter future. While it's difficult to see so much change in such a short time, it's probably necessary for the long-term success of the business. But it won't be easy for McCarthy.  

Here are three things he must get right in his new role as Peloton's CEO.  

business person looking out window of office.

Image source: Getty Images.

1. Manage investor expectations  

Peloton's business was absolutely thriving during the depths of the pandemic. Quarterly sales growth in excess of 125% was normal, and the stock soared 434% in 2020. Because of this monster success, management severely overestimated consumer demand for connected-fitness products in a normalized world.  

Revenue for fiscal 2022 is now expected to be $3.75 billion, much lower than the previous guidance of between $4.4 billion and $4.8 billion, which was also reduced from even earlier expectations of $5.4 billion.  

To be fair, Peloton is a young business, having been founded in 2012. And the pandemic threw a curveball no executive team could've been prepared for. Therefore, I cut them some slack for not being able to correctly forecast demand in a strange economic environment.  

But McCarthy and his team should do the exact opposite of the prior leadership. Instead of setting ambitious financial targets and underperforming against those metrics, they should set realistic subscriber, sales, and profit goals and aim to exceed those numbers. Having a solid grip on the competitive landscape, as well as consumer interest, is crucial for Peloton right now.  

Better managing Wall Street's expectations, now seemingly at an all-time low, should be a top priority for McCarthy in his new role. If the company starts to impress on both the top and bottom lines, shareholders will be rewarded.  

2. Set a clear path to profitability  

Over the past 12 months, Peloton produced a net loss of $1.1 billion on revenue of $4.1 billion. In fact, losses have increased in each of the past four quarters. This is not sustainable, especially for a business that has reached the scale that Peloton has. Investors are desperately craving profitability .  

The company has already announced a restructuring plan that would slash $800 million in annual costs. Peloton no longer plans to build the previously announced $400-million factory in Ohio. Capital expenditures in fiscal 2022 will be reduced by $150 million. And as I alluded to above, 2,800 employees will be let go, representing 20% of the head count.  

"We are taking steps to best position Peloton for sustainable growth, while also establishing a clear path to consistent profitability," outgoing CEO Foley said in a letter to shareholders. These are the right words, but time will tell if the execution is there.  

McCarthy's finance background and expertise could indicate an intense focus on operational efficiency, margin improvement, and a bolstered balance sheet, all of which would give shareholders confidence in Peloton's prospects.  

3. Build on the brand's strength  

Lastly, McCarthy should double down on Peloton's primary strength: its powerful brand . I don't think anyone denies that Peloton sells the best home exercise equipment on the market today, as it created the category of connected fitness.  

Well-known rival Nautilus , which owns the Bowflex brand, has been around for decades, yet today only carries a market cap of $168 million. Even more telling, Nautilus generated revenue of only $665 million over the past 12 months. Peloton's sales were almost twice that amount in just the last quarter.  

Sales and marketing expense increased 97% in the second quarter of 2022 compared to the prior-year period. And Peloton just appointed Jonathan Mildenhall, formerly the chief marketing officer at Airbnb  and a recognized leader in marketing and advertising, to its board. The primary goal here should be to remain in first place in a crowded market with numerous competing offerings.  

Peloton is clearly the leader in its space, and it has become a household name. Management needs to do everything it can to stay relevant in an industry that is prone to crazes and fads.  

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Neil Patel owns Netflix. The Motley Fool owns and recommends Airbnb, Inc., Netflix, Peloton Interactive, and Spotify Technology. The Motley Fool has a disclosure policy.