today is May 20, 2022

A consulting group is reportedly helping the company get its financial house in order, but that could mean cutting parts of the business.

What happened

Connected-fitness company Peloton Interactive (NASDAQ:PTON) is bringing in outsiders to evaluate its finances, and that's causing the stock to drop sharply today. As of 10 a.m. ET, Peloton stock is down almost 5% and down more than 80% from its all-time high last year.

So what

According to CNBC, Peloton management is bringing in McKinsey Co. to advise the company on its finances. Layoffs could be on the table. They will also reportedly look at cutting underperforming business units like the recently launched apparel division. And store closures are also a possibility. 

A person lifts their glasses to cover their eyes, apparently frustrated by something on a computer.

Image source: Getty Images.

Now what

For me, today's news isn't a surprise -- Peloton's primary struggle at the moment is lack of financial control. Take two recent developments as examples. First, management lowered prices for its stationary bikes and treadmills late in 2021 in an effort to attract more users. However, the company just added delivery fees to these devices, offsetting the price cuts in an apparent contradiction.

Second, in the most recent quarterly conference call, Peloton's CFO said the company didn't need to raise capital. But less than two weeks later, it announced it was raising $1 billion by selling stock. 

Actions like these communicate a need for greater financial control from management. Consider that in the first quarter of fiscal 2022 (the most recent quarter), total revenue for Peloton was up only 6% year over year. But gross margin dropped from 43% in the previous-year period to 33% this year. And operating expenses increased 140%, resulting in a massive quarterly loss from operations of $360 million.

For these reasons, bringing in outside help from McKinsey Co. is a prudent move by Peloton, in my opinion. The company needs to tighten its belt, so to speak, and this could be the first step toward solving its biggest problem.

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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.

Jon Quast owns Peloton Interactive. The Motley Fool owns and recommends Peloton Interactive. The Motley Fool has a disclosure policy.