Peloton and Lululemon: A Look at Two Fitness Giants in Transition

Peloton Interactive, a leading provider in the connected fitness training sector, is currently facing significant challenges. Despite a solid business model, the company is struggling with growth difficulties and earnings issues. The new CEO barely assumed office before departing again. While there is potential for a turnaround, an investment currently seems risky. Since its IPO at the beginning of the COVID-19 pandemic, Peloton initially recorded strong revenue increases and enthusiastic investors. However, the young company made serious mistakes that it could hardly reverse. In the third quarter of fiscal year 2024, revenues fell by 3% compared to the previous year. This was the ninth consecutive quarter with a decline, following sputtering revenues before. During the pandemic, Peloton was able to achieve short-term gains but has been grappling with losses for years. Peloton's problems are manifold: product recalls, oversized infrastructures, and low inventory levels have burdened the company. Although an experienced CEO was hired two years ago, he left the company in May. While there are takeover rumors circulating, management is currently trying to revitalize the brand through cost reductions and new initiatives. In contrast, Lululemon Athletica reported stellar results for the first quarter of fiscal year 2024. Revenue increased by 10% compared to the previous year, and earnings per share rose from $2.28 to $2.54. The company expects similar results for the entire year. Although there were some product issues in the quarter, particularly with colors, the loyal fan interest remained unbroken. However, Lululemon pulled its new “Breezethrough” collection from stores last week due to customer complaints. Analysts downgraded the stock, especially after Nike released a concerning report about the state of the retail market in the activewear sector. Instead of reducing prices, Lululemon completely removed the products from its assortment to protect brand integrity. Lululemon may have to endure short-term losses but will benefit in the long run. Similar problems arose over a decade ago with the "see-through" leggings, after which a manager left the company, and Lululemon quickly recovered. Notably, Sun Choe, Chief Product Officer for nearly eight years, has already announced her resignation. Her responsibilities will be taken over by a three-member team. Although Lululemon is currently experiencing some product issues, the company remains profitable and is growing. Compared to Peloton, which is declining and less profitable, Lululemon appears attractively valued and is likely the better long-term choice. While Peloton continues to produce great products and has a loyal fan base, it faces significant challenges. In contrast, Lululemon has a recognized track record of success and is currently at a historically favorable price level.