Peloton's treadmill recall could improve company’s image: analyst

Peloton faces backlash after the fitness company recalled all of its treadmills due to rising safety concerns. Amine Bensaid, Bloomberg Intelligence Equity Analyst, joins Yahoo Finance Live to discuss.

Video transcript

- Take a look at shares of Peloton here, off about 3% in the premarket, this coming off a double digit decline yesterday, 14.5% drop in the shares. Following that news that we covered here, and the story evolved throughout the day, the company issuing a recall for its Tread Plus treadmills and really setting off questions about what this does or does not mean for the company going forward.

Joining us now to talk about the impact of this and then Peloton's earnings after the bell tonight is Amine Bensaid, an equity analyst over at Bloomberg Intelligence. So let's start with the recall and the potential financial impact, at least as far as you guys have modeled it, and what your thinking is around this latest news item.

AMINE BENSAID: Good morning. Thanks for having me on. So I think-- we think this recall is kind of the right move to have at this time because we've seen the number of incidents increasing. But it's also important to remember that brand image in this industry is extremely important.

And that's especially true from a competitive standpoint because in the public market we see a few names in the- a few big names in the fitness industry trying to IPO, namely Equinox, which owns SoulCycle, and also ICON, which is the maker of NordicTrack. So that's why it was, I think, important for the company to make that recall.

From the financial impact, there are many layers to it, as you alluded to. We believe, for a full recall, that could have half a billion to around $600 million financial impact, if that were to happen. But we think it's a bit too early to give an accurate estimate just because this is just still developing. So more to that after today's earnings call.

- I mean, Peloton has been the hottest ticker on the Yahoo Finance platform for over 12 hours. And I imagine that is because a lot of people and a lot of traders have bought this stock on the way up. And now it's down another 4% premarket, fell 15% yesterday. What do you do with the stock here?

AMINE BENSAID: Well, it's unclear, because we have to see what the company does with this recall and how that impacts their subscriber base. Because when we look at the Treadmill Plus, they say around 125,000 of them would be recalled, just all of them basically. And today we expect the company to report around 2 million subscribers. So that equals around 6% of the subscriber base.

But it's important to remember that this assumes worst case scenario, that people actually cancel their subscriptions and return the treadmills, which is not clear because, as the company mentioned, over half of people that's on treadmills also on another Peloton device. That means if they return the device, that doesn't mean they cancel their subscriptions.

And to answer the second part of your question about the financials, it's important because hardware margins are only 40%, where subscription is even more important, because the margins there are 60%. And that's become 20% of total sales and growing. So subscription is key for the company. And maintaining that lower churn is going to be, in our view, more important over the long run than losing a little bit on the hardware.

- Peloton has over $1 billion in cash. So that's good, at least on paper. But do you there's a significant balance sheet risk to Peloton from this recall? And I'm meaning-- by that I mean, do you think they'll have to raise a good slug of debt to pay for any liabilities that come up from this?

AMINE BENSAID: Again, it's a very good question. We believe it's unclear just because we don't know how many people are actually going to recall. But in a scenario of a full recall-- and you mentioned clearly, with the cash that they have on the balance sheet it doesn't look like they will need to raise more debt. In addition to that, the company has been very active in M&A. And they spent around half a billion in acquiring a company called Precor, to improve their supply chain.

So so far, the balance sheet looks like it can sustain the worst case scenario. But a debt or maybe even another equity issuance could be in the books if this situation worsens.

- Amine, it's Julie here. You talked a little bit about the brand here. And obviously, Peloton is sort of this, I mean, is bougie the right word to use? I don't know. It's sort of this cache brand, to having a Peloton is not just a way to work out, it's a status symbol. What does this situation do to that? I mean, one would think this isn't great for that sort of image.

AMINE BENSAID: That's a very good question. We believe image, like I said earlier, in this industry is the most important part of it. Right now Peloton has the advantage of being a leader in the market. But there is not-- you know, when you look at the market, there's not that many companies that do what Peloton does. And image is one of the top three most important things, or most important aspects, that pushes customers to purchase this product.

By having this recall, we believe, in a way, it's-- in a way, to repair their image and not have this overhang stay there, especially as more competition, we believe, is going to accelerate in the market. So overall, to answer your question, this is a good move to improve their image, at least in the short term.

Over the long run, if this is fixed correctly and the Tread Plus comes back to the market, that could be one of the things that maybe customers forget in the future. The same thing that-- I don't know if you remember, a little over a year ago, the advertising drama that one of the ads had. I don't think many people remember it today. But at that time that was a focus. But they fixed it in a relatively OK way. And this issue is not been talked to too much at this point of time.

- Is the other risk here-- and I'm not hearing this talked much about thus far-- but do you expect management changes, in light of this?

AMINE BENSAID: It's unclear. We haven't seen hints of that. So I don't think there is an imminent manage change at this point of time.

- All right, Amine Bensaid, an analyst over at Bloomberg Intelligence. Amine, thanks for jumping on this morning. Really interesting conversation, I know something we could talk about all day here, at Yahoo Finance. And maybe we will see how far we could take that. Amine, thanks for jumping on. We'll talk to you soon.