💥At-Home Fitness Took a "BIG" Fall💥
PTON & LULU both bite it pretty hard; three distressed situations to watch
Yes, people are returning to gyms and, no, Peloton Interactive Inc. ($PTON) isn’t the hot commodity it was at the height of the pandemic. People have moved on, it seems, and that old trope about the bikes becoming expensive clothes hangers is apparently proving true. From The Atlantic: “People have been trying to guess how the pandemic would change American life since the moment the pandemic began, and headstones have been carved for lots of things that will very obviously survive—handshakes, restaurants, in-person office work, and, yes, gyms.” On point, this ⬇️, is an absolutely brutal thread that demonstrates just how far the pendulum has swung (you’ll need to click-through):
It’s even more brutal now that PTON’s stock is down into the high 30s. Look at that YTD return…OUCH:
It is, frankly, stunning. To put an exclamation point on this, the 52-week high was $171/share. REPEAT: $171/SHARE. 😬
Anyway, the aforementioned thread is nowhere near as brutal as the treatment PTON got from HBO:
We’re just going to assume that, by now, you know what it is that we’re referring to. Per The Los Angeles Times (spoiler alert!):
I don’t know if series creator Michael Patrick King has a particular grudge against the fitness company — maybe he’s just a SoulCycle guy? — but rarely in the history of pop culture has an enviable product placement ever gone quite so wrong. Sure, star instructor Cody Rigbsy just finished in third place on “Dancing With the Stars,” but Peloton’s indirect role in the demise of one of the most iconic romantic leads in the annals of television puts it in a position nearly as awkward as Big’s stance on the bike.
To which we say: short Sarah Jessica Parker. Sure, it’s not a good look for PTON to be the root cause of a popular character’s death in any show let alone the wildly unnecessary updating of the Sex and the City franchise. But let’s be real here: the more likely reason for PTON’s rough end-of-week is the fact that Credit Suisse dropped an epic downgrade on the company. Per Barron’s:
Credit Suisse analyst Kaumil Gajrawala cut his rating on the stock to Neutral from Outperform and lowered his target for the price to $50 from $112 in a research note on Friday. He pointed to a rise in interest on spending on activities that weren’t possible during the pandemic, as well as the reopening of gyms and other in-person fitness options, as headwinds the firm faces following a blowout 2020.
“Consumers appear fixated on reopening themes and purchases with an unclear timeline for normalization,” Gajrawala said. “Over the next year, we think these factors increase the likelihood of a no-to-low growth” fiscal 2022.
Gajrawala argued the company will need to spend more on marketing and boost discounts to counter slowing demand.
“Given the shift in consumer focus (reopening), we expect a lower return on marketing, pushing acquisition costs above pre-pandemic levels,” he wrote. “Hardware margins appear structurally lower and may no longer allow equipment gross profit to offset” the customer acquisition costs. (emphasis added)
Zero to low growth! Ouch. A slashed price target more than half to $50 from $112/share!! OUCH. Wait…*checks notes*…the stock is at $38/share. Ok, sure. That definitely sounds like 30% upside from here.* 🙄
*****
Meanwhile, let’s short Lululemon Inc.’s ($LULU) M&A team while we’re dumping on fitness. To be clear, the company reported earnings on Thursday that absolutely crushed. Revenue was $1.45b, up 30% YOY, and surpassed analyst expectations of $1.41b. Comparable store sales rose 32% — a bullish sign for brick-and-mortar retail (and landlords). The company’s sales growth continued online too — though some might poo poo only a 23% YOY increase. Propelled by these positive trends, the company boosted guidance slightly.
And so you’d think the stock would react positively. Well, think again. Baked into the earnings report was the nugget that the company’s at-home fitness device, MIRROR — which it acquired last year for $500mm — ain’t looking so good (see what we did there?). The company casually dropped that annual sales for the device may end up being only about half of what was anticipated. Whoops! Just a small miss, y’all. The stock got banged up as a result ⬇️.
*There very well may be. Overnight people seem to have forgotten there is a recurring revenue stream here, apparel is just getting off the ground, and supply chain issues won’t last forever. The thing does still have network effects.
👍 Winners of the Week👍
1. All of Mankind (Long Telling You How We Really Feel). On Thursday, the Senate Judiciary Committee recommended that Congress pass the Open Courts Act of 2021 which would make the godforsaken f*cked-upon-beyond-all-recognition PACER system free to users. It’s a Christmas miracle, Johnny!
But wait. There’s more. Per Courthouse News:
The legislation would also modernize PACER to streamline searches and update the program's technology, something that Durbin noted is already underway via the Administrative Office of the U.S. Courts.
"The PACER system is not keeping pace with reality and technology. Its search function is torturous. There’s no uniformity in filings," [Committee Chairman, Dick] Durbin said.
To which we respond: there’s no way that’s a real quote. First, “torturous” is probably the most generous description of PACER we’ve heard in f*cking years. And, second, there isn’t a human being on the planet who can write or say a sentence about the f*cking technological cesspool that is PACER without an F-bomb in it. PACER is literally the only f*cking instance where technology is having a hard time keeping up with the law (versus the other way around).
“As someone who has had to use that search function — I’m a lawyer, this is something I was supposed to be doing in my job — if you are a normal person who is trying to access these records, it’s just about impossible," [Senator Josh] Hawley said.
PACER is literally so bad, it may very well be the one thing that f*cking Democrats and Republicans can actually agree upon.
2. Mallinckrodt’s Unsecured Noteholders (Long Litigation Handicaps). So there was drug in the form of a gel. It had a Dune-esque name, “Acthar.” The company sold it post-
petition at what a bunch of claimants alleged were insanely over-inflated prices that were so egregious so as, they argued, to constitute anti-trust, RICO and other violations. If victorious, those claimants could and would attempt to assert upwards of $300mm in administrative claims against the Mallinckrodt estates — a fact pattern that, needless to say, would not be all-too-favorable to junior creditor recoveries. Luckily for those junior creditors, however, Delaware Judge John Dorsey shot down the claimants’ arguments after a lengthy trial, ultimately denying payment of the large sum. This is a big win for the company, of course, but it trickled down through the company’s capital structure as well: the 5.75% ‘22 unsecured notes traded up on the ruling, as did the 5.625% ‘23 unsecured notes.
3. Limetree Bay Services (Short Deadlines). It’s not often that we cite a two-time winner but a crazy year is apparently just getting crazier. On November 21, we wrote: