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Peloton Co-Founder John Foley Faced Repeated Margin Calls From Goldman Sachs as Stock Slumped

John Foley,

the co-founder and former chief executive of

Peloton Interactive Inc.,

PTON -3.41%

faced repeated margin calls on money he borrowed against his Peloton holdings before he left the fitness company’s board last month, according to people familiar with the situation.

As Peloton’s shares slumped over the past year,

Goldman Sachs Group Inc.

GS -2.11%

asked Mr. Foley several times to provide fresh funds or additional collateral for personal loans the bank had extended to him, the people said. The company’s share price has fallen nearly 95% from its $160 peak in December 2020.

Resigning from the board gave Mr. Foley flexibility to sell or pledge more Peloton shares, though he said the margin calls weren’t the reason he left the company.

“I didn’t resign from the board because I was underwater,” he said. “To the extent that I took on debt through Goldman, it was because I am bullish on Peloton and still am. It was and is a great company.”

The former chairman and CEO had pledged as collateral about 3.5 million Peloton shares as of the end of September 2021, or about 20% of his stake at the time, securities filings show. The pledged shares were worth more than $300 million a year ago. At current prices, they are worth roughly $30 million.

Peloton has cut thousands of jobs this year to stem its losses.



Photo:

John Smith/VIEWpress/Getty Images

Mr. Foley was able to secure private financing and avoid stock sales by Goldman, the people said. He declined to say on Monday how much of his current stake had been pledged or how much he had borrowed against his holdings.

His seat on the board limited his ability to raise additional funds because most public companies prohibit directors and executives from selling their shares during certain trading periods. In addition, Peloton’s policy limits pledges for margin loans by directors or executives to 40% of the value of an individual’s shares or vested options.

Mr. Foley’s decision to leave the board on Sept. 12 followed a tumultuous several months at the company he co-founded a decade ago, as well as a sharp decline in his personal wealth as Peloton’s sagging fortunes diminished the value of his holdings. His stake in the company, worth $1.5 billion a year ago, is currently worth less than $100 million.

“Everyone can see I had a rocky year,” Mr. Foley said. “This was not a fun personal balance-sheet reset.”

Barry McCarthy, a Silicon Valley veteran, became Peloton’s CEO in February.



Photo:

Angela Owens/The Wall Street Journal

In February, Mr. Foley stepped down as Peloton’s CEO and was succeeded by

Barry McCarthy,

a former

Netflix Inc.

and Spotify Technology SA executive. Mr. Foley kept his position as Peloton’s executive chairman and continued to hold a controlling stake in the company through Class B shares with 20 votes apiece.

A few weeks later, Mr. Foley reported selling $50 million worth of Peloton shares in a private transaction. At the time, Peloton said the sale was part of the executive’s personal financial planning. The sale left him and his wife,

Jill Foley,

a former Peloton executive, with 6.6 million shares and options on another 8.4 million, according to securities filings, which combined are currently worth less than $100 million. He hasn’t reported any stock or option sales since March. Business Insider reported in March that Mr. Foley was in discussions with Goldman about restructuring his personal loans.

Peloton’s business deteriorated throughout the spring and summer, with the company in August reporting a $1.2 billion loss and the first ever quarter in which its subscriber numbers failed to grow. The company has cut thousands of jobs this year to stem its losses, including a round of layoffs unveiled last week.

Mr. Foley’s 10-year tenure as CEO was marked by rapid growth and sometimes lavish spending. He took heat from Peloton employees last December for hosting a black-tie holiday party that included some of the company’s celebrity instructors weeks after implementing a hiring freeze. Pictures circulated on Instagram of gown-clad instructors dancing at New York’s luxury Plaza Hotel. Mr. Foley acknowledged on social media that the event caused “frustration and angst” among employees.

Peloton has been on a wild ride, announcing its CEO was stepping down and thousands of jobs would be cut, despite seeing a surge in sales early in the pandemic. Here’s why Peloton became a viral success, and why it’s spinning out now. Photo illustration: Jacob Reynolds

That same month, Mr. Foley paid $55 million to purchase an oceanfront mansion in East Hampton, N.Y., according to real-estate records and people familiar with the transaction. He and Ms. Foley in September put their Manhattan penthouse up for sale. The property, last priced at $6.5 million, is in contract to be sold, according to listings website StreetEasy.

Margin loans, or borrowing against portfolios of stocks and bonds, come with the risk that a broker can call for additional cash or collateral to meet the minimum equity required if a security’s price drops too low. Sharp drops in stock prices during the 2000 dot-com burst and the 2008 financial crisis generated margin calls for executives at well-known companies.

John Foley paid $55 million to purchase this oceanfront mansion in East Hampton, N.Y.



Photo:

PICTOMETRY

Peloton requires directors, executives and employees to get approval for pledging their shares as collateral for margin loans. Other Peloton executives also have pledged some of their Class B holdings, and in the annual report Peloton filed last month, the company warned that investors could be harmed if its stock fell and executives were forced to sell shares.

Goldman has worked closely with Peloton, including when Mr. Foley was the CEO. The investment bank was one of the lead underwriters of the company’s initial public offering in 2019. Goldman bankers also co-led a $1 billion stock offering in November 2021.

Investors initially soured on Peloton—its shares fell 11% the day they made their debut at $29. The stock surged in 2020 during the onset of the Covid-19 pandemic, giving the company a peak market value of $50 billion and making Mr. Foley a billionaire on paper. The shares closed down 3.4% Tuesday at $8.78.

and Katherine Clarke contributed to this article.

Write to Sharon Terlep at sharon.terlep@wsj.com and Suzanne Vranica at suzanne.vranica@wsj.com

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Peloton’s Quarterly Loss Tops $1.2 Billion

Peloton Interactive Inc.,

PTON -19.32%

racing to save itself, will reject some of the most fundamental aspects of its decade-old business model. 

The once-hot maker of connected fitness equipment posted losses of more than $1.2 billion in the most recent quarter as revenue plunged and the company warned it would spend more cash than it brings in for several more months. Peloton lost $2.8 billion in the year ended June 30, compared with a $189 million loss in the prior year.

Losses come as demand for Peloton’s bikes and treadmills has plunged and the company’s count of people who subscribe to its fitness classes stagnated after growing fourfold since early 2020. The company had about 3 million subscribers to its connected fitness offering at the end of the June quarter.

Peloton CEO Barry McCarthy aims to make Peloton primarily a subscription-based company.



Photo:

Kevin Dietsch/Getty Images

Peloton shares were down nearly 20% in morning trading, as the company posted steeper losses and weaker revenue than analysts had projected. Through Wednesday’s close, its share price was down 88% from a year ago.

“The naysayers will look at our [fourth-quarter] financial performance and see a melting pot of declining revenue, negative gross margin, and deeper operating losses. They will say these threaten the viability of the business,” Chief Executive

Barry McCarthy

said in a letter to shareholders. “But what I see is significant progress driving our comeback and Peloton’s long-term resilience.”

Peloton has long sought out an affluent base of customers with stationary bikes that cost up to $2,500, and has worked to ensure only owners of its equipment are able to connect to its popular workout classes.

Mr. McCarthy, who took over in February, said the company also will court more frugal customers and make its workout classes, often accessed through screens on Peloton equipment, compatible with competitors’ exercise products.

He said the company is also trying to bring more people in through selling equipment and clothes through Amazon.com Inc.’s e-commerce platform to letting people rent bikes through a subscription. Peloton historically has offered two subscription options, one in which courses connect to bikes and treadmills and cheaper options in which classes aren’t connected.   

“You never know which initiative is going to get us where we want to go, but I am confident of the cumulative effect,” Mr. McCarthy said in a call with analysts. 

The efforts come as Peloton’s finances deteriorate. 

Revenue for the June quarter fell to $679 million, a nearly 30% drop from a year ago as declining exercise equipment sales more than offset higher revenue from subscriptions. 

Efforts to restructure the company contributed to it burning through $412 million in cash in the latest quarter, after going through $650 million in each of the prior two periods. It ended June with $1.25 billion in cash reserves and a $500 million credit line. 

Peloton is taking steps to shore up its finances, from sweeping layoffs to outsourcing manufacturing of its fitness equipment. The company said earlier this month it would cut around 800 jobs in an effort to reduce costs, after announcing in February it would lay off about 2,800 workers. Executives said cost-cutting aims to ensure the company maintains at least $1 billion in available cash.

One of the pandemic’s biggest winners, Peloton has struggled to adapt as Americans revert to prepandemic habits and tighten spending amid inflation near its highest level in decades. Americans are spending less on in-home fitness, from sales of equipment to connected workouts, as they return in droves to gyms and become increasingly cautious about spending available cash amid economic uncertainty.

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Mr. McCarthy’s predecessor, Peloton co-founder

John Foley,

spent hundreds of millions of dollars to expand the company’s manufacturing and supply, betting that demand would hold as the pandemic waned. Along with replacing Mr. Foley, the company earlier this year made changes to its board and said it would cancel plans for a $400 million factory in Ohio.

For the first time, in the most recent quarter, Peloton’s subscription revenues were greater than equipment sales. Mr. McCarthy, who previously worked at

Spotify Technology SA

and

Netflix Inc.

, aims to make Peloton primarily a subscription-based company. Subscriber revenue for the quarter was $383 million; equipment sales were $296 million. 

Peloton’s subscriber count rose by just 4,000 in the quarter ended June 30 and the company predicts that the total number of subscribers will remain flat in the current quarter.

It is a big change from the start of 2021, when Peloton’s quarterly revenue peaked at $1.2 billion, and exercise equipment comprised more than 80% of sales. 

The company said it expects total revenue between $625 million and $650 million for the current quarter, which ends Sept. 30.

Mr. McCarthy, in his investor letter, likened Peloton to a dangerously tipping cargo ship he was aboard as a high-schooler when the crew managed a dramatic recovery.

“Peloton is like that cargo ship,” he said. “We’ve sounded the alarm for general quarters. Everyone’s at their station.”

Write to Sharon Terlep at sharon.terlep@wsj.com

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Peloton Swaps Out Finance Chief as It Navigates Persistent Losses

Peloton Interactive Inc.

is exchanging its top finance executive about four months after it named a new chief executive, a move that comes as the fitness-equipment maker navigates persistent losses.

The New York-based at-home exercise equipment company on Monday said

Liz Coddington

will serve as its chief financial officer, effective June 13. Peloton said its current CFO,

Jill Woodworth,

decided to leave after more than four years with the company.

Peloton said Ms. Woodworth will remain with the company as a consultant on an interim basis to help prepare the fiscal year 2022 financial results.

Ms. Coddington most recently served as vice president of finance for Amazon Web Services, an

Amazon.com Inc.

subsidiary that provides on-demand cloud computing platforms. Before that, she held CFO and leadership finance roles at companies including retailer

Walmart Inc.

and streaming business

Netflix Inc.

Ms. Coddington joins Peloton as the company is dealing with waning demand from consumers after facing issues around its ability to meet orders, which soared during the early stages of the pandemic. The surge in demand for Peloton bikes led the company to break ground on a million-square-foot factory in Wood County, Ohio, last year.

Peloton is now looking to sell the factory that it will never use. The company also slashed prices for its equipment, projected slower growth and had to borrow $750 million to fund its operations.

Peloton in May reported its largest quarterly loss since the company went public in 2019, reporting a net loss of $757.1 million for the quarter ended March 31, compared with a loss of $8.6 million in the prior-year period.

In February, Peloton replaced Chief Executive

John Foley

with

Barry McCarthy,

who previously led the finances of digital music service

Spotify Technology SA

and Netflix. The company also cut 2,800 jobs amid reduced demand for its exercise equipment. Mr. Foley was closely associated with the company’s growth phase after its public offering and the revenue surge early in the pandemic.

The change in the CFO-seat makes sense given the continuing restructuring under Mr. McCarthy, said

Rohit Kulkarni,

managing director at equity trading and research firm MKM Partners LLC.

“As the new CEO puts his mark on the organization’s structure and aligns it with where he wants the company to go, these changes are not completely surprising,” he said.

With Peloton’s fiscal year ending June 30, Ms. Coddington will very quickly be “under a bigger investor microscope,” as the expectation is that the company will release fiscal year guidance soon after she joins, Mr. Kulkarni said. “It will be a challenging task to provide that new guidance.”

Write to Jennifer Williams-Alvarez at jennifer.williams-alvarez@wsj.com and Mark Maurer at Mark.Maurer@wsj.com

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A Peloton Bike and Subscription for One Monthly Fee? Company to Test New Price Plans

Peloton Interactive Co.

PTON -5.33%

’s new chief executive is looking to overhaul the stationary-bike maker’s pricing strategy in a bid to turn around the company.

The company on Friday will start testing a new pricing system in which customers pay a single monthly fee that covers both the namesake stationary bike and a monthly subscription to workout courses. If a customer cancels, Peloton would take back the bike with no charge.

Select Peloton stores in Texas, Florida, Minnesota and Denver will for a limited period offer a bike and subscription for between $60 and $100 a month, an experiment that aims to find a price proposition that will help return Peloton to profitability without crippling growth.

If adopted, the model would be a major shift for Peloton, which built a business around selling high-price, screen-equipped stationary bikes alongside $39-per-month subscriptions to its connected workout classes. The idea: sell Peloton as a fitness service that can be canceled anytime rather than as a major purchase with a subscription attached.

“There is no value in sitting around negotiating what the outcome will be,”

Barry McCarthy,

who last month replaced co-founder

John Foley

as CEO, said in an interview. “Let’s get in the market and let the customer tell us what works.”

Along with a pricing overhaul, Mr. McCarthy, the 68-year-old former finance chief of

Netflix Inc.

and

Spotify Technology SA,

said he plans to reshape his executive team, consider manufacturing simpler bikes, and upend the company’s capital spending strategy. Rather than investing primarily in bikes, treadmills and other equipment, he said, Peloton will spend most of its money improving its digital interface and content options.

He said inventors that control 70% of voting shares of Peloton, including Mr. Foley, have agreed to put off any discussions around selling the company while he executes his turnaround plan. Mr. Foley still controls around 35% of voting power even after selling about $150 million worth of his shares in the company since the start of 2021, said Ben Silverman, director of research at InsiderScore. That voting power is because of his holdings of Class B shares, which entitle holders to 20 votes a share.

Initially one the pandemic’s biggest success stories, New York-based Peloton has lowered its revenue forecasts for several quarters in a row and has said it would cut roughly 20% of its corporate positions to help cope with widening losses as demand cools.

The $39-a-month subscription price has existed essentially since Peloton’s inception. In recent years, the company has lowered the cost of its bikes and treadmills, either by cutting prices or offering cheaper options. A Peloton bike in 2020 cost $2,495; now the cheapest model is $1,495, not including a delivery charge.

CEO Barry McCarthy said a different pricing system could draw new customers and make the business more profitable.



Photo:

brendan mcdermid/Reuters

Under the test program, people get a Peloton and a membership that includes access to all its courses for a single monthly fee, with the ability to cancel anytime. The offers would be available through Peloton stores, or studios, and not online. Subscribers would pay a nonrefundable delivery fee.

Mr. McCarthy said a different pricing system could draw new customers and make the business more profitable.

His predecessor, Mr. Foley, argued that Covid was only the beginning of Americans’ shift to online, connected fitness. Based on that assumption, Mr. Foley dramatically increased the company’s capacity, which proved to be well in excess of demand as legions of people returned to gyms and Peloton’s growth sputtered

That misstep, Mr. McCarthy said, led to Peloton’s current woes.

Now, he said, Peloton has to figure out how to tap new customers and make more money on each subscription, while reducing its reliance on bikes and treadmills to deliver profits.

Given Peloton’s ability to retain subscribers, Mr. McCarthy said, higher subscription rates carry big profit potential over time. Even at $39, Peloton subscriptions are hugely profitable, he said. He said he wants to employ models that succeeded at Spotify and Netflix and that Peloton has far higher retention rates than either of those companies.

“I’m a huge proponent of them charging more for subscriptions,” said BMO Capital Markets analyst Simeon Siegel. “But they need to internalize that that will hurt their brand and lower demand,” while making the company more profitable.

He said the fact that Peloton’s growth has slowed dramatically despite cutting the price of equipment casts doubt on whether any changes to the pricing model will win converts.

A Peloton spokeswoman said the ability of customers to cancel anytime differentiates the potential new model from previous price cuts.

Peloton has been on a wild ride, announcing its CEO was stepping down and thousands of jobs would be cut, despite seeing a surge in sales early in the pandemic. Here’s why Peloton became a viral success, and why it’s spinning out now. Photo illustration: Jacob Reynolds

Profitability of Peloton’s exercise equipment is sharply lower than it was before the pandemic, as the company struggles with higher production and logistics costs and excess capacity.

Equipment sales have been vital because the physical machines, while more costly to make, generate more than twice as much revenue as subscriptions, UBS analyst Arpiné Kocharyan said.

Equipment sales have funded Peloton’s ballooning marketing spending up until now, Ms. Kocharyan said. “If you are going to get out of the product business, who is going to pay for that sales and marketing?” she said.

Mr. McCarthy said it isn’t yet clear the role Peloton machines will play in the company’s future. He said roughly 80% of capital spending goes toward equipment, with the rest spent on software. That should be reversed, he said.

Among potential offerings he thinks Peloton should look at developing: its own social-media platform, more seamless ways for members to interact and compete with each other during classes, and partnerships that could land Peloton classes on other devices, or allow outside content to stream on Peloton’s screens.

At the moment, Mr. McCarthy said, Peloton will fervently market test, a strategy more reliable than focus groups and consumer surveys. Netflix also did market tests to see what caused subscribers to ditch the service or keep it, he said.

There isn’t much middle ground between success and failure, he said.

“Either I’m going to leave here successfully,” he said, “or I’m going to leave with a greatly diminished reputation.”

Write to Sharon Terlep at sharon.terlep@wsj.com

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The Hidden Ways Companies Raise Prices

Lettuce Entertain You Enterprises Inc., a Chicago-based restaurant group, has added a 3% “processing fee” to checks at many of its restaurants.

Harley-Davidson Inc.

added a charge last year to its motorcycles to cover rising material costs.

Peloton Interactive Inc.

in January began charging $250 for delivery and setup of some of its indoor bikes, a service that was previously included free.

Companies are finding all kinds of ways to make consumers pay for rising costs. Often that is not reflected in the posted price.

The Labor Department’s consumer-price index, which measures how much consumers pay for goods and services, rose to 7.5% in January compared with the same month a year earlier—the biggest rise since February 1982.

The index accounts for some changes that raise consumers’ costs, such as smaller package sizes and some fees attached to hotel packages or car purchases. But it can miss other ways in which dollars don’t stretch as far– a hotel that changes sheets only between guests, a theme park that cancels its free airport shuttle, or an auto dealer that requires customers to buy a protective paint coating with a car.

With supply-chain challenges, pent-up demand and a tight labor market leading to inflation, businesses are looking for subtle ways to pass along rising costs. Particularly in the food business, companies have long used what the industry calls weight-outs, or shrinking package contents instead of raising prices, during economic distress periods such as the 2007-2009 recession.

“There is a lot more to come,” said

Doug Baker,

head of industry relations for FMI, a food-industry trade organization. “Everything is on the table in an effort to deal with those cost increases, and at the same time, not make it too difficult for consumers to shop.”

A global computer-chip shortage has reduced vehicle inventories just as Americans were buying cars in record numbers, pushing up prices for new vehicles. In many cases, they are selling for thousands of dollars above manufacturers’ suggested retail prices, said Tom McParland, founder of Automatch Consulting, which helps consumers find vehicles.

“They’re calling it a market adjustment fee,” said Mr. McParland. “That’s the new thing they are doing: hiding markups with substantially overpriced accessories like mud flaps and cargo protectors.”

Ford Motor Co.

and

General Motors Co.

have said they are cracking down on dealerships using that tactic.

Harley fees

Base prices on Harley-Davidson’s motorcycles haven’t gone up much in recent years, the Milwaukee company said. But to cover rising costs, it added a mandatory materials surcharge last year, which dealers are passing on to customers. Dealers said the fee, which varies based on the model, is easier for the company to adjust than base motorcycle prices when costs decrease.

Dealers said the fee is $850 to $1,500 a bike. Harley this week told analysts that the surcharges helped boost revenue during the fourth quarter last year.

Harley-Davidson added a fee to its motorcycles to cover rising material costs; a dealership in Louisville, Ky., this week.



Photo:

Luke Sharrett/Bloomberg News

Some restaurants are adding new fees in response to escalating costs for food and packaging, and for wage increases executives say are needed to keep cooks and servers.

Brinker International Inc.’s

Maggiano’s Little Italy in October 2020 started charging $5 for a second, to-go pasta dish offered as part of a two-entree deal. For about a decade before the pandemic, the chain had offered a second classic pasta dish free.

“We’ve had no push back,” Maggiano’s president Steve Provost told investors last October. A Brinker spokeswoman said the price change allowed the company to invest more in the value of its carry-out offerings.

When Michael Pfeifer, a marketing professional, picked up the check for his meal at

RPM

Seafood in Chicago this week, he was surprised to find a 3% Covid surcharge added to the bill. “What’s next?” he said. “A dishware rental fee?”

The fee, added in the spring of 2020, offsets the cost of pandemic-related government regulations and mandates, said RJ Melman, president of Lettuce Entertain You, which owns RPM. “These fees can be removed and refunded for any guest that requests,” he said, “no questions asked.”

Peloton, according to its website, is adding the new $250 fees on bikes and a $350 delivery-and-setup fee for some of its treadmills. It cut the price of its original stationary bike in August to $1,495 from $1,895. With the added fees, the total price is now back up to about $1,745, as the company dealt with slowing demand and its own rising costs.

Peloton declined to comment on the fees. In an earnings call on Tuesday, Peloton CFO

Jill Woodworth

said that the fees could cut into consumer demand but that they were part of a “critical learning” process as the company restructures and cuts costs for the post-pandemic era.

Walt Disney Co.

’s Disney World in Orlando stopped offering free airport shuttles—known as the Magical Express—this year, leaving Disney guests to pay for their own transportation. The parks added several fees last year while keeping the base ticket price at $109. A fast-pass system that let park guests make reservations for rides, which used to be free, was discontinued and replaced by a new system that costs $15. And some popular rides, like Star Wars: Rise of the Resistance and Space Mountain, now cost between $7 and $15, on top of the park admission ticket.

Disney offers “a wide range of options to match different budgets and interests,” said Disney spokesman Avery Maehrer.

At its theme-park restaurants, Disney is trying to avoid across-the-board price increases, Disney CFO

Christine McCarthy

told analysts in November. “We can substitute products. We can cut portion size, which is probably good for some people’s waistlines,” she said. “But we aren’t going to go just straight across and increase prices.”

Consumer backlash

Consumer pressure has led some companies to back off added fees, including

Frontier Group Holdings Inc.

The airline, which uses a la carte pricing that lets frugal travelers choose to forgo amenities, in May 2021 added a $1.59-per-flight-segment Covid-related fee. After consumer backlash, Frontier in June stopped breaking it out as a component of its base fare but it didn’t stop charging it. Frontier didn’t respond to requests for comment.

In a press release it said: “The charge, which was included in the airline’s total promoted fare versus an add-on fee, was meant to provide transparency and delineate what portion of the fare was going toward COVID-related business recovery.”

Some of

Marriott International Inc.’s

Autograph Collection hotels had been charging a “sustainability fee” of about $5 a night. The company that manages the properties, Innkeeper Hospitality Services LLC, says it covered things like more-efficient HVAC systems.

They stopped charging the fee several weeks ago, “because we understand that while we believe in environmentally responsible stewardship, not everyone cares about our planet’s health,” IHS CEO Amrit Gill said. He said Marriott had asked the company to stop charging the fee. Marriott declined to comment.

The Biden administration has begun to look into some forms of hidden fees, which it calls “junk fees.” The administration says the amount being charged is not always tied to the costs faced by the company providing the goods or services. The Consumer Financial Protection Bureau is seeking public input on financial services, such as bank overdraft fees, while the Transportation Department is planning actions on airline baggage fees.

John Fiorello, a father of four in Torrington, Conn., was dismayed to see prices rising in his local grocery-store aisles but was initially pleased to see that the blocks of cheese he usually buys hadn’t gone up much in price—perhaps 10 cents, he said. Then he noticed that the package had shrunk, to 12 ounces from 16.

“I picked up the block and said, ‘this is definitely smaller,’ ” Mr. Fiorello said. “It just adds an extra layer of stress.”

Shrinkflation, as economists call it, tends to be easier for companies to pass on to consumers. Despite labels that show price by weight, research shows that most customers look at only the overall price.

The food industry has long shrunk package contents instead of raising prices during economic-distress periods; a Salt Lake City grocery store in October.



Photo:

George Frey/Bloomberg News

“There are sizes that people remember, like a half gallon of ice cream,” said John Gourville, a Harvard Business School professor. “Once you break from iconic sizes, it’s pretty easy to move from 13 ounces to 12 ounces.”

Over the years, tuna cans have come to contain less tuna and toilet-paper rolls less tissue, said

Burt Flickinger III,

managing director of Strategic Resource Group, a consulting firm that works with consumer-product companies. “Historically,” he said, “it’s called a ‘cheater pack.’ ”

Companies have become more sophisticated and use multiple tactics to protect their profitability, he said. They can pull back on discounts, stop making low-selling products and create new varieties that sell for higher prices

Downsized Oreos

Oreo-maker Mondelez International Inc. raised prices by an average of 6% to 7% in the U.S. last month, but it wasn’t enough to make up for its higher costs, the company said. So Mondelez has been introducing new sizes and flavors it says are more profitable.

Oreo’s new 110th Birthday chocolate confetti-cake cookies cost about 10 cents more than regular Double Stuf Oreos at several grocery stores, even though the new flavor comes in a slightly smaller package. At a

Target Corp.

store in Chicago, the limited-edition birthday Oreos, which came out January, cost $3.79 for a 24-cookie package and the Double Stuf ones cost $3.69 for a 30-cookie package.

Retailers set the final prices. Mondelez said it charges the same for the two products, and its limited edition flavors are typically different-sized packages than regular ones. A Target spokesperson said: “We’re priced competitively throughout the markets we do business.”

Economists and analysts at the Labor Department’s Bureau of Labor Statistics monitor prices of thousands of goods and services. They can account for shrinkflation, because they track the cost of certain products by weight and quantity—so a cereal box that costs the same amount but now has 30% less volume would be registered as a price increase.

They said their efforts can’t identify every fee or dropped amenity, such as a hotel room rate that remains the same but that no longer includes fresh towels or a hot breakfast. “We do not capture the decrease in service quality associated with cleaning a room every two days rather than one,” said Jonathan Church, a BLS economist.

Disney World in Florida added several fees last year while keeping the base ticket price at $109; the Magic Kingdom last summer.



Photo:

Joe Burbank/Orlando Sentinel/Associated Press

Jeremiah Mayfield and Carlos Larrea stayed at Alohilani Resort in Honolulu in December and opted for a $75 a-night upgrade to “club level” for free food and drinks. But they said they could rarely use it because the resort didn’t have enough staff to replenish the club-level amenities. After complaining, they were offered free dinner.

Alohilani General Manager Matthew Grauso said that quality and efficient guest service are top priorities and that he tries to remedy any shortfalls immediately, adding, “The pandemic has presented a unique set of challenges within the hospitality industry.”

“We gave them hell for it,” Mr. Mayfield said. “We paid $800 a night. We never expected it would be so scarce in terms of service and amenities.”

Many hotel chains are replacing complimentary hot breakfast buffets with a snack bag. Some fitness centers and pools remain closed, and housekeeping doesn’t refresh rooms daily. Some guests feel like they are getting less for their money.

InterContinental Hotels Group

PLC, which owns Holiday Inn, said it has been working with hotels to return amenities and make it right if guests aren’t satisfied. “Hotel teams have been overcoming many challenges including supply chain and labor shortages, changing health guidance and regulatory requirements,” an IHG spokesperson said.

On a recent trip to St. Louis, Meg Hinkley booked a Holiday Inn because it said online that it offered room service. When she arrived, the restaurant was closed, so there was no room service. She said she would have stayed at a lower-priced hotel if she had known. “I was paying for that convenience.”

Write to Annie Gasparro at annie.gasparro@wsj.com and Gabriel T. Rubin at gabriel.rubin@wsj.com

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Peloton CEO John Foley to Step Down, Firm to Cut 2,800 Jobs

Peloton Interactive Inc.

PTON 20.93%

plans to replace its chief executive, cut costs and overhaul its board after a slowdown in demand caused the once-hot bike maker’s value to plummet.

Peloton co-founder

John Foley,

who has led the company for its entire 10-year existence, is stepping down as CEO and will become executive chairman, the company told The Wall Street Journal.

Barry McCarthy,

the former chief financial officer of

Spotify Technology SA

and

Netflix Inc.,

will become CEO and president and join Peloton’s board.

The New York company will also cut roughly 2,800 jobs, affecting 20% of its corporate positions, to help cope with the drop-off in demand and widening losses. The cuts won’t affect Peloton’s instructor roster or content.

A little over two weeks ago, activist investor Blackwells Capital LLC called for Peloton to fire Mr. Foley and explore a sale of the company, which the Journal has reported is attracting potential suitors including Amazon.com Inc.

Blackwells reiterated its call Tuesday, saying Mr. Foley should leave the company entirely rather than become executive chairman. The company also released a 65-page presentation in which it estimated a sale could value Peloton above $65 a share. Peloton shares closed Monday at $29.75.

“We are open to exploring any opportunity that could create value for Peloton shareholders,” Mr. Foley said in an interview prior to Blackwells’s Tuesday release. Mr. Foley, a former Barnes & Noble Inc. executive who co-founded Peloton 10 years ago last month, declined to comment further.

The naming of a new CEO could indicate that Peloton sees an independent future for itself, or at least doesn’t want to sell at the current depressed share price. Any deal would likely require Mr. Foley’s support, as he and other insiders have shares that gave them control of over 80% of Peloton’s voting power as of Sept. 30, according to a securities filing.

Former Spotify CFO Barry McCarthy said his strength is a deep understanding of content-driven subscription models.



Photo:

Michael Nagle/Bloomberg News

Once a pandemic darling as homebound customers ordered its exercise equipment and streamed its virtual classes and its valuation soared, Peloton’s fortunes have recently sagged, with its stock until recently trading below its September 2019 IPO price of $29 a share as lockdowns ease and gyms start to fill up again.

The company’s shares fell 2% in early Tuesday trading. The company confirmed news of the leadership changes and reported a second-quarter net loss of $439 million. Peloton also lowered its revenue forecast for its full fiscal year to a range of $3.7 billion to $3.8 billion, down from its prior range of $4.4 billion to $4.5 billion.

The company’s value has fallen from a high of around $50 billion roughly a year ago to around $8 billion last week, before its shares rose 21% Monday on news of potential suitors.

Peloton has said it was planning cost cuts and reviewing the size of its workforce and production levels. Investors have been awaiting details of its plans.

Messrs. Foley and McCarthy said that the company had long been planning to hire a new CEO and that Mr. McCarthy entered the picture in the past few weeks.

“I have always thought there has to be a better CEO for Peloton than me,” said Mr. Foley, 51. “Barry is more perfectly suited than anybody I could’ve imagined.”

Mr. McCarthy, who is in his late 60s and plans to move from California to New York, said his strength is a deep understanding of content-driven subscription models, while Mr. Foley’s is in product development and marketing.

“Together we can make a complete grown-up and build a really remarkable business,” Mr. McCarthy said. He has consulted for Peloton investor Technology Crossover Ventures, sits on the boards of Instacart Inc. and Spotify, and was CFO of the music-streaming service until early 2020.

Peloton is making other personnel changes:

William Lynch,

the company’s president, will step down from his executive role but remain on the board;

Erik Blachford,

a director since 2015, will leave the board; and two new directors will be added.

The new directors are

Angel Mendez,

who runs a private artificial-intelligence company focused on supply-chain management, and

Jonathan Mildenhall,

the former chief marketing officer of

Airbnb Inc.

and co-founder of branding company TwentyFirstCenturyBrand.

Peloton said it expects to cut roughly $800 million in annual costs and reduce capital expenditures by roughly $150 million this year. The company will wind down the development of its Peloton Output Park, the $400 million factory that it said in May it was building in Ohio, and reduce its delivery teams as well as the amount of warehouse space it owns and operates.

“Where the company got over its skis is it built out a cost structure as if Covid was the new normal,” Mr. McCarthy said.

Mr. Foley has said the company is acting to improve its profitability and would share details with earnings. The company reported preliminary second-quarter revenue of $1.14 billion and said it ended the period with 2.77 million subscribers.

Peloton’s Pandemic Rise and Fall

Write to Cara Lombardo at cara.lombardo@wsj.com

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With Peloton, ‘Patience Required.’ Deutsche Bank Starts Coverage at Buy.

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A Peloton stationary bike for sale at the company’s showroom in Dedham, Massachusetts, U.S., on Wednesday, Feb. 3, 2021.


Adam Glanzman/Bloomberg

Shares of


Peloton Interactive

were falling Friday even after Deutsche Bank initiated coverage on the stock at Buy despite its recent tumbles.

In addition to the Buy rating, analyst Chris Woronka set a $76 price target, which implies a nearly 80% upside from the stock’s closing price on Dec. 1 of $42.25.

“While it’s never fun to lead off a Buy report with a ‘patience required’ asterisk of sorts, that’s exactly what we find ourselves doing here,” Woronka wrote.

The exercise bike manufacturer (ticker:


PTON

) became a darling stock in 2020 when the coronavirus pandemic boosted sales of at-home exercise equipment. It has since lost favor among Wall Street bulls as the company has grappled with manufacturing woes and people have returned to gyms.

Peloton stock was down 4% to $42.63 on Friday. The shares have lost about 71% this year.

Disappointing third-quarter earnings sent the stock on a downward spiral in November, driving it to its lowest levels since July 2020 and prompting a series of price target slashes. Peloton reported a net loss of $376 million, or $1.25 a share, in its latest quarter, delivering a worse performance than the loss of $1.10 a share expected by Wall Street. 

Peloton now expects to end the 2022 fiscal year with 3.35 million to 3.45 million connected fitness subscribers, down from a prior forecast of 3.63 million. Its outlook for fiscal-year revenue ranges from $4.4 billion to $4.8 billion, down from a prior forecast of $5.4 billion.

Of the 31 analysts covering the stock, 16 rated it a Buy, 12 rated it a Hold, and two rated it a Sell.

In his note, Woronka noted that the market is looking at fitness stocks as an “either/or” sector — either people return to gyms full-time or continue working out at home.

“That’s an oversimplified view of the world; we think the hybrid work model extends to fitness, too, and that PTON has plenty of momentum to regain operationally,” he said.

Woronka brushes off fears that the at-home fitness trend was just a “fad,” pointing to Peloton’s strong growth trajectory before the first Covid case was reported.

While investors have been spooked off by lower sales volumes for the company’s core Bike product and recent recall of its Tread Plus machine, Woronka sees several upsides in the coming year. Peloton’s new, lower -priced Tread model could outpace the Bike units within a few quarters, he said. He also foresees the company’s subscription revenue growing rapidly by 2024.

He also outlined other growth opportunities for the company, such as tapping into the corporate fitness market and expanding into international markets to continue growing.

The brand also has a cult-like following that it could leverage to “expand the content platform into new, adjacent mediums that don’t necessarily fit neatly into the traditional fitness bucket,” Woronka wrote. Peloton’s churn rate is extremely low, hovering below 1% for all periods the company has disclosed it dating back to 2019.

“We think if indeed the stock can regain its footing for fundamental reasons, it has quite a bit of room to run,” he said.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

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Peloton Stock Is Tumbling. A Disappointing Report Sinks Another Pandemic Play.

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Peloton stock is down double-digits in after-hours trading after the at-home fitness company reported a big loss and cut guidance.


Courtesy Peloton


Peloton Interactive

was the latest pandemic-play stock casualty this earnings season. Shares were diving in premarket trading Friday after the at-home fitness firm reported a wider-than-expected net loss for the September quarter, and cut its full fiscal-year outlook.

Peloton reported a fiscal-first-quarter net loss of $376 million, or $1.25 a share. Total revenue grew 6% year over year to $805.2 million. Wall Street’s consensus estimate called for a net loss of $1.10 a share on revenue of $808.7 million, according to FactSet.

The company, which sells bikes and treadmills that pair with $39.99 a month subscriptions, said average monthly workouts per connected fitness subscription dropped to 16.6 from 20.7 a year ago. Investors watch that metric for signs of engagement.

Peloton stock dropped 33.5% to $57.27 early Friday. The stock set a 52-week intraday high of $171.09 in January. The company joins


Roku

(ROKU) and


Chegg

(CHGG) as popular pandemic plays that are now disappointing investors with reports this week.

Peloton now expects the 2022 fiscal year to end in June with 3.35 million to 3.45 million connected fitness subscribers, down from a prior forecast of 3.63 million. Its outlook for fiscal-year revenue ranges from $4.4 billion to $4.8 billion, down from a prior forecast of $5.4 billion.

For the fiscal second quarter, which includes the all-important holiday season, the company expects to hit connected fitness subscribers of between 2.8 million to 2.85 million. It expects revenue in the range from $1.1 billion to $1.2 billion for the quarter, below Wall Street’s consensus estimate of $1.49 billion, according to FactSet. The company said that so far, the fiscal second quarter has been softer than expected.

“With the benefit of adequate inventories and order-to-delivery windows that are now back to pre-pandemic levels, we expect a healthy holiday selling season,” the company added in a prepared statement. “Our forecast assumes unit sales modestly ahead of last year’s Q2 levels, driven by growing consumer interest in the Connected Fitness category and a resumption of our marketing and promotional activity.”

Write to Connor Smith at connor.smith@barrons.com

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