Peloton's new CEO slammed by activist investor Blackwells Capital

Peloton's new CEO Barry McCarthy isn't doing enough, says activist investor Blackwells Capital, and former CEO now executive chairman John Foley could be partly to blame. 

"Two months have passed since John Foley was promoted into the role of Executive Chairman and Barry McCarthy came out of retirement to assume the post of CEO. Remarkably, shareholders are worse off now than before," Blackwells chief investment officer Jason Aintabi said in a statement. "Having provided Mr. McCarthy a $275 million sign-on compensation package, they remain at the whim of former CEO John Foley, who appears financially distressed – and a forced seller of the Company’s stock – even while he still controls the Company." 

On Feb. 28, Foley sold approximately $50 million in Peloton stock at a 12% discount to MSD Partners, an investment firm backed by Michael Dell. Blackwells argues the move has exacerbated "misalignment with other shareholders."

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According to a presentation released by Blackwells on Wednesday, Peloton shareholders have lost nearly $2 billion in market value since McCarthy assumed the role of chief executive officer. They blame the declines on issues related to cost structure, capital allocation, inventory management and quality control.

The firm, which owns a nearly 5% stake in the fitness giant, believes Peloton has the potential to be shaped into a much more attractive business. However, they argue that change cannot effectively happen in the public markets as long as a small group of insiders, including Foley, continue to maintain voting control. 

"Blackwells calls upon Mr. Foley to recognize his own limitations and the dampening effect his control has on public market investors by immediately eliminating the dual class structure," Aintabi added. "Blackwells continues to believe that Peloton cannot be controlled by an Executive Chairman who appears to be under extreme duress, and will pursue all remedies available to it and to all shareholders."

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In the presentation, Blackwells recommends that Peloton should outsource all manufacturing and focus critical resources on turning Peloton into a fitness-as-a-service platform (FaaS). They emphasize that Peloton becoming a software-focused company and one-stop shop for physical and mental health wellness would allow them to tap millions of new potential subscribers and expand into new markets including gyms, offices, hotels, schools and universities and hospitals and medical centers. 

"If Peloton’s Fitness-as-a-Service, comprehensive health and wellness offering can penetrate even 2% of the already physically active adults in high-income countries, the Company could add approximately 16 million additional users, increasing its current subscriber base by nearly 6x," Blackwells notes. 

Blackwells also floats the idea of creating a social media platform for the Peloton user community, adding that the move could potentially generate over $155 million in incremental subscription revenue per year. 

In addition, the company reiterated its previous call for Peloton to pursue a sale and proposed several options for a strategic acquirer, including Amazon, Apple, Google, Warner Bros. Discovery, SiriusXM, Liberty Complex, Netflix and Nike.  

"At current valuation levels Peloton would need to more than double last-twelve-months (LTM) revenue and grow connected fitness subscribers from 2.8 million to 18.6 million to organically grow to the $75 / share that Peloton is worth in a sale," Blackwells notes. 

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Along with McCarthy's appointment, Peloton announced a series of cost-cutting measures in February expected to deliver at least $800 million of annual run-rate cost savings. The company's restructuring has included cutting 2,800 jobs. 

Under McCarthy's leadership, the company has hired a new supply chain officer, started testing a new pricing system in which customers pay a single monthly fee for workout equipment and access to on-demand fitness classes, and launched Peloton Guide, a TV-connected device that tracks a user's movements and offers personalized metrics and workout recommendations. 

However, Blackwells argues that the cost reduction plan lacks transparency and does not go far enough and that the new supply chain executive does not appear to have the experience necessary to resolve Peloton's "extensive inventory and production problems". The firm also called Peloton Guide "underwhelming" and claimed that the company "appears to be facing more quality control issues with its bikes."

McCarthy previously told the Wall Street Journal that discussions about a sale of Peloton have been put off while the company executes its turnaround plan.

"We appreciate the views of our shareholders and have acted, and will continue to act, in the best interest of all Peloton shareholders," a Peloton spokesperson told FOX Business.