Peloton Sinks After Voluntarily Recalling Treadmills

Peloton's CEO says 'we made a mistake in our initial response to the Consumer Product Safety Commission’s request" for a recall. The shares are lower.
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Peloton Interactive  (PTON) - Get Report was sliding on Wednesday after U.S. regulators and the fitness equipment maker jointly said they were recalling the company's Tread+ and Tread treadmill machines after injuries and a death.

Shares of the New York company were down 13.3% to $83.80 at last check.

Peloton is scheduled to report third-quarter earnings on Thursday.

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The U.S. Consumer Product Safety Commission said in a statement that consumers who bought either treadmill should immediately stop using it and contact Peloton for a full refund.

A 6-year-old child died after being pulled under the rear of the Tread+, the commission said. 

In addition, Peloton has received 72 reports of adult users, children, pets or objects being pulled under the rear of the Tread+. These include 29 reports of injuries to children, such as second-and third-degree abrasions, broken bones, and lacerations.

Last month, the commission issued an "urgent warning" linked to the devices.

Robert Adler, the commission's acting chairman, said "the agreement between CPSC and Peloton is the result of weeks of intense negotiation and effort, culminating in a cooperative agreement that I believe serves the best interests of Peloton and of consumers."

Peloton Chief Executive John Foley said in a statement that the decision to recall both products "was the right thing to do for Peloton’s members and their families."

"I want to be clear, Peloton made a mistake in our initial response to the Consumer Product Safety Commission’s request that we recall the Tread+," he said. "We should have engaged more productively with them from the outset. For that, I apologize."

Peloton is offering consumers who do not want a refund the option of moving the Tread+ free of charge to a room where children or pets cannot access the treadmill.

The company is also making software changes to automatically lock the Tread+ after each use and prevent unauthorized access by assigning a 4-digit passcode that will be required to unlock the Tread+.

KeyBanc analyst Edward Yruma said in an alert that the recall "is a clear negative." He noted that the "high running surface of the Tread+ may require a more substantive fix."

"We believe this will negatively impact the timing of the broader rollout of Tread (previously scheduled for May 27)," Yruma said. "Moreover, this may have other unquantifiable impacts to long-term demand. Our estimates are under review pending the 3Q21 earnings call tomorrow."

Stifel analyst Scott Devitt, who has a buy rating on Peloton, said he couldn't yet quantify the near-term impact on Peloton’s business "but it’s likely that this recall will have an infinitesimal long-term impact on the business."

"We will wait until tomorrow’s earnings results to revisit our price target," Devitt said, "but even if we have to be more measured in the 12-month window of price targets, this incident is likely to prove to be a gift to patient long-term investors."

In February, Peloton reported second-quarter results that topped analyst estimates, but said it couldn't keep up with demand and warned that profit would be squeezed in the near term.