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Peloton Stock Leaps After Exiting In-House Bike, Tread Manufacturing

CEO Barry McCarthy said the move to exit in-house manufacturing will simplify its supply chain while allowing Peloton to focus on content and technology.

Updated at 12:39 pm EST

Peloton Interactive  (PTON)  shares moved higher Tuesday after the connected fitness equipment maker said it would stop making its flagship exercise bike in-house and instead expand a manufacturing contract with a group in Taiwan. 

Peloton said the shift forms part of its strategy to both simplify its supply chain and focus on technology and content under the turnaround plans of new CEO Barry McCarthy. Taiwan-based Rexon Industrial Corp will be the primary manufacturer of Pelton's fitness equipment, including its iconic stationary bike and its popular treadmill.

"Today we take another significant step in simplifying our supply chain and variablizing our cost structure – a key priority for us," McCarthy said. "We believe that this along with other initiatives will enable us to continue reducing the cash burden on the business and increase our flexibility. Partnering with market-leading third party suppliers, Peloton will be able to focus on what we do best – using technology and content to help our 7 million Members become the best versions of themselves."  

Peloton shares were marked 3.15% higher in early afternoon trading Tuesday following news of the manufacturing shift to change hands at $9.20 each, a move that would still leave the stock with a year-to-date decline of around 75%. 

Peloton posted a wider-than-expected third quarter loss of $2.27 per share in late May, with McCarthy cautioning that the overall business was 'thinly capitalized', with only $879 million in unrestricted cash at the end of the quarter, and unveiled details of a $750 million term borrowing agreement with Goldman Sachs and JPMorgan.

Looking into the current quarter, Peloton said it sees revenues in the region of $675 million to $700 million, and plans to end the period with just under 3 million subscribers to its Connected Fitness program.

"Turnarounds are hard work. It’s intellectually challenging, emotionally draining, physically exhausting, and all consuming. It’s a full-contact sport," McCarthy said in a letter to shareholders published alongside the third quarter earnings release.

"Some of the challenges we face are systems related (there is substantial tech debt, not uncommon among successful fast-growing businesses) which tax our productivity and speed of decision making, as well as our speed of execution," he said. "And some of 1 the challenges have resulted from poor execution, like last quarter’s increased use of 3PL partners for last mile distribution. The strategy wasn’t flawed, but our execution was. Better systems. Better decision making. Better execution. We’re working on it."