Last month, the CPSC had "urged consumers with children at home to stop using [Tread+] immediately"
Shares of Peloton (PTON) are under pressure following the announcement of two separate voluntary recalls of the company’s Tread+ and Tread treadmills. Peloton is recalling about 125,000 Tread+ treadmills with model number TR01 after a six-year-old child recently died after being pulled under the rear of the treadmill and following 72 reports of incidents involving the treadmills. Additionally, Peloton is recalling about 1,050 Tread treadmills in the U.S. and about 5,400 in Canada, as the touchscreen on the treadmill can detach and fall, posing a risk of injury to consumers. Following the news, Baird analyst Jonathan Komp added a "Fresh Pick designation" on Peloton as he sees a "compelling trading opportunity" with shares lower and recommends investors "more aggressively buy the dip."
TREADMILL RECALL: Peloton is recalling about 125,000 Tread+ treadmills with model number TR01. The treadmill was launched as the Peloton Tread in 2018 but renamed Tread+ in September 2020. A 6-year-old child recently died after being pulled under the rear of the treadmill. In addition, Peloton has received 72 reports of adult users, children, pets and/or objects being pulled under the rear of the treadmill, including 29 reports of injuries to children such as second- and third-degree abrasions, broken bones, and lacerations. "Consumers should immediately stop using the recalled Tread+ and contact Peloton for a full refund until November 6, 2022," the statement said.
Additionally, Peloton is recalling about 1,050 Tread treadmills in the U.S. and about 5,400 in Canada, as the touchscreen on the treadmill can detach and fall, posing a risk of injury to consumers. The firm is aware of 18 reports of the touchscreen loosening and six reports of the touchscreen detaching and falling. No injuries have been reported in the U.S. There have been reports of minor injuries such as abrasions, minor cuts, and bruises in Canada and the United Kingdom. "Consumers should immediately stop using the recalled treadmills and contact Peloton for a full refund. This product is different than the Peloton Tread+ that was also recalled by the CPSC on May 5, 2021 because children, pets, and objects can be pulled underneath the Tread+ deck, posing a risk of injury or death," the statement added.
'AGGRESSIVELY BUY THE DIP': Baird analyst Jonathan Komp told investors in a research note that he sees a "compelling trading opportunity" with Peloton Interactive shares lower following the treadmill recalls. The analyst added a "Fresh Pick designation" on Peloton, while keeping an Outperform rating on the shares with a $175 price target. While the recalls "raise slight risk" of delayed sales, the impacts are likely temporary and the direct financial impact likely equates to less than 1% of Peloton's current enterprise value, Komp contended. With the stock down over 25% since mid-April, the analyst "would more aggressively buy the dip." He views concerns on the recall news as overblow.
Meanwhile, Stifel analyst Scott Devitt said he believes the event "seems akin to similar overblown issues in the history of other consumer franchises" and that this will be looked back on as a buying opportunity. While he can't yet quantify the near-term impact on Peloton's business, he argued this recall will likely "have an infinitesimal long-term impact" and "is likely to prove to be a gift to patient long-term investors." Devitt maintained a Buy rating on Peloton shares, noting that he will wait until Thursday's earnings report to revisit his existing $170 price target.
'CLEAR NEGATIVE': Also commenting on the news, KeyBanc analyst Edward Yruma said he sees the voluntary recall of Peloton's Tread and Tread+ as "a clear negative." The analyst thinks that the solution on Tread may be simpler while the high running surface of the Tread+ may require a more substantive fix, and will negatively impact the timing of the broader rollout of the new Tread that was previously scheduled for May 27. The analyst made no change at this time to his Overweight rating.
Meanwhile, Truist analyst Youssef Squali told investors that he believes Peloton's recall of all Tread and Tread+ products following the injuries and death of a child will likely result in significant near-term one-time financial costs and operational disruption, with potential reputational damage. The analyst, who estimates that Tread+ sales are less than 10% of revenue, feels the move will effectively delay the official launch of the new Tread, scheduled for May 27. Squali, who made no change to his Buy rating, contended that the secular growth trends in the home fitness industry remain intact and that Peloton's long-term standing and opportunity within this massive segment remain strong.
WHAT'S NOTABLE: Back on April 17, the U.S. Consumer Product Safety Commission had issued a bulletin about the "danger of popular Peloton Tread+ exercise machine after multiple incidents of small children and a pet being injured beneath the machines." The warning came less than a month after Peloton itself released news of a child's death by a Peloton Tread+. "In light of multiple reports of children becoming entrapped, pinned, and pulled under the rear roller of the product, CPSC urges consumers with children at home to stop using the product immediately," it added.
After announcing the recalls for both its treadmill products Peloton Interactive CEO 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+. We should have engaged more productively with them from the outset. For that, I apologize. Today's announcement reflects our recognition that, by working closely with the CPSC, we can increase safety awareness for our Members. We believe strongly in the future of at-home connected fitness and are committed to work with the CPSC to set new industry safety standards for treadmills. We have a desire and a responsibility to be an industry leader in product safety."
PRICE ACTION: In Wednesday afternoon trading, shares of Peloton have dropped over 13% to $83.83.
Published May 5th, 2021 10:30, updated May 5th, 2021 13:25