Peloton sells connected bikes and treadmills and a subscription to go with them. For three years its cash flow statement showed both sides of customer funding in one company.

FiledPeloton Interactive, Form 10-K for the fiscal year ended June 30, 2022, statements of operations and cash flows. In the last three rows, positive numbers brought cash in and numbers in brackets used it.

Fiscal 2020: customers pay first

In the year to June 2020, demand ran far ahead of supply. Customers paid, then waited: deposits and deferred revenue added $272.3 million. Peloton lost $71.6 million and still brought in $376.4 million from operations Filed. That’s the Dell position.

Fiscal 2021: the backlog ships, and stock is bought for the peak

Revenue more than doubled. But the deposits turned back into products as the backlog shipped, and that line swung to minus $212.7 million, while Peloton spent $625.9 million building inventory. Operations used $239.7 million, on a net loss of only $189.0 million Filed.

Fiscal 2022: the stock outlives the demand

Then demand fell. Revenue dropped to $3.58 billion, yet inventory rose to $1.10 billion at June 30, 2022, about 140 days of the year’s cost of revenue Derived. The cash flow statement carries $224.9 million of excess and obsolete inventory reserve adjustments, up from $38.7 million Filed. Operations used $2.02 billion; Peloton took a $696.4 million term loan, raised $1.22 billion in a public offering, and in July 2022 announced a move to “third-party manufacturing partners for 100% of our products” Filed.

What to take from it

Peloton’s troubles had many causes, and it isn’t a typical DTC brand. But three lessons carry over.

• Customer deposits are temporary. They reverse as you ship. Never treat a preorder surge as a permanent source of funding.
• Buy for the demand you’ve seen. Stock bought at the peak is paid for at the peak and sold, or written down, after it. Smaller, more frequent orders (chapter 10) limit how much you’re left holding.
• Watch commitments, not just the balance sheet. Stock ordered but not delivered isn’t in inventory; it’s a payment date. Chapter 13 puts every open order on the calendar.

A preorder surge is a timing gift. Spend it as if it will reverse, because it will.

Do this

• List every open purchase order and commitment with its remaining payments and the weeks of current sales it represents. Any order over 16 weeks gets a second look this week, while it can still be cut or split.