Buried in the news regarding Peloton’s poor earnings report was a vague disclosure regarding account irregularities.
“The company separately disclosed it found a problem with the way it has been accounting for inventory. An audit of fiscal 2021, which ended on June 30, discovered a “material weakness” in the internal controls that govern Peloton’s financial reporting. It will not, however, result in the restatement of any of its past results, the company said.”
This is a massive red flag! I won’t hold any stock that runs into accounting issues. And the fact that they aren’t disclosing exactly what the issues are or restating earnings is a problem for me as well.
I sold out of this last year. And I know a lot of people sold their shares already based on the manufacturing issues they were facing, which appears to be the right call given today’s ER.
The material weakness is described this way in the 10-K (p101)
Management has concluded that a material weakness existed as of June 30, 2021 with respect to identification and valuation of inventory:
• Controls were not effectively designed, documented, and maintained to verify that the existence of all inventories subject to physical inventory counts were correctly counted, and our process for compiling and communicating inventory data to ensure accurate reporting in our financial statements was not effective, including inadequate verification for completeness and accuracy of key reports used to review and monitor inventory balances.
This material weakness did not result in any material misstatement in our financial statements or disclosures. Based on additional procedures and post- closing review, management concluded that the consolidated financial statements included in this report present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented, in conformity with accounting principles generally accepted in the United States.
So they are saying there was a material weakness in their control over inventories but it had no impact on the accuracy of their numbers…If inventories are overstated in the financials, profits - both gross and net are too.
The audit opinion (p66) also noted/emphasized two “critical audit matters” - one relating to the calculation of the tread returns reserve (which again hits the bottom line directly and negatively) and relating to the “occurrence of revenue” - revenue recognised in a particular period and cut-off (ie does the revenue fall into a particular period or not). And again it states that all is ok.
These three things taken together are very much red flags, yes. All relate to critical and easily misjudged numbers. Revenue cut-off can have a huge impact if revenue of
future periods are pulled into this quarter, and stock amounts and reserves hit profitability directly.
So glad I’m not in this one.
The above is perhaps useful for anyone still owning PTON.