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No. of Recommendations: 3
Rafes, yes, in principle reduction of GM is more negative than positive. The reasons here are

"The strong reception of Bike+, combined with challenges
associated with port congestion and COVID-19-related
warehouse closures, impacted Bike+ delivery dates for
many of our customers and caused significant Member
experience challenges. Therefore, we are incurring
additional shipping-related expenses in Q2 to alleviate
some of the delays ahead of the Holiday period
. As a result,
we expect Q2 gross margin to temporarily decline to about
39%, implying a Connected Fitness Product Gross Margin
of 35% and Subscription Contribution Margin of 63%. "

For next year GM will be in low 40s, the reason is

"For FY 2021 our gross margin guidance remains
unchanged at approximately 41%. We continue to expect
Connected Fitness Product Gross Margin to decline
year-over-year to approximately 36%, driven primarily by
our recent Bike price reduction and continued mix shift to
Tread
. We continue to expect Subscription Contribution
Margin in FY 2021 to be roughly flat
year-over-year. We
expect leverage in fixed costs of content production to be
offset by elevated engagement levels, higher penetration
of Digital Subscriptions, and continued fitness and
wellness programming investments.

We anticipate that year-over-year declines in our gross
margins will be OFFSET by significant year-on-year
leverage in sales and marketing expense and general and
administrative expense
."


To sum-up the trend is for GM to go down to low 40s and stabilize there at least for the moment. Last quarter GM was 46.7%.

On the other hand - lowering prices allows for more sales to lower income customers catching also middle (and lower?) market. Shift to Tread allows another revenue stream in addition to bike. So, the decision is right from business perspective.

As Tinker said - Apple GM is even lower than Peloton's. Considering current revenue growth as well as subscription revenue growth I'm not significantly concerned with low 40s GM at the moment.
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