Earnings Call Transcript
PELOTON INTERACTIVE, INC. (PTON)
Earnings Call Transcript - PTON Q1 2026
Operator, Operator
Thank you for joining us. My name is Karen, and I will be your conference operator today. I would like to welcome everyone to the Peloton Interactive First Quarter Fiscal Year 2026 Earnings Call. I will now hand the call over to James Marsh, SVP of Investor Relations. Please proceed.
James Marsh, SVP of Investor Relations
Thank you, operator. Good afternoon, and welcome to Peloton's First Quarter Fiscal 2026 Conference Call. Joining today's call are Peloton Chief Executive Officer and President, Peter Stern; and Chief Financial Officer, Liz Coddington. Our comments and responses to your questions reflect management's views as of today only and will include forward-looking statements related to our business under federal securities law. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business. Please refer to our SEC filings and today's press release, both of which can be found on our Investor Relations website, for a discussion of our material risks and other important factors that could impact our results. During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in today's press release. I'll now turn the call over to Peter.
Peter Stern, CEO
Thank you, James. Good afternoon, everyone, and thank you for joining today's call. Before I summarize our performance in Q1, I'd like to address our voluntary recall announced earlier today. As previously disclosed, we have received a small number of reports of an Original Series Bike+ seat post breaking during use. As of today, we are aware of 3 such incidents. The well-being of our members is our highest priority. And therefore, in cooperation with the U.S. Consumer Product Safety Commission and Health Canada, we are voluntarily recalling approximately 833,000 units in the U.S. and approximately 44,800 units in Canada of the Original Series Bike+ model. These units were manufactured from December 2019 to July 2022 and sold beginning in 2020 to April 2025. We are offering an updated self-installable seat post replacement, which is the CPSC approved remedy. Impacted members will receive an email with order instructions and the notification will also appear on their Bike+ touchscreen. This recall does not impact any other equipment models, including our new Cross Training Series Bike and Bike+. The anticipated financial impact is reflected in our results and our guidance, including the increases to our adjusted EBITDA guidance and minimum free cash flow target. Liz will share more details about the financial impact later in this call. Turning our attention to the first quarter of the fiscal year. I am proud of Peloton. In the quarter leading up to our October 1 innovation reveal, our team once again successfully executed on our business priorities, progressed our financial results and delivered positive human impact at scale. As a result, our performance came in above the guidance range on most key financial metrics in this seasonally slower quarter for fitness equipment sales, and we continue to see year-over-year growth in average workout time per Connected Fitness subscription. Looking from the outside in during the first quarter, it may have felt like business as usual, as we continue to demonstrate financial discipline and established a strong foundation for achieving our full year financial guidance. But behind the scenes, the quarter was anything but. Throughout the quarter, the Peloton team was hard at work, setting the stage for our new chapter by innovating on every aspect of our magic formula of premium equipment, software powered by AI, world-class instructors and a deeply engaged community. In last quarter's remarks, I laid out Peloton's strategy. The first and most foundational part of that strategy is our commitment to improving member outcomes. To that end, on October 1, we simultaneously unveiled and began shipping the most significant product update in our history with an all-new equipment lineup, the Peloton Cross Training Series and the Peloton Pro series. Our understanding of human health has progressed since Peloton took the world by storm with the introduction of the original bike. And today, we know that adults need to pursue a combination of cardio, strength and more to achieve their wellness goals. To that end, all Peloton products now feature advanced swivel screens, allowing members to easily transition between cardio and strength to complete floor workouts, including strength, yoga, Pilates and stretching. Our new Plus line includes an advanced computer vision movement tracking camera that counts your reps, corrects your form and offers weight suggestions in real-time, along with voice control, enabling members to adjust weights, skip moves or pause their workout without touching a thing. We've made several additional upgrades, including improvements in audio across the board and featuring sound by Sonos in our Plus line for a studio-like experience. On October 1, we also launched Peloton IQ, which gives every Peloton member a personalized coach regardless of whether they own our new Cross Training Series, our Original Series or work out with a Peloton app subscription. Peloton IQ uses AI to turn years of insights and data points, including your goals, class activity and health stats from wearable devices into personal training guidance. In so doing, Peloton IQ makes some of the benefits of personal training accessible to millions of people, providing individual insights and recommendations based on members' intentions, preferences, level of fitness and performance. Since launching the Cross Training Series and Peloton IQ, we've observed a favorable mix shift toward our more premium products, including a mix shift toward Tread sales and toward our Plus line of products, the latter of which we believe is driven by excitement around the advanced computer vision features. Beyond our work on cardio and strength, the trust we've built with our community gives us an opportunity to address an even broader array of wellness domains. In September, we acquired Breathwrk, an award-winning app specializing in breathing exercises, which have been shown to positively impact sleep, focus, blood pressure, heart rate variability, stress and anxiety. The Breathwrk subscription app makes mental fitness accessible to all, and now our members can enjoy Breathwrk as part of their All-Access or App+ subscriptions. We'll have more to share over time as we evolve in this important category. We also announced a first-of-its-kind collaboration with the Hospital for Special Surgery, the world leader in orthopedics to offer Peloton members access to expert care for joint and muscle pain, injuries and orthopedic conditions. We've co-developed class collections with HSS medical experts, recently launching the first 5 on preventing some of the most common types of injuries. We're also committed to meeting members where they are in their life stages. In response to member demand, we started with menopause, a life stage that impacts the majority of our members at some point in their lives. We're extremely proud of our partnership with Respin Health, founded by Halle Berry to revolutionize menopause care with an integrated holistic approach, and have just launched a study with over 1,000 women to measure the benefits of targeted movement strategies and other evidence-based lifestyle interventions. These findings will power our evolving evidence-based exercise programming and menopause support. The second part of our strategy is to meet members everywhere. We have made great progress on this front over the past few weeks. We now have 10 micro stores in the U.S., up from 1 prior to Q1. And we also announced a new retail partnership with Johnson Fitness & Wellness, the nation's largest independent fitness retailer with 100 locations across the U.S. We now have a physical retail presence in 46 states, while in Australia, we launched a retail presence in 11 franchise locations throughout the country. Our expanded retail footprint positions us well for the holiday season, providing opportunities for consumers to test and experience our new innovations. Our commercial business unit continues to show strong performance and is an area in which we are also innovating. The new Peloton Pro series offers a complete lineup of Peloton equipment for commercial environments such as hotel gyms and multi-residential buildings, and includes the Tread+ Pro, Peloton's first ever commercial treadmill. And Precor launched its new commercial Tread, the Breakaway. This new slat belt treadmill includes a sled-style push mode, cadence coach and a new console design. Peloton also recently became the primary fitness partner powering Utah City, a 700-acre mixed-use development outside of Salt Lake City. And now every residential building in Utah City will feature a Peloton space that includes several pieces of Peloton equipment and accessories for residents. The third part of our strategy is to make members for life. Celebrating achievement is crucial for sticking with any program. So last month, we launched Club Peloton, our first loyalty and recognition program. As members engage with our platform, they progress through levels from bronze to legend, unlocking exclusive content recognition and rewards. Already more than 500,000 members have engaged with Club Peloton. On October 1, we also introduced official Peloton teams led by Peloton instructors, including Move for Life, Menopause, HYROX and Cross Training. These teams provide a forum for members to connect, discuss goals and learn from each other and from experts, further elevating Peloton's community. Since October 1, engagement with teams is up nearly 50%. Ultimately, all these strategic initiatives, product innovation, wellness expansion and new distribution are underpinned by the fourth part of our strategy, our commitment to operational discipline and business excellence. Our full year guidance announced in August included targeted initiatives to improve monetization, such as the introduction of expert assembly fees. These were implemented within the quarter and exceeded our expectations. At the same time, our cost reduction plans remain on track. Perhaps most importantly, we remain confident in our ability to inflect toward revenue growth as the fiscal year progresses, building on the actions we took in Q1 and on October 1. We continue to monitor and respond to evolving tariff policies and broader changes in the macro environment and consumer spending. While those external factors are real, our focus remains on execution and being the best fitness and wellness partner to our members. We believe we offer an unmatched ecosystem of products and experiences to help our members invest in their health and well-being. As we enter this important holiday season, Peloton is exceptionally well positioned with great new equipment, Peloton IQ, new wellness partnerships, expanded distribution, a resurgent commercial business unit, new loyalty features, successful monetization changes, and improvements in our financial performance. I'll now pass it over to Liz, who will share more details about our Q1 financial results and guidance for the remainder of the year.
Liz Coddington, CFO
Thanks, Peter. I want to begin with our first quarter financial results in which we exceeded the high end of our guidance on most key metrics. We ended the first quarter with 2.732 million Paid Connected Fitness Subscriptions, reflecting a decrease of 6% year-over-year. Q1 is typically a seasonally lower quarter for hardware sales and seasonally higher quarter for churn. We exceeded the high end of our guidance range by 2,000, driven by higher-than-expected gross additions. Connected Fitness gross additions outperformed our expectations due to higher unit sales of our Connected Fitness products in both first-party and third-party retail channels. Average net monthly Paid Connected Fitness Subscription churn was 1.6%, an improvement of 20 basis points both year-over-year and 10 basis points quarter-over-quarter, in line with our expectations. We ended the quarter with 542,000 ending paid app subscriptions, inclusive of subscriptions from our acquisition of Breathwrk. Total revenue was $551 million in Q1, comprising $152 million of Connected Fitness products revenue and $398 million of subscription revenue, outperforming the high end of our guidance range by $6 million. Outperformance relative to guidance was primarily driven by Connected Fitness products revenue from higher-than-expected hardware sales of both Peloton and Precor products. Connected Fitness products revenue decreased $7 million or 5% year-over-year, driven by lower equipment sales and deliveries, partially offset by a mix toward higher-priced products. Subscription revenue decreased $28 million or 7% year-over-year, primarily driven by lower ending Paid Connected Fitness Subscriptions, lower content licensing revenue and lower ending paid app subscriptions, partly offset by used equipment activation fee revenue, which was introduced in late August of fiscal 2025. Total gross profit was $284 million in Q1, a decrease of $20 million or 7% year-over-year. Total gross margin was 51.5%, a decrease of 30 basis points year-over-year and 50 basis points below our guidance of 52%. Total gross margin was negatively impacted by a $13.5 million accrual for Bike+ seat post inventory costs this quarter, in addition to $3 million we accrued in the prior quarter, representing a total estimated impact of $16.5 million. Excluding this $13.5 million charge in Q1, total gross margin would have been 54% or 200 basis points above our Q1 guidance. Beginning in the first quarter of fiscal 2026, we began assigning executive compensation and other corporate overhead expenses associated with our corporate facilities as we focus on driving more accountability for costs at a functional level. Prior to fiscal 2026, these costs were all recorded in G&A, but starting in Q1 are assigned across cost of goods sold, sales and marketing, G&A and R&D. Connected Fitness products gross margin was 6.9%, a decrease of 230 basis points year-over-year, primarily driven by the Bike+ seat post inventory accrual I just noted. Excluding the inventory accrual, Connected Fitness products gross margin would have been 15.8%, an improvement of 660 basis points year-over-year, driven by a mix shift toward higher-margin products, lower warranty costs, a decrease in inventory reserves and lower warehousing and distribution costs. Subscription gross margin was 68.6%, an increase of 80 basis points year-over-year. Total operating expenses, excluding restructuring, impairment and supplier settlement expenses were $230 million in Q1, a decrease of $30 million or 12% year-over-year, reflecting the continued progress we've made in rightsizing our cost structure as well as a reduction to advertising expenses in Q1 ahead of our hardware portfolio refresh announced on October 1. We are on track to achieve our target to deliver at least $100 million of run rate cost savings by the end of fiscal 2026. Sales and marketing expenses were $67 million in Q1, a decrease of $15 million or 18% year-over-year, primarily driven by decreases in acquisition, brand and creative marketing spend as well as a decrease in retail showroom expenses. As of the end of Q1, we had 7 legacy retail showrooms remaining. Research and development expenses were $62 million in Q1, an increase of $4 million or 6% year-over-year, primarily driven by cost assignments from G&A, which were partially offset by lower product development costs from a reduction in contractor spend. General and administrative expenses were $101 million in Q1, a decrease of $19 million or 16% year-over-year, primarily driven by cost assignments to other functional areas and lower professional fees. This quarter, we recognized $13 million of impairment and restructuring expenses, of which $8 million was noncash. The noncash charges were primarily related to asset write-downs associated with accelerated retail store closures, while the remaining $5 million of cash charges were primarily related to exit and disposal costs and professional fees. Adjusted EBITDA was $118 million in Q1, which was a $2 million or 2% improvement year-over-year and $18 million above the high end of our guidance range. To note, the $13.5 million accrual for Bike+ seat post inventory costs was not added back to adjusted EBITDA. We generated $67 million of free cash flow in Q1, an increase of $57 million year-over-year, significantly outperforming our prior expectation for slightly negative cash flow in the quarter. Free cash flow benefited from tariff-related favorability associated with both lower-than-expected tariff rates and delayed timing for certain tariffs going into effect, lower operating costs associated with realizing indirect cost savings faster than anticipated, revenue favorability and other smaller impacts. Q1 free cash flow included roughly $30 million of timing favorability. We ended Q1 with $1.104 billion in unrestricted cash and cash equivalents, an increase of $64 million quarter-over-quarter. Net debt was $395 million, a decrease of $382 million or 49% year-over-year. Overall, our first quarter profitability performance has enabled us to continue deleveraging our balance sheet. Our gross leverage ratio, defined as our gross principal debt outstanding divided by trailing 12-month adjusted EBITDA was 3.8 in Q1, a substantial improvement from the 14 in Q1 of last year. Similarly, our net leverage ratio, defined as gross principal debt outstanding net of cash and cash equivalents divided by trailing 12-month adjusted EBITDA was 1.1 in Q1, down from 7.5 in Q1 of last year. We believe we have more cash on the balance sheet today than we need to run the business and are evaluating opportunities to optimize our capital structure over time. In February 2026, roughly $200 million of 0% convertible notes will come due, and we intend to pay them down at that time. It's also worth noting our $1 billion term loan has a 1% call premium through May of 2026. We are mindful of the timing of when this call premium expires as we evaluate our options. We expect a refinancing to deliver a lower cost of capital and more flexibility to our capital allocation strategy. Next, I'd like to share context for our financial outlook for Q2 and the remainder of the fiscal year. Our full year fiscal 2026 revenue outlook of $2.4 billion to $2.5 billion is unchanged from what we provided last quarter and reflects a 2% revenue decrease year-over-year at the midpoint. Our recently announced changes to subscription pricing were incorporated into our previous full year outlook. And so far, the impact of those changes has been in line with our expectations. We are pleased that our members continue to see the value in their Peloton membership and the recently added benefits like Peloton IQ, Club Peloton, Breathwrk and more. As we noted last quarter, our full year guidance anticipates an inflection toward growth during certain quarters within the fiscal year. Our Q2 revenue outlook of $665 million to $685 million reflects this expectation with a slight increase of 0.2% year-over-year at the midpoint and an increase of 23% quarter-over-quarter as a result of seasonally higher equipment sales and recent pricing changes. We are raising our full year fiscal 2026 guidance for total gross margin to 52%, which is an increase of 100 basis points from our prior guidance and an improvement of 110 basis points year-over-year, primarily driven by favorable tariff rates relative to our prior full year guidance as policy continues to evolve, a favorable mix of sales toward higher-margin products and our continued focus on driving cost efficiency to our supply chain. These tailwinds are partially offset by the accrual for the Bike+ seat post inventory impact in Q1. Q2 total gross margin is expected to be roughly 49%, down 250 basis points quarter-over-quarter due to an expected seasonally higher mix of Connected Fitness products revenue. We are raising our full year fiscal 2026 guidance for adjusted EBITDA to $425 million to $475 million, reflecting an increase of $25 million from our prior guidance and an improvement of 12% year-over-year at the midpoint, driven by favorable gross profit and operating expenses, reflecting our expectation for realizing cost savings faster than previously anticipated. To note, we are increasing our full year guidance by $25 million, notwithstanding the $13.5 million accrual for Bike+ seat post inventory costs in Q1. Our Q2 outlook for adjusted EBITDA of $55 million to $75 million reflects an increase of 11% year-over-year at the midpoint, but a decrease of 45% quarter-over-quarter due to seasonally higher marketing spend in Q2. Our Q2 guidance for ending Paid Connected Fitness Subscriptions of 2.64 million to 2.67 million reflects a decrease of 8% year-over-year at the midpoint. Average net monthly Paid Connected Fitness Subscription churn is expected to increase year-over-year and quarter-over-quarter due to an increase in subscription cancellations and pauses following our pricing changes announced on October 1. However, our guidance reflects an expectation that our net churn rate will be flat year-over-year in full year fiscal 2026. We also expect gross additions to decrease year-over-year as a result of an expected year-over-year decrease in hardware sales. Generating meaningful free cash flow remains a top priority. We are raising our full year fiscal 2026 minimum free cash flow target by $50 million to at least $250 million, reflecting the benefit of lower tariffs, both from lower rates and later-than-expected implementation timing and our progress on realizing indirect cost savings sooner. This target reflects our expectations for a roughly $45 million impact to free cash flow as a result of tariff exposure, which remains a dynamic situation that may change in the future. Overall, our guidance for Q2 and the remainder of the fiscal year reflects continued improvement in profitability and progress toward revenue growth. We still expect to achieve the important milestone of positive operating income on a full year basis in fiscal 2026. Now we'd like to open the line for Q&A.
James Marsh, SVP of Investor Relations
Thanks, Liz. We'll begin the Q&A process this evening by taking a couple of questions from investors that send in their topics in advance. The first question will come from Bill, leaderboard name Pizza is Life. Bill asked, what is the market opportunity for the new commercial business unit? How will you be approaching the new geographical markets? And will you successfully integrate Precor and Peloton for a unified B2B offering? Peter?
Peter Stern, CEO
Bill, I love your leaderboard name. Strategically, our commercial business unit is set up to win. First, the market opportunity is large, and we still have very low share. And when I talk to gym operators, they all tell me that there's only one brand that consumers ask for by name, and that's Peloton. Second, the combination of Precor and Peloton just makes sense. You think about Precor's brawn coming together with Peloton's brains, and you've got something no one else can match. And let me explain what I mean by that because we've got plenty of smart people over on the Precor team. Precor builds equipment that is truly commercial grade. It's the kind of stuff that's built to be run like 12 hours a day. And they also have the installation and service capabilities for commercial establishments. Peloton has software, content, community that's absolutely unmatched. You bring those things together, and we've got every reason to be able to win. Bill, you talked also about a third point I'd raise, which is international. Peloton is only in 6 countries right now, but Precor is in over 60 countries. So that opens up opportunities for Peloton to enter these new markets in ways that build on existing distribution and relationships that we've already got, starting with B2B. So strategically, we're in a great place. It's just an execution challenge from here, and you can already see us executing on this. For example, Precor now provides all the installation and service for Peloton commercial locations, including hotels. Last month, we announced Precor's first slated tread, the Breakaway with a new smarter, more powerful screen and Peloton's first-ever commercial tread initially for hospitality and for multi-dwelling units was launched as part of the new Peloton Pro line. So you add all of this up, I feel great about where we are with our commercial business unit, and I'm confident we're going to be able to bring this together and deliver an industry-leading set of products and solutions on behalf of commercial clients.
James Marsh, SVP of Investor Relations
Great. Thanks, Peter. Our second question comes from Christopher in San Francisco, leaderboard named Create SF. Are there any plans in the next 5 years to provide for dividends? Liz, maybe you can handle this one.
Liz Coddington, CFO
Sure. While this question pertains specifically to dividends, it might be more beneficial if I provide an update on our current capital structure and discuss our overall capital allocation strategy. As many of you may remember, in May 2025, we faced a maturity wall and successfully completed a $1.35 billion refinancing of our balance sheet. Following this refinancing, we generated significant free cash flow, with $380 million over the past 12 months. We are proud of our efforts to strengthen and rapidly reduce our debt, with net debt decreasing by $382 million, or 49%, year-over-year. Our net leverage ratio demonstrates the progress the company has made towards becoming healthier. This deleveraging approach is positive for our company, likely allowing us to reduce interest expenses in the future and make strategic investments with our cash. While it's still early to outline a specific capital allocation framework, we anticipate it will become a priority as we look to refinance at the right time. I'd like to highlight a few points. We previously discussed that we believe there is more cash on our balance sheet than necessary for current operations and that we have improved our creditworthiness since our last refinancing. Our primary focus remains on further reducing debt, as we believe this will provide us with more options in the future and lower our capital costs. When considering our gross leverage ratio targets, we envision aligning with a framework like public ratings. Ideally, we aim to align with companies that hold high single B to BB ratings, and we believe a gross debt-to-EBITDA ratio between 2x and 4x represents a sustainable structure. With continued deleveraging, we expect to have a range of capital allocation options, which may include stock buybacks, reinvestment for organic growth, pursuing potential acquisition opportunities, or, returning to your original question, offering cash dividends.
James Marsh, SVP of Investor Relations
Great. Can you open it up to Q&A at this stage?
Operator, Operator
The first question comes from Andrew Boone from Citizens Bank.
Andrew Boone, Analyst
I would love to just ask about the recall. Can you guys compare this to the initial recall and just help us understand why those 2 recalls weren't combined?
Peter Stern, CEO
Sure, Andrew. I'll cover that. This is Peter. As I'm sure you can imagine, decisions around recalls are really complicated and depend on a lot of factors. But what I can say is that the Original Series Bike and the Original Series Bike+ are different models and they're physically different pieces of equipment. And at the time of the bike seat post recall, there were no incidents. There were 0 incidents relating to the Bike+.
Andrew Boone, Analyst
Okay. And then just as a follow-up, I'd love to understand if there are any derivative impacts from the recall around the business, the brand. Can you guys, again, compare this to the previous recall? Just help us to understand if there are any ripples that we should be thinking about the broader business?
Liz Coddington, CFO
Sure, I can address that. First, I want to discuss the cost impact. We mentioned in our prepared remarks the $13.5 million accrual we booked in the first quarter, in addition to the $3 million accrued in the fourth quarter, totaling a $16.5 million impact. We believe we made the right assessments and judgments regarding that accrual's size, but keep in mind that estimates are forward-looking and actual results may vary. Regarding subscriptions, and in response to your comparison with the previous recall, based on behaviors following our prior seat post recall in May 2023, which only affected our original bike models, our Q2 guidance anticipates a slight headwind to Paid Connected Fitness net churn due to increased subscription pauses. We expect most of these additional pauses to resume in Q3, resulting in a small drag on subscriptions for the year. As for revenue impact, unlike the prior seat post recall, this one affects bikes manufactured during a specific timeframe that we no longer sell. We already have replacement seat post inventory ready to start fulfilling anticipated replacement orders. Overall, the revenue impact is expected to be negligible and is accounted for in our full-year guidance.
Operator, Operator
The next question comes from Arpine Kocharyan from UBS.
Arpine Kocharyan, Analyst
So I'm going to combine 2 questions into one, if I may. And you alluded to this in your prepared remarks, but you're raising EBITDA and your revenue guidance is unchanged, which tells me that there's no major change in your thinking as it relates to underlying churn assumptions from before you raised pricing. First, is that a correct read? And secondly, if you could talk through your thinking of how you see churn normalizing? I think you saw churn normalizing within 8, 12 months post price increase back in 2022. Could you maybe talk about how your base of subscribers is different today versus '22 kind of emerging from COVID lockdown. On the other hand, you've been targeting maybe segments of the market that have underlying churn a bit higher through your rental program and the secondary market. Just if you could talk through what you see different today would be super helpful.
Peter Stern, CEO
Yes. Arpine, this is Peter. I'll get us started on this, and then Liz can jump in as always. As Liz mentioned, the impact of the price increase on churn has met our expectations, and we are satisfied with the progress. To give you an idea of the timing, we observed a spike in cancellations during the first week after the announcement, primarily occurring in the initial days and among less active members, as you might expect. Some of those individuals were likely to cancel eventually regardless. Since then, our churn has mostly returned to normal levels. As we noted, our churn actually decreased in Q1, marking the second consecutive quarter of this trend. We feel positive about the overall churn dynamics of the business. Our member base is increasingly loyal and experienced at this point. Looking ahead for the year, the higher cancellations and pauses due to the price increase will lead to increased churn in Q2. However, we expect to see improvements in Q3, particularly as we reactivate some individuals who paused rather than canceled in Q2. Overall, for the year, we project flat churn on a percentage basis despite the increase in Q2, based on our strong relationship with our members. Our member composition has changed; more individuals now participate in programs like rental, which generally have higher churn rates. However, this is balanced by the fact that we have a significantly more experienced member base, and that experience contributes to lower churn. All these factors contribute to the confidence we have expressed regarding churn. Liz, would you like to add anything?
Liz Coddington, CFO
I wanted to add a bit about EBITDA. Our EBITDA for the year reflects the strong performance we had in Q1, and we are increasing our full-year guidance by about $25 million. We outperformed in Q1, and we expect continued benefits from tariffs due to timing delays and lower rates than what we initially forecasted. Additionally, we anticipate realizing some of the cost savings from our $100 million run rate cost savings plan sooner than expected. All these factors are contributing to the improvement in adjusted EBITDA.
Operator, Operator
The next question comes from Marni Lysaght from Macquarie Capital.
Marni Lysaght, Analyst
I understand you've mentioned several factors affecting the free cash flow results for the full year. Could you elaborate on the balance sheet, especially regarding the timing benefits? Receivables appear to be lower compared to sales, and I notice that inventories are slightly elevated, possibly due to preparations for new products. Could you clarify how these working capital aspects might influence free cash flow trends for this quarter and their connection to the full year?
Liz Coddington, CFO
Yes. In Q1, we definitely surpassed our expectations, which we initially thought would be slightly negative, and we experienced some outperformance. We discussed tariffs and our cost savings plan as well. We benefited from about $30 million due to vendor payment timing, which pertains to improvements in our payment terms. This may be part of what you are observing. For the full year, we anticipate continued favorability, although the timing may reverse. Therefore, we are raising our free cash flow target by $50 million, but this is a minimum target. I also want to emphasize that we expect to exceed this target over the course of the year.
Marni Lysaght, Analyst
Understood. And just kind of, I guess, with new products coming to market, the right way of thinking about inventory?
Liz Coddington, CFO
Yes. So we are balanced in terms of how we thought about inventory for our new products. Even though it's news to everyone here that we launched them in October, obviously, we have been planning for this for quite a while. And so we had a balance of working down our inventory on our old products, and we're being pretty measured about how much we built up in advance of the holiday season. So we feel pretty good about where we are at, at this point.
Marni Lysaght, Analyst
Okay. That's understood. And just a quick question about Repowered, the marketplace platform. How do we assess the early progress since the national rollout over the summer? Will the recalls affect some of the vendors involved?
Liz Coddington, CFO
Yes. Regarding Repowered, it is still a relatively new marketplace for us, created to facilitate secondary market transactions, which are an important entry point for price-sensitive customers. As for the recall, we either already have or will have a process in place to ensure that anyone purchasing on our Repowered marketplace will have access to a Bike+ seat post as part of the buying process when they purchase a Bike+ through that marketplace.
Operator, Operator
The next question comes from Shweta Khajuria from Wolfe Research.
Shweta Khajuria, Analyst
Let me ask two questions, please. First, Liz, could you discuss the overall demand environment? Considering the rest of this quarter and the first quarter of next year after the holidays, what trends are you observing that give you confidence in demand, particularly in the U.S.? My follow-up question is about your commercial opportunity. You mentioned this earlier in your response to the first question. Can you help us understand how significant that opportunity could be for you in the near to midterm? Additionally, how are you tracking your progress as you pursue that opportunity?
Liz Coddington, CFO
Sure. Let me discuss the demand trends we're observing. For the Connected Fitness market overall, our internal estimates combined with third-party sales data suggest that this category in the U.S. continues to decline year-over-year following the surge we experienced from mid-2020 to mid-fiscal 2022. However, the rate of decline has slowed to low single digits, which is encouraging. We do anticipate some ongoing softness in Connected Fitness equipment demand in the short to medium term, and this expectation is included in our full-year guidance. It's important to note that we are a significant player in the Connected Fitness market, so our focus on profitability affects the entire segment, particularly hardware sales. Nonetheless, we remain optimistic about our growth potential and that of the Connected Fitness category, as well as the fitness and wellness economy as a whole. When looking at the broader fitness and wellness economy, we see that consumers are placing a higher value on these aspects, extending beyond Connected Fitness primarily related to cardio fitness. While the total addressable market isn't clearly defined yet, third-party research estimates the entire wellness economy in the U.S. at over $2 trillion. That's a substantial figure. We don’t intend to be involved in all categories of the wellness economy, but we are shifting our focus to areas beyond connected cardio, targeting categories that show scale, growth, and deliver proven results for our members. As Peter has previously mentioned, as we redefine our strategy, our market opportunity will expand significantly beyond connected cardio fitness. Currently, cardio Connected Fitness represents a major portion of our business, but we aim to extend beyond that. Some categories we've discussed include strength, mental well-being, nutrition, hydration, sleep, and recovery, and we'll continue to elaborate on these as we carry out our strategy.
Peter Stern, CEO
And just to cover the commercial side of that equation. The overall gym market in the United States is considerably bigger than the in-home Connected Fitness market. And although our internal analysis suggests that it experienced a bit of a slowdown over the last month or 2, if we look over the last couple of years, it's been continuing to grow. And we've experienced growth from the Precor side of our business. In some ways, I think we should be able to outpace the growth rate of the others due to the strategic benefits that I talked about earlier as well as the fact that we are refocusing on the commercial business unit and on Precor itself and recommitting to our commercial partners in that space. In terms of the metrics for success there, as you, I think, at this point, know about us overall as a management team, we are focused on growth, but the growth needs to be profitable. And so we are working with the commercial business unit to ensure that the plans that we develop result both in top line growth as well as increased margins associated with that business as well. And again, we feel really good about that category and in particular, our positioning in the category.
Operator, Operator
The next question comes from Douglas Anmuth from JPMorgan.
Bryan Smilek, Analyst
It's Bryan Smilek on for Doug. Just 2 quick questions. Just thinking about the durability of double-digit sustainable Connected Fitness gross margins, can you just help parse out the drivers between product mix shift, the cost savings, obviously, that you're enacting? And I guess, conversely, but also similarly tied, you mentioned increased marketing spend in 2Q. Can you just shed more color on just overall brand positioning, where you're leaning into in terms of target demographics or service or channels as well for marketing?
Liz Coddington, CFO
In terms of gross margins, I believe your question was focused on the long-term perspective regarding where we intend to head with gross margins. Looking back at Q1, the gross margin for Connected Fitness was 6.9%, which was adversely affected by the inventory accrual for the Bike+ seat post. Excluding that impact, our gross margin would have been 15.8%, reflecting a 660 basis point increase year-over-year. Anticipating Q2, we expect the margin for Connected Fitness products to improve compared to Q1, driven by fixed cost leveraging due to seasonally higher hardware sales and a favorable mix of higher-margin products. Additionally, this quarter includes our highest seasonal promotions over the holidays, contributing to our anticipated margin improvement. We expect our full fiscal year 2026 Connected Fitness product gross margins to grow year-over-year. Regarding our long-term target, while you mentioned double digits, our aim is to eventually reach around the 20% range, and we plan to make progress toward this goal in the fiscal year. However, as discussed in previous calls, we will continue to balance gross margin against marketing spending based on the efficiency we observe in LTV to CAC. Now, Peter, would you like to discuss marketing further?
Peter Stern, CEO
On marketing spend, Q1 was a particularly low quarter for us. As Liz mentioned, we were finishing up our product inventory, and we went out of stock on the original bike in September in anticipation of the big launch. It didn't make sense to increase marketing when we knew we were running low on equipment. As we look to Q2, we have many messages to share and I'm excited about them. Our launch of a new product lineup with the Cross Training Series gives us a great opportunity to engage with both members and nonmembers. The introduction of Peloton IQ is a new concept, and it requires a lot of education. Additionally, we have increased distribution, so we need to drive people to those stores and ensure visibility. We are always cautious with our spending and closely monitor our LTV to CAC to ensure we acquire members profitably. Therefore, you will see an increase in our marketing spend in Q2. A larger portion of our spend will focus on brand and education compared to performance marketing in the early part of the quarter. As we move into the latter part of the quarter, the holiday season will create significant momentum, leading us to shift towards more efficient performance marketing, which will be evident for much of the rest of the year, benefiting from the investments made in Q2. All of this is included in our guidance for Q2, which still reflects considerable profitability. We take pride in our financial discipline, especially in the marketing area.
James Marsh, SVP of Investor Relations
Thanks, Peter. Karen, maybe we have time for one more question.
Operator, Operator
And the last question comes from Susan Anderson from Canaccord.
Susan Anderson, Analyst
I guess maybe just to follow up on all of the additional wellness offerings you guys added to the subscription. Just curious if you've seen an uptick in usage of those services yet. It still may be a little early. And then maybe also if you can give an update on how the new certified refurbished equipment program is going.
Peter Stern, CEO
Let me start with the usage point. It's been very positive. We previously mentioned that 500,000 of our members have already used Club Peloton. We are also observing that more people are taking workouts from our home screen, which is significant. Many of our members tend to stick to familiar routines, usually visiting the classes page. However, when individuals start taking workouts from the home screen, it indicates that the recommendations from Peloton IQ are resonating with them. We have also noticed a substantial increase in strength workouts, driven by our understanding of the science and what matters to our members regarding their overall health, along with the personalized programs we’ve created for those aiming to build strength and enhance longevity. The key takeaway is that in October, all forms of usage per member have increased. This includes metrics like total workouts, workout days, and workout time, which are all up, contrasting with the typical decline we see from September to October. We believe our investments, particularly in AI and community software, are yielding positive results. Regarding Susan’s question about the Repowered program, it currently doesn't offer certified refurbishing. However, it’s a fantastic idea and one we are considering because establishing trust in this area is essential. For now, we are focused on creating a trusted marketplace that connects sellers and buyers locally and provides the option for professional pickup and delivery, allowing individuals to avoid entering another person's home if they choose. It's still early in the program, but we’ve received positive feedback on the performance from our partner, and it is scaling as anticipated. Stay tuned for more exciting updates, and thank you for suggesting the idea.
James Marsh, SVP of Investor Relations
Thank you.
Operator, Operator
Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.