The Sleep Economy? Casper S1 Analysis - Part 1

Updated: Jan 16




Casper has the honor of being one of the first S1’s of 2020. According to Crunchbase, Casper has raised nearly $340M of financing from investors such as NEA - a $13.1m series A in 2014 - and a $55m 2015 series B round with investors including Slow Ventures, Norwest Venture Partners, Pritzker Group.

A Priori Questions

  • Competitors have proliferated - how does Casper handle this and what is the impact on the financials?

  • What does their marketing spend look like as a % of revenue?

  • Repeat customers? Customer replacement cycle?

  • Gross Margins? Are they higher relative to competitors b/c foam seems inexpensive?

  • Omni-channel strategy?




Intro Casper’s Highlighted KPIs & Introductory Positioning

In the first few colorful pages of the S1, Casper positions itself as part of the broader wellness category, mentioning how the US sleep economy tops $79B. Like many others, I did not realize a “sleep economy” existed.


Casper then lists several financial and operational KPIs. These KPIs warrant an additional level of scrutiny, especially in light of their prominence in the intro section of the S1. Here are a few that struck me as important.


  • 45.5% net revenue CAGR - full year ‘16 through ‘18 - revenue more than doubled in this period. Nine months ended September 30, 2019 and 2018 net revenue grew 20.3% year-over-year


After looking at the sequential revenue growth for ‘16-18, CAGRs may be emphasized b/c revenue grew by 48% between ‘16/’17 then slowed to 42% growth between ‘17/’18. In order to achieve sequential YoY growth of 45% in ‘18/’19, they would need to land at about $519m. This would amount to a 75% CAGR between ‘16-’19. You can see how elastic CAGR is as a revenue measure. I have never personally been a fan of using that figure for simple P&L analysis. Note, revenue in 16-18: $161Mm, $251m, $358m, with my forecast of $519m.

More on the revenue forecast figure: $519m seems to be at least within the realm of possible as Casper has banked $312m in revenue in the FY19 - 9 month stub period. So 40% of their revenue would need to materialize in Q4. Given that Q4 is a slower month in their business, this is probably a stretch. Later analysis may reveal how attainable this figure is.


Here’s a table to exemplify:









  • 50.7% gross margins for 3 months ending 9/30/19


It’s mentioned later on that margins are 42.8% for the year ended December 31, 2016. However, it’s hard to know if these are strong margins without looking at competitors. Casper is able to compete with both Temper Sealy and Purple, while all three lag far behind Sleep number with margins of at least 60%.











  • Each dollar of marketing returns $3 of revenue

This figure seems easy to game. What are the compositions of both sides? We will dive into this more in part 2. But as you read the financials, ask yourself if this ratio makes sense? What multiple would they need to be breakeven or profitable - e.g. each dollar of marketing would need to return at least $5 to break even?

  • 20% repeat customer rate for the first 9 months of 2019

This also seems easy to game. Core products only or core plus a low AOV (average order value) product?


  • D2C sales have grown on average over 2X faster in markets with ecommerce and retail stores than in markets w/out a retail store.

Initially, this could tell us that there could be a halo effect of the Casper stores. This also gets me thinking about their store strategy. In 2018, Casper had plans to open up 200 stores. However, it seems like Casper got ahead of their skis. The 2020 S1 states, “Currently, we distribute our products directly to customers in seven countries through our e-commerce platform, 60 Casper retail stores, and 18 retail partners.” It’s mentioned later on that 48 stores were opened in by September 2018, so Casper opened about 12 stores in 2019.



Highlights from Market & Industry Data & Prospectus Summary

The most surprising facts new facts that we learn in this sections are trends around customer behavior and the the synergistic effects between the two sales channels - direct retail (Casper stores) and ecommerce sales.

  • Over 16% of customers who have purchased at least once since Casper's inception have made a repeat purchase, despite the fact that the traditional replacement cycle of many of our products is longer than Casper's existence.

  • Direct-to-consumer sales in cities where we have opened retail stores have grown over 100% faster on average than cities without a Casper retail store. Store strategy analysis in part 2.


Selected Consolidated Financial and Other Data Analysis

We’ve already touched on some of the key financial metrics that underlie the performance. Now we can holistically view the P&L.

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9 months view AKA Stub Gross margins land at 49.7% and 44% in years 19/18 respectively - GMs ticked up by a respectable 5.7% points. However, S&M expenses increased by 23% YoY. Despite this, Casper maintained an almost constant ratio between marketing dollars and revenue. S&M as % of revenue was 36.5% and 35.7% in years 19/18 respectively. Similar effects are at play with G&A spend - relative to revenue, Casper is spending about the same % on G&A. If Casper has solid Q4’19 performance, they would be on track to beat their ‘18 results (below) by about 5-6% - assuming their Q4 is as strong as Q1’Q3’19.


Here is how Casper explains their gross margins, S&M, and G&A for this period.

The increase in gross margin was largely driven by higher margin products among our new offerings as well as implementing supply chain initiatives designed to reduce product unit costs, which as expected has had a favorable impact to our cost of goods sold. Sales and marketing expenses increased as we continued to invest in driving traffic to our e-commerce website, marketing our products to consumers and building our brand. General and administrative expenses increased as we invested for growth in hiring to support our growing business, particularly in retail stores and product development.



Full year view - ‘18/17

Gross margins at 44% and 46% in years 18/17 respectively - slightly declining margins. S&M as % of revenue is 35% and 42.6% in years 18/17 respectively. Does the decline in marketing spend relative to revenue indicate success in their marketing programs? S&M as a % of revenue declines by about 7-8% while GMs decline by only 2%. G&A as a % of revenue was nearly flat in each year - 35% and 32% in years 18/17 respectively. Part of the increase in G&A can be explained by, “Increased investment in product development 89.2% to $12.3 million in 2018 from $6.5 million in 2017”


Here is how Casper explains their gross margins, S&M:

The decrease in gross margin was largely driven by increased sales to retail partners, which are at a lower gross margin than direct-to-consumer sales. We also recorded a charge for slow moving inventory of $2.3 million in 2018 which is included in cost of goods sold. Casper explains the improvement in S&M as a % of revenue. This improvement reflects more efficient marketing returns as Casper expands its product offerings in existing and new categories, increased consumer awareness, a higher returning customer mix, growth in our retail partnership and retail stores and more effective marketing models as we continue to improve our understanding of our consumers.



Summary

Casper has relatively strong gross margins, but the below the line costs (S&M/G&A) are driving substantial operating losses. In part two we will start to contextualize their strategy including retail store expansion, international growth, margin improvements initiatives to understand if Casper is on track toward profitability. We will revisit some of Casper's favorite KPIs including returns on marketing spend. We will also dive deeper into risk factors including manufacturing and vertical vs. horizontal integration risk.




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