Since going public via reverse merger three years ago, Purple Innovation Inc. (Nasdaq: PRPL) has been largely ignored by the investors, who were more attracted by high-flying startup Casper Sleep (Nasdaq: CSPR) and established players like Tempur Sealy International (NYSE: TPX) and Sleep Number Corp. (Nasdaq: SNBR) in the mattress space.

Operationally, Purple Innovation has made a sharp comeback after the lockdown related shutdown and furloughs. The company has successfully shifted its sales to the direct-to-consumer channel, keeping the growth momentum intact and making improvements on the margins fronts. In the meantime, the stock continues to trade at a discount.

But that will change soon. As the mattress space benefits from ‘stay at home’ trends due to lockdown, Purple Innovation is monetizing the trend better than its peers. Somewhat similar to other markets within the retail sector, where we have seen the difference in the execution of Restoration Hardware (NYSE:RH) and Best Buy (NASDAQ:BBBY) forcing the market to assign a much higher trading multiple to businesses that are performing well, we may see Purple Innovation getting a valuation premium, instead of a trading discount right now.

What proves a strong execution? A swift comeback

“Everyone has a plan ’till they get punched in the mouth.”

Mike Tyson

At the start of the year, the company was aggressively positioning for expansion in brick and mortar channel, be it opening additional company showrooms or rolling out the newly announced partnership with Raymour & Flanigan, a furniture retailer with 138 stores, and then Covid-19 pandemic hit; almost 80% of the wholesale partners closed their stores.

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But the management executed remarkably, shifting resources to support growing digital sales, by moving furloughed showroom employees to the work-from-home contact center and other creative initiatives to push sales, while holding back on expenses.

The result was evident in the first quarter, revenues increasing by 46%, gross margins improving by 280 basis points and adjusted EBITDA increasing by 71%.

And continuing with a strong momentum

Now it is natural to question whether this momentum can be carried through, more so given Bears doubt how the demand will pan out once the stimulus checks run out. We at Purnha expect the continuation of this sales strength, mainly on the back of:

  • Continued strength in the direct-to-consumer channel
  • New products and bundled deals
  • Capacity expansion
  • Channel restocking for brick and mortar stores

The company is operating facilities at full capacity, thanks to higher-than-expected DTC demand. Indeed, direct-to-consumer sales increased 125% in May over the same time last year. Even though some website commerce and merchandising capabilities were upgraded last year, a much bigger redesign and platform upgrade are planned for a launch later this year.

New products and bundled deals

Mattress sales continue to be the biggest growth driver, but sales from other related products like seat cushions, pillows, and sheets are also benefiting from digital sales. Revenue from non-mattress products nearly doubled since the beginning of the year, thanks to initiatives like offering bundled deals and offers online.

Some of the newer products like premium Harmony Pillow, an upgraded platform base, and an updated Purple Pillow with boosters that allow height adjustments, may also help drive sales. A redesigned website may make a bigger push for such sales.

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Capacity expansion

As the sales came back, the company accelerated work on Max 7 machine that was launched in May this year, increasing the company’s capacity by 40% for the current year, providing confidence in its ability to deliver 40-45% sales growth for the current year.

Work on the new manufacturing facility on the East Coast is already underway that may bring Max 8 and 9 machines online. If the demand trends stay strong enough, new capacity may be launched by early next year.

Channel restocking

At the onset of the lockdown, wholesale and other brick and mortar stores cleaned up their inventory to better manage their cash positions, but now that stores are starting to open up, they will have to restock inventory, providing a further boost to the already strong demand trends for the company.

The Key differentiator – online sales can offer more than just growth

Yes, online sales have been a key differentiator, but what is not yet fully appreciated by the market is that online sales can offer much more than just strong revenue growth.

Besides helping the company push bundled sales, as mentioned earlier, more direct-to-consumer sales can:

  • Help grow the brand
  • Drive better margins given direct sales require less direct and operating expenses
  • Allow better inventory management
  • Improve cash flow metrics
  • Increase share in the sale of premium mattresses. Before lockdown, almost 80% of the premium mattresses were sold through brick and mortar stores. The ratio is expected to shift to 60-40 in favor of online sales, which may also increase revenue per mattress.
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Wait till you see the thesis play out in the numbers.

Purple Innovation Inc.
2018 2019 Q1 2020
Revenue Growth 50% 46%
Operating expenses
Marketing and sales 36% 32% 30%
General and admin 8% 5% 6%
Research and development 1% 1% 1%

Excludes stock-based compensation

The company has a vertically integrated business model, from manufacturing to retail stores, which is why if the demand stays strong earnings and cash flow can be disproportionately stronger.

Gross margins for the company during the first quarter increased to 43.5% from 40.7%, same time last year. Worth noting that share of DTC sales increased from 64% of the total last year first quarter to 66% during the first quarter 2020. Similarly, margin leverage is visible across the board, as the chart above shows.

Next Yr PE P/ Sales Market Cap (NYSE:M) Gross margins 2019 Sales Growth Next Yr.
Purple Innovation 42.0 0.6 $1,000 44% 20%
Casper Sleep Loss 0.7 $340 49% 24%
Tempur Sealy 29.6 1.2 $3,660 43% 10%
Sleep Number 58.0 0.8 $1,290 62% 11%

As the chart above shows, there is significant room for the company to increase margins, but equally important to note, there is an even bigger room for the stock to catch up to peers’ valuation, all of which are trading at 20-100% premium to Purple Innovation, even though the company is executing much better.

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.