Purple Innovation (NASDAQ:PRPL) had evolved from an online bedding company to an omni-channel brand that sells multiple mattresses across a wide range of price points. Post the outsized growth during the pandemic, the company’s fortunes have significantly deteriorated having declined ~89% in past 3 years and over 35% in past year.
Once a high growth company which witnessed an outsized growth during the pandemic as people stayed home and shopped its value for money products online saw a significant decline in revenues as the demand scenario looks significantly depressed with inflation hurting the value conscious consumers. This has been echoed by other industry competitors including Sleep Number (SNBR) which has also been struggling, with the exception of Tempur Sealy (TPX) which reported resilient earnings growth.
We believe while the company’s pivot to a more premium category is welcome, but it might be too little too late and could face pressure from Tempur Sealy who has a strong moat within the premium category. It reported a significantly weaker set of numbers for Q2 and post the shares dropping by a fourth in last two days, we remain neutral.
PRPL reported a significantly weaker set of Q2 results with sales declining 16% YoY as a result of broad-based declines across both its wholesale and DTC channels. The weak demand industry backdrop coupled with slower roll-out of new products in wholesale were the primary drivers for the tepid numbers. Gross margin declined 200 bps to 31.8% falling to its lowest and significantly below consensus expectations of 35%+ driven by elevated launch costs and promotions eating up the margins. SG&A deleverage significantly as elevated and sticky fixed costs and higher advertising spends coupled with declining sales. Declining sales and gross margins coupled with SG&A deleverage led to surprise EBITDA loss of ($18.5 mn). Balance sheet position remains weak with cash balance declining to $27 mn from $55 mn last quarter primarily driven by ~$25 mn of cash used in operations. Inventory levels increased for the quarter on the back of new product rollouts and management’s cautious approach. It closed on a new debt facility consisting of a $25 mn term loan that provides up to $50 mn in financing with better terms.
It now expects net revenue to be in the range of $560 to $590 mn (from $590 – $615 mn previously) and Adjusted EBITDA between ($10 mn) and breakeven (from $13 – $17 mn previously) citing weak industry trends. Despite the lower guidance, it still expects a 20% sales acceleration in H2 2023 (vs 20% decline in H1 2023). We believe the growth could be achievable as it faces soft comparables going forward along with ramp up of the new products it launched in May.
PRPL has traded at an average of 14x EV/ NTM EBITDA historically since last 3 years. We believe management will likely meet the current estimates and accelerate going forward in H1 2024 as a result of soft comparables and improvements in the portfolio mix. Gross margins are likely to remain flattish with slight improvement in average ticket price (as seen sequentially in Q2 2023) and new product ramp ups to offset any increase in promotions. We also expect SG&A leverage as ramp up in sales is likely to benefit which will overall lead to an improvement in EBITDA sequentially.
|H2 2023 EBITDA||$10 mn|
|H1 2024 EBITDA||$15 mn|
|Total NTM EBITDA||$25 mn|
We believe given the significantly weak outlook and lower growth profile, we value it at 10x 2024E EBITDA with a target price of $2.5.
|Enterprise Value||$250 mn|
|(-) Debt||$25 mn|
|(+) Cash||$27 mn|
|Equity Value||$252 mn|
|Target Share Price||$2.5|
Seeking Alpha’s Quant rating ascribes a Strong Sell rating citing weakening growth and margin profile along with steeper valuations.
Risks to Rating
Risks to rating include
1) any change in consumer spends which will likely significantly impact the demand trends of the industry
2) Path to Premium sleep strategy hinges on focus on higher income users but PRPL could face significant competition from TSY who is already a formidable player within the segment. However, its focus on mid to high premium segments could likely benefit as demonstrated in an improvement in average ticket prices sequentially
We believe PRPL is on a rough patch amidst a significantly challenged demand outlook and post its recent earnings print, shares are likely to be under pressure in the near term with its shares shaving off about 25% already in a couple of days. However, we believe the management is likely to meet its revised guidance for the year which implies a healthy acceleration in sales lapping soft comparables. The risk remains weighted significantly on the downside, and we await any tangible improvements in the operational performance. Initiate at Neutral with target price of $2.5.