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Casper Sleep Files For U.S. IPO

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About: Casper Sleep Inc. (CSPR)
by: Donovan Jones
Donovan Jones
IPOs, tech, alternative investments, CEO VentureDeal.com
Summary

Casper Sleep has filed to raise $100 million in an IPO, although the final figure may differ.

The firm sells mattresses and related products direct to consumers.

CSPR has grown quickly but that growth is decelerating and operating losses remain high.

Quick Take

Casper Sleep (CSPR) has filed to raise $100 million in an IPO of its common stock, according to an S-1 registration statement.

The firm sells mattresses and related sleep accessories and services.

CSPR has grown quickly but revenue growth is decelerating and the ‘Sleep Economy’ market it seeks to tap into may require very large additional investment beyond the IPO.

Company And Technology

New York, NY-based Casper was founded to sell mattresses in a direct-to-consumer business model. The firm seeks to expand its category to provide a complete range of sleep-related products across the ‘Sleep Arc,’ what it calls the larger 'Sleep Economy.' The chart below shows an overview:

Management is headed by Chief Executive Officer Mr. Philip Krim, who has been with the firm since 2013 and was previously CEO at Vocalize Mobile and CEO of The Merrick Group.

Below is a brief overview video of Casper's sleep product design:

Source: Casper

The company’s primary offerings include:

  • Mattresses

  • Pillows

  • Sheets

  • Duvets

  • Bedroom furniture

  • Sleep accessories

  • Sleep technologies

  • Sleep services

Casper has received at least $307 million from investors including Institutional Venture Partners, New Enterprise Associates, Norwest Venture Partners, Red Cart Ventures and Vaizra US.

Customer Acquisition

The company utilizes a 'direct-to-consumer' or DTC model to acquire customers directly rather than through wholesale distribution relationships.

CSPR currently operates 60 company-owned retail stores and also sells through 18 retail partners. In addition, the company obtains customers through its website and via online and offline marketing efforts.

Sales and marketing expenses as a percentage of total revenue have been uneven but trending downward as revenues have increased, as the figures below indicate:

Sales & Marketing

Expenses vs. Revenue

Period

Percentage

Nine Mos. Ended Sept. 30, 2019

36.5%

2018

35.3%

2017

42.6%

Source: Company registration statement

The sales & marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of sales & marketing spend, dropped to 0.5x in the most recent reporting period, as shown in the table below:

Sales & Marketing

Efficiency Rate

Period

Multiple

Nine Mos. Ended Sept. 30, 2019

0.5

2018

0.8

Source: Company registration statement

Average Order Value [AOV] grew from $583 in 2017 to $686 in 2018 and then to $710 for the nine-month period ending September 30, 2019, so AOV is beginning to plateau.

The firm averages $1,600 in annual net sales per square foot in its retail stores that have been operating for one year or more, which is higher than typical mattress stores.

CSPR has 18 retail partners such as Amazon (AMZN), Costco (COST) and Target (TGT).

Market And Competition

According to a 2019 report by Frost & Sullivan commissioned by the company, the market for 'sleep economy' products and services is expected to reach $585 billion by 2024, as the graphic shows below:

This represents a forecast CAGR of 6.3% from 2019 to 2024.

The company believes that consumers are increasing their focus on personal wellness and sleep is becoming an important part of that focus. Also, management asserts that the replacement cycle for sleep products is shortening. Consumers typically purchase a new mattress every ten years, so shortening this long cycle between purchases would result in a significantly larger market size.

The firm counts numerous competitors depending on its product type such as mattress, soft goods, bedroom furniture and sleep technologies.

Management says its data-driven approach to customers gives it a better understanding of consumer behavior and improves their ability to design products, market them, and retain customers for a higher lifetime value.

Financial Performance

Casper’s recent financial results can be summarized as follows:

  • Growing top line revenue, although at a decelerating rate

  • Increasing gross profit and fluctuating gross margin

  • Lowered negative operating margin

  • Reduced use of cash from operations

Below are relevant financial metrics derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

Nine Mos. Ended Sept. 30, 2019

$ 312,319,000

20.3%

2018

$ 357,891,000

42.6%

2017

$ 250,909,000

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

Nine Mos. Ended Sept. 30, 2019

$ 154,977,000

33.5%

2018

$ 157,752,000

35.0%

2017

$ 116,871,000

Gross Margin

Period

Gross Margin

Nine Mos. Ended Sept. 30, 2019

49.62%

2018

44.08%

2017

46.58%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

Nine Mos. Ended Sept. 30, 2019

$ (65,143,000)

-20.9%

2018

$ (91,960,000)

-25.7%

2017

$ (71,261,000)

-28.4%

Comprehensive Income (Loss)

Period

Comprehensive Income (Loss)

Nine Mos. Ended Sept. 30, 2019

$ (67,324,000)

2018

$ (93,169,000)

2017

$ (73,113,000)

Cash Flow From Operations

Period

Cash Flow From Operations

Nine Mos. Ended Sept. 30, 2019

$ (29,706,000)

2018

$ (72,255,000)

2017

$ (84,015,000)

Source: Company registration statement

As of September 30, 2019, Casper had $54.9 million in cash and $170 million in total liabilities.

Free cash flow during the twelve months ended September 30, 2019, was a negative ($106.4 million).

IPO Details

Casper intends to raise $100 million in gross proceeds from an IPO of its common stock, although the final amount may differ.

Management says it will use the net proceeds from the IPO as follows:

We intend to use the net proceeds from this offering for working capital, to fund growth and for other general corporate purposes, including the repayment of [an as-yet undisclosed amount] of borrowings outstanding under our Senior Secured Facility. Currently, the Senior Secured Facility consists of a $25.0 million revolving credit facility that becomes due and payable on September 1, 2020, and borrowings under the Senior Secured Facility accrue interest at an annual rate equal to the greater of [i] the prime rate or [ii] 3.5%.

Management’s presentation of the company roadshow is not available yet.

Listed bookrunners of the IPO are Morgan Stanley, Goldman Sachs, Jefferies, BofA Securities, UBS Investment Bank, Citigroup, Piper Sandler, and Guggenheim Securities.

Commentary

Casper is seeking to raise public capital for its growth plans.

Management believes that it can build a company that essentially expands the sleep category into a much larger addressable market beyond just mattresses.

Additionally, it believes its direct-to-consumer or DTC model gives it an inherent advantage over existing, legacy mattress sellers and that its expansive approach will lead to better brand recognition, customer retention and reduced buying cycle times.

The firm’s financials show a company that has grown revenue sharply. However, that growth rate is decelerating while the firm is still producing significant operating losses.

Sales and marketing expenses have been uneven but are trending downward as revenues grow; its sales & marketing efficiency rate has dropped, however, indicating less efficiency in this regard.

The market opportunity for the ‘Sleep Economy’ is large and growing, however, the speed of that growth is uncertain and a major question is whether the company will realistically be able to tap into that growth across numerous product categories.

Also, another question is how much additional investment CSPR will need to generate meaningful growth in those other product categories. I’ve seen venture capital estimates of as much as $500 million within a few years in additional investment (and potential shareholder dilution) to accomplish this big task.

Valuation assumptions will be all-important on this ‘unicorn’ IPO and I’ll provide an update when we learn more details.

Expected IPO Pricing Date: To be announced.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.