Casper IPO: everything you need to know
Casper is burning through cash and is deep in the red, but the mattress company is hoping investors will buy into its growth potential as it looks to go public.
When is Casper’s IPO and what is the IPO price?
Casper has made an initial filing with the US Securities and Exchange Commission (SEC) to become a publicly listed company, but it has not yet set a date or the price at which it will list its shares.
We do know that Casper was valued at $1.1 billion in its latest Series D funding round back in March 2019, when it raised $100 million from a consortium led by retailer Target. The New York Post recently reported that chief executive Philip Krim is determined to get a $1 billion-plus valuation.
Casper has shown its intent by making an initial filing but there is no guarantee that the company will go ahead with its listing, particularly if it can’t secure the value it wants. Conducting an Initial Public Offering (IPO) is a way to raise cash to fund future growth but it is also a way for founders and early investors to cash-in and profit from some of their investment, so the price is important. WeWork, the shared workspace provider, withdrew its S-1 filing last year after failing to convince the market it was worth the $47 billion valuation it was targeting.
Read more: What is an IPO?
How to trade the Casper IPO
You will be able to trade Casper shares or invest in them using IG once the company has completed its IPO. You will be able to invest in the stock post-IPO using an IG Share Trading Account and speculate on future price movements – long or short - by trading the stock using an IG CFD account.
What is Casper?
In a nutshell, Casper designs and sells mattresses and other bedroom furniture and accessories. Initially, it was one of the pioneers that started selling mattresses to customers online before folding and shipping them in a box which could be unravelled upon delivery. The direct-to-consumer model lowered the price as it cut out the middleman.
The company has experienced significant growth with over 1.4 million customers served to date and has diversified into a range of new areas of what it calls the ‘sleep economy’. This has seen it introduce bed frames, bedding, pillows, dog beds and even a light that helps improve people’s sleep. It designs the majority of its products and technology in-house from Casper Labs, its research and development centre in San Francisco. However, it does licence some technology and relies on third parties to manufacture its products. Casper says it believes ‘that no other company in the category has our level of product development talent, resources, or expertise’, and that it is ‘the first company that understands and serves the sleep economy in a holistic way’.
Today, it has 60 retail stores across North America, mostly in its core market of the US with a few in Canada. However, it also serves the UK, Germany, Austria, Switzerland and France online. It also sells through 18 major retail partners including Amazon, Costco, Hudson's Bay Company and Target. Casper sees great value in its multi-channel approach and is digitally-savvy when it comes to leveraging the likes of social media platforms and streaming sites. Offering interest-free financing, no-hassle returns and free trial periods are also central to its offering.
How much is the sleep economy worth?
Casper claims the global sleep economy – encompassing everything from basics like pyjamas to more advanced developments like sleep tracking devices and sleep supplements – was worth $432 billion in 2019 and is expecting that jump to $585 billion by 2024. Its core US market was valued at $79 billion last year and is forecast to grow to $95 billion by 2025, representing a slower rate than the world average.
Casper see’s huge growth potential considering it currently serves a market worth around $67 billion. But, by expanding into new countries and introducing more products, it believes it has another $365 billion of addressable market to chase.
Who are Casper’s competitors?
Selling mattresses and bedroom furniture is nothing new, but Casper is one of many new entrants to the market that claims to offer superior mattresses with new technology and a modern sales model that attracts a new generation of customers that are increasingly focused on improving their quality of sleep. This means it not only competes with more traditional players like Tempur Sealy International and Serta Simmons Bedding, both of which have become market leaders following a period of consolidation, but others that offer a direct-to-consumer, mattress-in-a-box model such as Purple and Leesa, or UK-based outfit Eve Sleep.
The number of competitors has expanded as Casper has developed new products. It is now up against the giants that dominate in homewares and bedding like Wal-Mart, Amazon, IKEA, Wayfair and Overstock.com.
How has Casper performed financially?
Casper’s finances will be familiar to any investors that have tapped some of the biggest IPOs in recent years. The company is growing at a stellar rate but it is unprofitable and burning through cash.
The company reports net revenue, which excludes any money it has spent on discounts or on refunds. It offers a 100-day free trial on its range of mattresses and a 30-day try-out on most of its other products, promising hassle-free returns. As we can see in the table below, Casper reported a $67 million loss in the nine months to the end of September 2019 after returning over $80 million in refunds, returns and discounts. This has prompted a focus on the level of returns as it is currently being seen as a core driver of losses. Another big point of expenditure has been on marketing, with over $422 million invested since the start of 2016, as it builds a ‘sophisticated, data-driven, and integrated marketing strategy’.
|($, 000s, unless stated)||9-months to Sept 30, 2019||9-months to Sept 30, 2018||Year ended December 31, 2018||Year ended December 31, 2017|
|Refunds, returns and discounts||80,085||57,659||80,695||45,656|
|Sales & marketing||113,994||92,705||126,189||106,809|
|General & admin||106,126||88,166||123,523||81,323|
|Net loss per share (pence)||(6.4)||(6.2)||(8.91)||(7.22)|
On the upside, growth remains strong, margins are improving, and its cash burn has slowed. Net revenue grew over 20% year-on-year in the latest nine-month period and its gross margin sits at nearly 50% compared to below 45% last year. Its losses have continued to swell, but its cash burn has reduced by one-third year-on-year.
There will be understandable concerns about Casper being in the red and questions about whether it can become profitable and self-sustaining. Investors will have to rely on the share price appreciating for returns as Casper will not pay dividends any time soon, and that could be hard if it Is adamant on securing a high valuation in an IPO.
It is also worth mentioning that Casper’s business is influenced by some seasonality. In the limited years that Casper has been operating, sales have typically peaked in the third quarter of the calendar year before dipping in the fourth, whilst the first two quarters tend to be the weakest periods.
How does Casper intend to grow and what are the challenges?
‘People spend more time sleeping than on any other single activity throughout their lives. When we sleep better, we experience better hours awake, making us more productive, creative, happy, and healthy. We believe sleep is rapidly becoming the third pillar of wellness and is poised to undergo the same massive transformation that fitness and nutrition have as they became major consumer categories’ – Casper.
Casper intends to grow its top-line by continuing to open more retail stores, expand into more countries and introduce more products. When it comes to opening new stores, the immediate focus will continue to be on North America, where it eventually hopes to have 200 stores. Some may question its focus on building a costly network of shops considering most other retailers are closing-down stores and adopting leaner, online sales models, but Casper sees them as invaluable. For example, it said that sales in cities that have a retail store grow twice as fast as sales in cities that are only served online or through its retail partners.
It will also start considering whether to open new stores outside the region and plans to be operating in 20 countries in the long term.
Can Casper become profitable?
But the real challenge will be growing the bottom-line, not the top. It risks falling into an unpopular group of businesses that have failed to demonstrate their sustainability since listing, including ride-hailing firm Uber, unless it can show it is moving toward profitability and positive cash generation.
Casper has identified several things it needs to address to improve productivity and become profitable. The first is reducing the amount of returns it receives, which looks set to be a key metric that the market will watch if it ends up listing, and ‘optimising’ its pricing and promotion strategy. Return rates have largely been stable and in-line with management expectations so far, but there are fears that they could increase as it rapidly introduces new products to the market. While its core products like mattresses have been tried-and-tested by the market, this can’t be said for any new products it releases, which may fail to meet customer’s needs. Casper has warned that ‘an increase in return rates could significantly impair our liquidity and profitability.’
Overall, it is hoping to make its marketing more efficient after investing so much money. It currently generates $3 in sales for every $1 invested in marketing, excluding promotions, and this will also been keenly watched by any investors. It also hopes to invest in its supply chain as it currently relies on third-parties for its distribution, logistics and manufacturing. Right now, just two manufacturers make over 70% of its mattresses and Casper has warned that finding good partners on favourable terms has become much more difficult because of ongoing consolidation among suppliers of foam, which is a key component of its mattresses.
Casper has said ‘our ability to identify qualified manufacturers is a significant challenge, especially with respect to goods sourced outside of North America’. Plus, most of its agreements with its manufacturers are not exclusive, allowing them to freely produce goods for Casper’s competitors. This is also the case for the limited amount of technology that it licenses. Most of its tech has been developed in-house but it does use certain foam formulations that are owned by its manufacturing partners – meaning it could lose important intellectual property (IP) rights if one of its partners cuts ties with the business.
Casper is exposed to trade wars
Still, it does have manufacturing partners in India, Canada, Germany, Belgium, the UK and China – the last of which exposes it to the US-China trade war. ‘These tariffs have the potential to significantly raise the cost of our products. In such a case, there can be no assurance that we will be able to shift manufacturing and supply agreements to non-impacted countries, including the United States, to reduce the effects of the tariffs. As a result, we may suffer margin erosion or be required to raise our prices, which may result in the loss of customers […] In addition, the imposition of tariffs on products that we export to international markets could make such products more expensive compared to those of our competitors if we pass related additional costs on to our customers,’ Casper cautioned in its initial filing.
Should you invest in Casper if it goes public?
Casper is the latest loss-making company aiming to achieve a blockbuster valuation at its IPO. Convincing the market of its worth will be critical over the coming weeks if it is to avoid following in the footsteps of WeWork. If the listing goes ahead, then it will have to show it is moving toward profitability to avoid following in the footsteps of Uber.
Casper is growing fast and looking to use its data-driven, digitally-savvy model to cement itself as a lifestyle brand in an emerging market. The company believes the sleep market will be transformed in the coming years, similar to what the nutrition and fitness markets have experienced.
But its rapid expansion, including launching new products and entering new markets, will exacerbate the risks facing the company, like the potential weaknesses of its arrangements with its partners or its exposure to geopolitical instability.
Read more: Learn more about upcoming IPOs
Casper may be one of the larger mattress companies to have entered the market in recent years, but it is not the only one, and there are a couple of large and formidable players that dominate the market after a period of consolidation. The ambition to compete and to expand will mean investment will have to remain high in the coming years – and potential IPO investors need to be aware that they will face significant dilution. Casper said in its filing that it will need to raise further cash in the future and said this could come from either debt or equity.
It is hard to judge the appeal of investing in Casper before it sets an IPO price and valuation. However, initial coverage has not been favourable, and the company may struggle to drum-up sufficient interest in the coming weeks.
Read more: What is an IPO lock-up period and how do you trade it?
Or should you consider other mattress stocks?
With all of that in mind, some investors may not want to wait to find out whether Casper is going to list – especially when there is a more established and profitable option already available.
Tempur Sealy International
Tempur Sealy International is growing and in the black. In the nine months to the end of September 2019, the company reported a 10% rise in revenue to $2.23 billion and an impressive 55% increase in pretax profit to $202.9 million. Its margin also improved, and the firm is cash generative, with net operating cashflow rising to $201.7 million from just $130.6 million the year before. The stellar performance, plus the expectations for its full year results to be released on February 13 2020, has propelled Tempur Sealy shares to an all-time high.
Trade or invest in Tempur Sealy shares today
Eve Sleep is an example of how tough the mattress market can be. It predominantly sells mattresses in a box to consumers online but, like Casper, has been expanding its product range to the point that non-mattress products now account for over 25% of sales. It too is trying to improve the efficiency of its marketing but has struggled due to intense discounting by rivals and overall weaker macroeconomic conditions.
The stock is loss-making and revenue is in decline. It recently released a year-end trading update ahead of its annual results that confirmed revenue fell 19% to £23.8 million in 2019 and said it remains in the red, even if losses have narrowed and its cash burn has been cut in half. The business has been reducing costs and said this means the last four months of 2019 is more indicative of its 2020 prospects. This suggests it will post an improvement for the final quarter and that things are looking up this year but puts added pressure on its annual results that will be released on March 24 2020. Eve Sleep shares are currently worth just 1.9p after losing 81% of their value over the past 12 months – a fraction of the 130.5p high it hit at the end of 2017 and the IPO price of 101p.
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