Purple Innovation Stock: The Prognosis After Much Uncertainty (NASDAQ:PRPL)

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“It is the nature of physics to hear the loudest of mouths over the most comprehensive ones.” ― Criss Jami,

Today, we take a long look at a struggling manufacturer whose stock has dropped sharply due to a combination of issues. However, it does seem to have a ‘best of breed‘ product for a growing market and a key beneficial owner has bought the dip in a significant way even as the stock has become a leper for analyst firms recently. Company destined to circle the drain or rise like a Phoenix? A full analysis follows below.

PRPL - One Year Stock Chart

PRPL – One Year Stock Chart (Seeking Alpha)

Company Overview:

Purple Innovation, Inc. (NASDAQ:PRPL) is a Lehi, Utah based manufacturer of mattresses and complimentary products that exploit its expertise in gel and comfort technologies. The company sells about two-thirds of its mattresses direct-to-customer [DTC], and the balance through brick-and-mortar wholesale partners or its own showrooms. Purple was founded in 2010 as seat cushion manufacturer Wonder Gel, which then raised ~$150,000 from a Kickstarter campaign it initiated in 2015 to produce mattresses. It changed to its current moniker in 2017 and went public in 2018 when it reversed capitalized through special purpose acquisition company Global Partner Acquisition Corp. with its first trade transacting at $10.05 per share. After peaking at $41.08 in January 2021, shares of PRPL have retreated significantly and now trade around $7.00 a share, equating to an approximate market cap of $475 million.

The company created Hyper-Elastic Polymer, a material that can be stretched up to 15 times its original size and return without losing its shape. It is non-toxic, hypoallergenic, and durable. As such, Purple believes it is the first significant breakthrough in mattress technology since the introduction of memory foam in the 1990s. So unique is the polymer, the company had to develop its own machines (dubbed Mattress Max) to mold it into king-sized open-grid structured mattresses at scale. Both Hyper-Elastic and Mattress Max are patent-protected technologies. Owing to these advancements, Purple advertises its products as a balance between comfort and support with excellent responsiveness and thermal management; and thus a potential solution for 70 million Americans who suffer from chronic sleep disorders. So far, consumers agree with Purple, which has achieved number one in customer satisfaction for mattresses sold online in each of the past two J.D. Power surveys.

Domestic Bedding Market

Believing that it cracked the code with its gel grid mattresses, the company has embarked on an aggressive campaign to disrupt the market, which consists predominantly of coil, foam, and hybrid offerings. The largest participants in the $21 billion domestic bedding and base industry (2020) are privately held Serta Simmons Bedding (~32% market share), Tempur Sealy International (NYSE:TPX) (~30%), and Sleep Number (NASDAQ:SNBR) (~8%). The industry, which is still 80/20 physical-location buying/online purchases, is expected to grow at a 4.8% CAGR to $26.8 billion in 2030. By contrast, Purple owns a ~20% share of the higher-margin premium mattress (>$2,000) DTC market but only a ~5% share of the premium brick-and-mortar market.

Aggressive Three-to-Five Year Plan

Returning to the company’s growth initiative, it was first revealed in June 2021 and has an ultimate objective of more than tripling its top line – $648.5 million in 2020 – to $2.0 billion-$2.5 billion and growing its Adj. EBITDA margins from a 2019-2020 average of 10.7% to 14%-15% over the next three to five years. The company’s approach involves a multi-pronged strategy, the most important of which is to gain a greater share of the premium segment (>$2,000) by broadening and elevating its offerings from four mattress families to six or more. By increasing the quality of its offerings, Purple expects to raise its average selling price [ASP] from its current ~$1,900 to ~$2,400 while gaining a greater share of the premium market, which currently accounts for ~30% of retail mattress revenues. To aid in the accomplishment of this goal, it opened a third manufacturing plant – and its first outside Utah – near Atlanta in August 2021.

The company also aims to up its non-mattress revenue (consisting of pillows, sheets, bed frames, duvets, seat cushions, etc.) from ~$140 million to ~$450 million (based on range midpoints) in the three-to-five year time frame. These goals will also be aided by the expansion of its distribution ecosystem, in which it expects to grow the number of its owned showrooms from 13 at June 2021 to over 200 at a cost of ~$600,000 per with a 15 month payback period. It also anticipates scaling the number of its wholesale partner locations from ~2,300 to~3,500. Lastly, by realizing greater efficiencies from economies of scale and a next generation Mattress Max machine, Purple expects to expand its Adj. EBITDA margins.

Recent Derailment

Shortly before these long-term plans were released, an employee died in an industrial accident at the company’s Grantsville, Utah plant in May 2021. This prompted an investigation into the event – which was the fourth safety incident at that location in 2021 – and subsequent installation of safety equipment. Purple initially stated that it did not believe the resulting temporary production stoppage would impact deliveries, but after experiencing unexpected “mechanical and maintenance issues encountered bringing machines back online“, the company was compelled to withdraw its full-year guidance in late June, which earlier in the year had been upwardly revised to Adj. EBITDA of $100 million on revenue of $880 million, based on range midpoints. It took until late July (ten weeks) before full production was restored. These estimates were later reinstated to Adj. EBITDA of $83 million on revenue of $835 million when the company announced disappointing 2Q21 earnings in August.

The tragic incident not only produced significant DTC shipment backlogs, but also had the effect of generating a significant inventory build when Purple returned to full production in 3Q21 as wholesalers very conservatively brought back the company’s offerings into their storefronts. As such, Purple’s top and bottom lines were significantly impacted in both 2Q and 3Q.

Disastrous 3Q21 Results & Revised Outlook

After posting 52% year-over-year sales growth in 1Q21, the company only managed an 11% increase in 2Q21, which then dipped into negative territory in 3Q21. On November 9, 2021, Purple reported an 3Q21 Adj. net loss of $0.07 a share and a positive $0.1 million Adj. EBITDA on revenue of $170.8 million as compared to positive $0.27 a share and Adj. EBITDA of $30.1 million on revenue of $187.1 million in 3Q20, reflecting a 9% decrease in revenue. Wholesale revenue increased 10% due to the expansion of partner locations, but DTC decreased 16% as the aforementioned delays and decreased marketing spend – meant to keep demand artificially down while it caught up on shipments – negatively impacted results. On a positive note, Purple indicated that it was on track to add 400 to 500 doors in 2021 – bringing the total to ~2,800 – with expectations for ~3,500 wholesale doors by YE22.

Returning to the negative, the inefficiencies related to its production issues as well as rising input costs and a channel shift mix towards wholesale hammered gross margins, which dropped from 47.2% in 3Q20 to 35.8% in 3Q21. The earnings figure fell $0.22 a share short of Street consensus and the top line was $27.5 million (or 14%) below expectations.

All that could have been forgiven, considering the accident and its rippled effects through Purple’s financial statements, as long as those effects appeared behind them. However, owing to its poor 3Q, an increased marketing spend to reignite DTC demand, and a less than vibrant start to its 4Q, management was compelled to drastically lower its outlook for FY21 Adj. EBITDA from $83 million to $10 million and revenue from $835 million to $730 million. These projections were based on range midpoints. Only five weeks after this surprising development, Purple issued a press release revising its forecast yet again to the lower end of those ranges ($10 million and $720 million, respectively) and announcing the resignation of its CEO.

Shares of PRPL, which were already down 41% to $19.20 since the accident (and 53% from their all-time high of $41.08 set in January 2021), cratered 24% to $14.50 in the trading session subsequent to the company’s 3Q21 report and eventually below $9 (intraday) after the CEO’s departure was announced on December 13, 2021. The stock has continued to fall during the broad stock market sell-off we have seen so far in 2022.

Balance Sheet & Analyst Commentary:

Purple also stated in its 3Q report that it was on track to end 2021 with 28 showrooms and expected to add another 30 in 2022. To support this continued expansion, the company held cash of $83.6 million and debt of $39.9 million on September 30, 2021. Owing its poor performance and infrastructure build, the company was impelled to tap the entirety of its previously untapped $55 million revolver in November. It anticipates total year-end liquidity of $85 million to $95 million.

Unsurprisingly, with its credibility besmirched, Purple has received the cold shoulder from Street analysts, receiving no fewer than six downgrades since September 2021. Once universally positive, since November five analyst firms including Bank of America and Raymond James have either reissued or downgraded PRPL to a Hold or a Sell. Three analyst firms including Wedbush have reiterated Buy ratings over that time, but all contained downward price target revisions. Their new price targets range from $10 to $22 a share. The current analyst consensus has the company earning 20 cents a share in FY2022 on just over $800 million in revenues.

Coliseum Capital Partners has a more optimistic take. This beneficial owner is represented on the board by Adam Gray and having unloaded 7.3 million shares at $30 in May 2021 in a secondary offering, it has used the sharp downdraft in Purple’s stock as an opportunity to essentially by back what it sold, purchasing 7.45 million shares at an average price of $11.29 between December 16th and 20th, raising its ownership interest back to 23%.

Verdict:

There is plenty of uncertainty surrounding Purple. Either one tragic incident has cascaded into three quarters of significant underperformance verses expectations (initial or revised), or the fallout from the accident is masking structural demand and margin issues. It is likely somewhere in between, as the pandemic played into its DTC model during 2020, likely rendering its three-to-five year plan overly optimistic. However, with two consecutive J.D. Power customer satisfaction awards – although with shipping delays for several months, not holding breath on a third one – Purple is generating a product that consumers like.

The higher-margin DTC channel may spring back to life if the latest Greek-lettered variant forces people back indoors, and with 3,500 wholesale doors anticipated in its ecosystem by YE22, next year is positioned for a comeback, at least in the second half. Down ~80% from its all-time high, trading at roughly 60% of FY22E revenue – a top line that hopefully will result in bottom-line profitability and significant support from a deep-pocketed insider around $10-$12 level, Purple deserves at least a ‘watch item‘ position for the aggressive, long term investor. Options are available against the stock making it a viable covered call candidate which is how I have initiated a small initial holding while awaiting the next quarterly update which should be out shortly.

“No one man can terrorize a whole nation unless we are all his accomplices.” ― Edward R. Murrow

Bret Jensen is the Founder of and authors articles for the Biotech Forum, Busted IPO Forum, and Insiders Forum

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