Purple Innovation (PRPL) – A High Comfort Level
Purple Innovation (PRPL) designs and manufactures a variety of innovative, premium, branded comfort products, including mattresses, pillows, seat and back cushions, frames, sheets and more.
Last month, on January 26th, UBS was out with U.S. Mattress outlook note saying that for 2021, it is important to be selective when investing across this sector. A key debate for this year is whether the industry can sustain growth in the second half when comps get tougher and wallet share gains likely reverse. The optimistic case is that a strong housing market will drive demand. The counter argument is that there’s a good chance that some demand has been pulled-forward. “Our PCE analysis shows that mattress industry gained ~2 bps of share of the overall PCE spend of $14T. If it gives 1 bp back in FY’21, it would imply a flattish year for the sector. Still, share shifts among brands and channel shifts between DTC/retail will determine which brands will win in 2021. The other key theme is whether the industry can sustain the lower ad spend that it enjoyed in 2020 (most likely it won’t). Given these risks and opportunities, PRPL remains our top pick in the sector.” UBS would also provide a few different takeaways:
Takeaway #1 – Near-term trends should be supported by continued government stimulus and owners nesting at their homes. In 2020, despite the disruption to the labor market, personal income grew Y/Y. However, this was entirely driven by government transfers through enhanced unemployment benefits and direct stimulus checks. In fact, income through wages and salaries actually declined slightly Y/Y in the first half. With the recent $600 stimulus checks and expectation of another $1,400 being distributed, they believe the mattress sector will benefit in the near-term.
Takeaway #2 – The online channel should continue to grab share. The UBS Evidence Lab Survey of ~2,500 adults showed that 27% of respondents had purchased a mattress in the past 12 months (up 200bps Y/Y). This was the highest reading in the past 4 years. Further, online adoption increased meaningfully as 73% of those that bought a mattress in the past 12 months, noted that they bought it through the eComm channel. This compares to 62% in 2019 and only 14% in 2018.
Takeaway #3 – Conversations with Industry Executives. Analyst Atul Maheswari, in a note on January 26th, said his recent discussions with a handful of industry executives suggest that demand for mattresses has been strong as of late. While the general sentiment was that industry trends decelerated in December, as the mattress category was crowded out by other holiday merchandise, there has been an acceleration in January.
“One of the interesting themes from our recent checks is that consumers have increased their tendency to do more research online before buying mattresses. This should improve advertising ROIs for DTC brands as they have a fertile set of consumers willing to transact online in the category. We would note that this should benefit PRPL and the rest of the bed-in-a-box space. Separately, our checks indicate that in-stock levels have improved lately for all mattress brands, driven in part by factories ramping up production and a slight improvement in availability of components such as innerspring & coils.”
Following the ICR Conference last month, a handful of notes have come out reiterating the bull case for PRPL:
KeyBanc – Though management did not provide explicit Q4 guidance, they came away from their meetings extremely positive on the continued market share story. With PRPL’s new Atlanta facility expected to be producing mattresses by February, they believe this will allow the company to increase capacity significantly to help meet demand. Furthermore, management plans to achieve excess capacity in the future to provide more flexibility, while having the ability to handle any unplanned downtime should it occur.
In addition, PRPL expects to launch new products and update its existing lineup in 2021, with the material additions coming in the back half of the year, most likely in Q4. Notably, the company plans on launching even more premium mattress this year after seeing continued customer demand for the product. Purple maintains a large wholesale opportunity, with many of its partners showing demand for more products and more doors. Finally, management discussed the success of pillows and cushions, which in the long run could allow the company to acquire more customers at a lower cost now that they’ve bought into the Purple technology.
BofA – Analyst Curtis Nagle said that aside from admirable growth and execution, one of the most attractive parts of the PRPL story is the ability to drive higher pricing. This is a clear positive for sales growth and gross margin. As of Q3, average mattress order value was up 14% Y/Y. PRPL is achieving this through a mix of: 1) A selling model focused on the quality and technology built into the beds; 2) Increasing the mix of higher ticket beds and: 3) Taking price increases (two put through in 2020 with no impact to volumes).
UBS – They believe Purple will again meaningfully outgrow the broader mattress market in 2021. They model PRPL’s revenues increasing 35% (to $907M), which is meaningfully above their forecast that calls for a 5% increase for the overall mattress market.“We believe PRPL’s planned capacity addition will help it enter into more wholesale doors while continuing to generate consistent growth in its DTC segment.”
Finally, taking a look at JaguarScan, we can see that since early November, there has been activity building in the April 30 Calls. More specifically, total premium stands at $339,000.