Pyrosky/E+ via Getty Images
Pyrosky/E+ via Getty Images
From time to time, and certainly almost every day, people need to relax and/or sleep. Though if someone is exhausted enough, comfort can become a secondary concern, the fact of the matter is that being comfortable is a key part to recovering from the travails of the world. One company that, prior to most recently, exhibited significant growth in this space is Purple Innovation ( NASDAQ:PRPL ). Anybody looking at the company's financial trajectory through 2021 would think that the enterprise has a bright future. But when you dig in deeper, you see that the firm's bottom line has not been all that great. Up until today, that may have been acceptable when you consider the rapid expansion the company saw. But in 2022, the picture is looking rather painful, with sales expected to drop materially. Because of this, and because the company's bottom line has never really been stable and positive, there certainly are better players on the market that should be considered.
The management team at Purple Innovation describes the company as a digitally native vertical brand that is founded on the concept of comfort product innovation. More specifically, the company produces innovative, branded, and premium comfort products like mattresses, pillows, cushions, bases, sheets, and more. Many of these offerings include the firm's proprietary gel technology that is known as the Purple Grid. Operationally speaking, the business largely focuses on providing a direct-to-consumer experience through its online platforms. However, the business does have other means of generating revenue. Included under the direct-to-consumer operations, the business also has over 30 company-operated showrooms located across the US. In the past 12 months alone, they have opened 25 such locations. Their goal, according to management, is to eventually grow to have over 200 locations nationwide.
Given its focus on the direct-to-consumer experience, it stands to reason that the majority of the company's revenue comes from such activities. During the firm's 2021 fiscal year, 65.3% of all of its sales came from these operations. However, Purple Innovation also has exposure to the wholesale market. 34.7% of sales come from its wholesale partners, with products produced by the company sold in over 3,100 different retail outlets. In terms of sales composition, the company boasts that 91.5% of all revenue is associated with the company's sleep products. Meanwhile, all of its other products combined make up 8.5% of sales.
Author - SEC EDGAR Data
Author - SEC EDGAR Data
Over the past four years, the management team at Purple Innovation did a really solid job of growing the company's top line. Sales went from $285.8 million in 2018 to $726.2 million last year. That implies an annualized growth rate of 36.5%, with revenue in 2021 coming in 12% higher than what the company had experienced in 2020 despite still dealing with impacts associated with the COVID-19 pandemic. Unfortunately for shareholders, growth for the company is on hold. Originally, management was forecasting sales for 2022 of between $790 million and $830 million. However, that number has since been reduced to between $650 million and $690 million. The first of this pain was experienced during the first quarter of 2022, with revenue of $143.2 million coming in far weaker than the $186.4 million experienced one year earlier. Management attributes this weakness to the post-pandemic headwinds facing the economy, such as inflation and changes in consumer spending patterns.
On the bottom line, things have been a bit mixed in recent years. Take net income. Between 2018 and 2020, net profits of the company went from a negative $4.3 million to a negative $236.9 million. But then, in 2021, the company generated a profit of $4 million. Other profitability metrics followed a different path. Unlike the company's bottom line, which worsened through 2020, operating cash flow actually improved during that time frame. It went from a negative $21.7 million in 2018 to a positive $81.3 million in 2020. Unfortunately, 2021 proved to be a difficult year for the company, with cash flow turning negative to the tune of $30.9 million. Even if we adjust for changes in working capital, it would have been negative by $9.5 million. That compares to the $74.1 million positive reading experienced one year earlier. Just as was the case with cash flow, EBITDA for the company improved between 2018 and 2020, rising from a negative $10.7 million to a positive $88.4 million. But then, in 2021, it was negative to the tune of $11 million.
Author - SEC EDGAR Data
Author - SEC EDGAR Data
When it comes to the 2022 fiscal year, the pain on the company's bottom line has only worsened. During the first quarter of the year, the business generated a net loss of $13.5 million. That compares to the $20.8 million in profit achieved one year earlier. Operating cash flow declined from negative $9.4 million to negative $44.3 million. If we adjust for changes in working capital, it would have gone from a positive $16.6 million to a negative $13.1 million. Even EBITDA showed deterioration, going from a positive $22.8 million to a negative $9.6 million. Although the first quarter was tough, management did say that EBITDA for 2022 should be higher than it was last year, with the figure likely coming in at between $21 million and $27 million.
Author - SEC EDGAR Data
Author - SEC EDGAR Data
Pricing a company like this can be rather tricky. We don't know how long the pain the business is experiencing because of the aforementioned issues will last. If we try to value the enterprise based on 2021 results, we find ourselves unable to do so if we rely on the price to operating cash flow approach. Net profits have been so volatile that using a price to earnings multiple doesn't make sense either. The only thing we really can do is to use the EV to EBITDA multiple. Using the figures from 2021, this would come in at a multiple of 31.5. Though if management is correct about 2022 and we see EBITDA come in at the midpoint of expectations, this multiple would decline to 14.4. To put the pricing of the company into perspective, I did decide to compare it to five similar firms. Though it is worth mentioning that these are more traditional furniture companies. That said, the EV to EBITDA multiple for these firms ranged from a low of 2.6 to a high of 10.7. So in either the 2021 scenario or the 2022 forecast scenario, Purple Innovation was the most expensive of the group.
Based on all the data provided, it seems to me as though Purple Innovation is struggling a great deal right now. Although it is likely that market conditions will eventually improve, we do not know what timeline that will take place over. Shares look expensive under the current situation, leading me to be rather cautious of the enterprise. Though it is likely that shares will rise significantly in the event of a full recovery, betting on that is purely speculative in nature. And value-oriented investors would be wise to eschew such speculation. For all of these reasons, I have decided to rate the enterprise a 'sell' at this time.
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This article was written by
Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.