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Casper Sleep (NYSE: CSPR) can give clients a good night’s sleep, but for investors it has mostly been a nightmare.

After pricing its February 2020 IPO at $ 12 per share, the stock is trading at just $ 4 today. The timing of that IPO might have been doomed, shortly before the pandemic struck. But Casper – which sells through a mix of e-commerce, own-store, and retail partners – also missed out on many of the benefits that other e-commerce stocks have enjoyed, including its competitors. Violet innovation (NASDAQ: PRPL).

With the economic reopening in the second quarter, Casper appeared to be getting off on the right foot as sales from continuing operations rose 45% to $ 151.8 million, and sales from its retail channel jumped 79%. while customers returned to the stores. While revenue growth was strong, increased costs related to transportation and materials weighed on the bottom line, and the gross margin increased from 51.8% to 47.8%. This is one of the main reasons the stock plunged 17% after the report.

The stock has continued to decline since then as supply chain problems and inflation worsened and several senior executives and dozens of employees were laid off in September. The stock fell again in late October after a filing indicated the company could experience a cash shortage as a lender agreed to waive the company’s obligation to maintain a minimum cash balance of $ 32 million. dollars until the end of the year. Casper lost $ 42.5 million in free cash flow in the second quarter. Restructuring expenses related to layoffs and reductions in office leases accounted for $ 17.6 million in expenses, and the company only had $ 49.7 million in cash.

If liquidity is a concern, so is the company’s ability to generate profit.

Image source: Casper.

Can Casper come out of the red?

Founded in 2013, Casper has historically been unprofitable, losing money based on generally accepted accounting principles as well as free cash flow and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). But the company is making some progress. In the second quarter, its second quarter adjusted EBITDA loss fell from $ 6.7 million to $ 4.8 million, a margin of 3.2%.

The company said ahead of its IPO that all of its stores are profitable on four walls, meaning gross profit less in-store operating expenses is positive. These stores also generated over $ 1,600 in sales per square foot, which is higher than most retailers, showing that the company is making good use of its real estate.

Before the pandemic, the company had steadily improved its gross margin, but was disrupted by supply chain issues and other challenges. In the last quarter, general expenses, including sales, marketing, and general and administrative expenses, accounted for 58% of revenue, which means that the gross margin would need to reach this level at its current size for the business generates operating profit. Management says it earns $ 3 in revenue for every $ 1 it spends on marketing, and expects to gain operational leverage on its investments in technology and distribution.

Casper also cut costs, and in September fired his chief marketing officer, chief technology officer, chief operating officer and dozens of employees as he headed for profitability.

If the business continues to grow, it should achieve profitability, but it faces a number of challenges along this path. Besides macroeconomic factors, supply chain delays and labor shortages, competition has also intensified in the industry with other direct-to-consumer brands like Purple and Nectar. Larger companies have also entered the bed-in-a-box business as a Walmart launched his own brand, Allswell.

In this context, it will be difficult for Casper to forge a competitive advantage, even though he owns the most well-known brand in the industry. It doesn’t help that mattresses are durable products that last around 10 years, which means companies continually have to attract new customers.

Casper could eventually turn profitable, but with the headwinds he’s currently facing, investors seem to think it’s more likely not to be. Given the revolving door of the C-suite and the macroeconomic challenges, it’s hard to blame them. We’ll find out more when the company releases its third quarter results in November.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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