by dhsmatt2

TL:DR –

Sell Purple Puts – January 2021, 15 strike.

Buy purple calls with a Strike of 17.5 January 2021.

These Options just became available, so please be careful to place limit orders as they are still thinly traded.

Warrants are more liquid but also more risky. Warrants have an 11.50 Strike and Feb 2023 Expiration. 2 warrants are required per share. These are traded on OTC markets like a stock. PRPLW is the ticker. The warrants have a large amount of intrinsic value already.

Purple Mattresses are sold out everywhere, even with a recent 40% increase in manufacturing capacity. I currently hold a position worth ~2M. My position consists of stock, warrants and cash secured puts. I also sold 18 calls (a mistake). Increased DTC will improve margins and allow purple to continue to gain market share.

My Positions: imgur.com/a/9OGkPSg

Purple could easily trade above 20 dollars by year end. My analysis is found below. Web traffic to purple.com is through the roof and I expect we see that in their May Sales. April was a record and May’s online traffic was 54% higher.

​

Overview

Purple is a hyper-growth company that went public towards the beginning of 2018. Purple has had immense growth over the last few years and there doesn’t appear to be a slow down. Purple’s first full year of business resulted in 65M in revenue, followed by ~185M, ~285M and last year’s ~430M. Purple provided 2020 projections of 550-575M, but recent Covid Developments have greatly accelerated their DTC (Direct to consumer) growth. Their business went public through a reverse Merger (SPAC) with a public shell company. Purple didn’t have the traditional IPO and has suffered from a low available float that has recently been mitigated with 2 non-dilutive secondary offerings. A larger float, increased online sales, increased capacity and a large short interest are the trifecta that could cause a large increase in share price over the next 2-3 months. Purple is trading ~50% higher than when it went public but it has achieved nearly a 300% increase in revenue and has become profitable in that same time period.

The following post will dive into purple’s business model as well as some of their competitors and or other businesses with similar strategies. Purple is estimated to provide Q2 earnings sometime in August but I expect a business update prior to August that will provide guidance in the 600-700M range ( 50-125M higher than their original guidance). Purple has ample room to grow and only commands 3-4% of the mattress market.

Digitally Native Companies are thriving during this lockdown

Companies like Overstock, Peloton, Wayfair, Ebay and a slew of other online or DTC companies have seen significant increases of online sales. The stock price surges seen by these companies can be expected of purple once they provide another business update. We have already seen snippets of April numbers and I expect May numbers to be even better. According to the CEO, DTC sales in April alone were 54M. Aprils total sales were in the neighborhood of 62M.

General sentiment article: retailtouchpoints.com/topics/customer-experience/covid-19-impact-e-commerce-sales-surge-as-more-shoppers-display-urgent-buying-habits

Wayfair Revenue Article: www.barrons.com/articles/wayfair-stock-has-rocketed-700-since-march-why-there-may-be-more-gains-ahead-51591126007

Purple: CEO commenting on their online Sales: finance.yahoo.com/video/purple-ceo-april-bed-sales-142911499.html

The Math behind the numbers using last years numbers and extrapolating for 2020.

Purple had 4.5 machines worth of production capacity in 2019, 4 from the start of the year and a 5th that went live mid year. This machine count leads me to believe that under typical sales conditions, a machine, when taking into account wholesale and DTC mix is capable of producing about 95M in revenue (428/4.5). Also, it should be noted that although wholesale only accounts for ~35% of Purple’s revenue, it represents about 50% of their capacity due to the lower selling price of the wholesale business. Covid has pushed a larger portion of purple’s business online and therefore the average capacity of each machine increases on a revenue basis. According to Joe Megibow, wholesale sales were down about 45% in April but they were showing sequential improvements week after week. For sake of this post, I am going to assume that wholesale is @ 75% of previous capacities, only down 25%. all of my numbers also assume that returns as a % of revenue holds steady.

As of today, Purple now has 7 Machines online, a 6th that came online in late March and a 7th that we can assume came on in late May. All of this information was made public either via a filing, an earnings call or a public statement by Joe Megibow.

When purple had their secondary offering, they submitted a prospectus that listed their average selling price of a mattress along with their total mattress revenue as compared to their ancillary offerings such as pillows and cushions. Using these numbers, we can get a rough idea of how many mattresses are manufactured per machine. Purple did 428M in sales, with ~93% of that revenue coming from mattresses. The average selling price per mattress was ~1900 USD.

The Prospectus: d18rn0p25nwr6d.cloudfront.net/CIK-0001643953/dd844b8b-3558-4921-9245-b148dfb811a0.pdf

Purple Mattress Revenue from Mattress sales:

93%* 428M = 398M, (~7% was other ancillary products like cushions)

Total Purple Mattresses manufactured:

$$$398,000,000/ $1900 USD = 210,000 mattresses made in 2019 with 4.5 machines.

Mattress Capacity per Machine:

210,000/ 4.5 Machines = 46,500 Mattresses per machine, per year. This equates to 11,625 mattresses per quarter, per machine.

For Q2 2020, purple has 6.33 Machines worth of capacity. Also, we can assume that the average selling price per mattress is higher in Q2 as Wholesale is down and DTC is up drastically. My assumptions are fairly conservative and I believe we will meet or exceed the numbers below.

Average Selling price: Stay with me here. We know that the manufacturing capacity by count was 50% wholesale and 50% DTC. I am going to use the purple king 3 as my baselines for DTC to give me a ballpark estimate for the average wholesale price that purple sells to mattress firm.

.5*( 2549.00) + .5(Wholesale average) = 1900 – Solving for wholesale average we get that the average wholesale is ~ 1251.00 USD. I expect that this is extremely low and that the number is actually closer to 1500.00.

Q2 Mattress Sales Capacity:

6.33 Machines * 11,625 Mattress per quarter * average selling price of 2160. This leads me to believe that the mattress revenue alone will likely be in the 160M range. If we assume that mattresses only account for 93% of revenue then we can expect the total revenue to be in the 170M dollar range and this is on the conservative side. Please keep this number in mind as there is other potential upside. Last year, PRPL’s Q2 revenue came in @ 103M. 170M in revenue would be a 65% increase as compared to last year which is realistic considering improved selling prices and 40% more capacity.

The Evidence

There was a post on Friday regarding PRPL and there were a lot of non believers. The following items are key as they help justify the expected growth.

Web Traffic: Similar web estimated April Traffic was 2.3M- Similar Web estimates May traffic @ 3.5M, a 54% increase. Please keep in mind that April DTC sales were up 170% and May traffic exceed April’s web traffic by more than 50%. With sales like this you would expect there to be a shortage. Well you’re in luck, there is a shortage and here is the proof – A letter to Mattress Firm employees stating that purple demand is outpacing supply.

Web Traffic Link:www.similarweb.com/website/purple.com#overview

170% DTC increase story: www.furnituretoday.com/bedding-manufacturers/purples-net-revenues-up-46-3-in-q1-net-income-improves-to-20-million/

Job Openings- Purple is offering signing bonuses for production/fulfillment workers. What kind of company needs to offer signing bonuses when there are 40M people out of work? A company that is strapped for production capacity and needs people ASAP.

Job Postings with signing bonus:www.paycomonline.net/v4/ats/web.php/jobs/ViewJobDetails?job=22886&clientkey=0FD6FE79845086D9BD36D6EC936B7173

Vendor shortage: With online sales surging you would expect there to be wholesale shortages. This is indeed the case. As of right now, purple has discontinued manufacturing the original mattress so that it can manufacture the 2,3, and 4 inch model. An E-mail was released to Mattress Firm employees. Please see link. imgur.com/a/sa2aqrr

Institutional Investor filings. In Q1, there were several institutions that took larger positions in PRPL, namely Vanguard, BlackRock and several Hedge Funds, etc. There were ~30 institutional investors that increased their positions See link. imgur.com/a/9Ivj1Vl Every single institutional investor increased their position.

The Future and the Upside Potential

Increased DTC Expansion and Ample room to grow wholesale will allow purple to grow even during an economic downturn. As of Q2, purple was in ~1700 stores. There are more than 30,000 furniture stores in the USA. Purple is currently in less than 5% of all furniture stores. See nationwide store count: imgur.com/a/mrmUpXK

In Purple’s job posting they indicate the Sunday is a volunteer day that pays a premium, It’s my understanding that with the shortage, this is likely now a standard production day that will increase capacity from 170M to at least 184M. I’m assuming that they get an additional single 12 hour shift. 144 hours are contained in a standard 6 day production schedule . An additional shift on Sunday would make the total hours of production 156. 156/144 = 1.08X capacity.

The temporary stoppage of production of the original will also likely increase average mattress sales price. The information regarding stoppage of original production was made available in the mattress firm memo linked above.

All in all, there are ample opportunities for purple to gain market share.

Valuations as compared to Peers

TPX currently trades with an Enterprise Value / Sales Ratio of 1.8, purple has nearly the same ratio but is growing more rapidly and is thriving during this time, TPX is bleeding . The difference is that Tempur Sealy will have drastically lower sales in Q2 and PRPL is going to have drastically higher sales and they are trading at very similar multiples. If we assume purple achieves 650M in revenue in 2020 then their stock price would approach 22 dollars per share if we used the same EV/Sales Multiple. I believe PRPL should be at this price already as it is growing more than 40% per year and that should command a premium multiplier. TPX on the other hand is likely to shrink revenue on a YOY basis. Sleep Number is in the same boat as Tempur sealy and will likely feel some pain from their store closures. It’s likely that online retailers will continue to gain market share while covid is still in the media.

Further Expansion

Purple just expanded to City Furniture.

www.cityfurniture.com/product/9721370/purple-hybrid-mattress-set

Purple is now in Mattress firm, Macy’s, Raymour flannigan, Denver Mattress and a handful of other smaller regional players

Purple has ample room with existing vendors. Purple is in only 800 Mattress firms with another 1700 Mattress firms available for expansion.

Purple has better online brand recognition than Casper and many other bed retailers. See Google trends. Purple has better brand recognition than tempur-pedic, Casper and is on par with Sleep number. Purple is achieving incredible traction with their marketing campaigns.

Google trend graphs: imgur.com/a/Ac6FlFg

The MOAT, the analysts and Expected upcoming events

Purple’s technology is used in a ton of products you may have heard of.

• Dr. Scholls gel
• Jansport gel backpack straps
• Intellibed – Purple’s founders licensed their tech to intellibed. although the chemistry is different, the concept is the same.
• Striker Medical beds – burn victim technology used to relieve pressure on burn victims skin.
• wondergel cushions

​

The Targets: Analysts currently have an average price target of 17.50 and Bank of America is likely due to provide updated recommendations in the coming days.

The analysts: The analysts are all very familiar with the Industry with Brian Nagel, brad Thomas and Seth Basham being some of the most respected. Curtis Nagel has been holding out on providing a recent update and I believe that this will come this week and the price target will likely be in the 20 dollar range.

Analyst Targets: imgur.com/a/P0brnui

Imminent announcements: Purple has not provided new full year guidance. I expect in the coming days or weeks that at a minimum there will be May numbers released and potentially revised and upgraded full year guidance. If purple can maintain 60M in sales for the remainder of the year then they will achieve 662M in sales.

The MOAT: this is the most important thing for investors, how hard is it to penetrate their business? Purple innovation has over 100 patents on their technology and their manufacturing machines are difficult to build. This is a moat that will make it difficult for competitors to mimic their product. I expect this is critical in ensuring long term growth. Purple truly is a different product.

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.