PRPL - Purple Innovation: Assessing If 'Launch Fever' Can Be Sustained

2023-05-23 10:39:37 ET

Summary

• Purple launches new mattresses in an effort to attract more premium buyers.
• The recent Q1 earnings report where we saw improved gross margins and a better outlook for the year is also bringing investors into this play.
• Negative earnings plus negative forward-looking revisions bring risk to this play, though.

Intro

It will be interesting to see if Purple Innovation, Inc. (PRPL) shares can continue to rally post the company's first-quarter earnings results for fiscal 2023. As we see from the stock's intermediate chart below, shares dropped below their 2022 lows in April, so the jury is still out on whether a sustained rally can occur here going forward (as technical damage has been done).

With respect to Q1, notwithstanding the reported earnings beat, investors were attracted by the rising gross margin trend despite the fact that sales declined by almost $34 million in the quarter. The drop-off in sales though was not all market-based as management had rolled back significantly on its advertising spend in recent months. This was due to the launch of multiple new mattresses by the company just this past week (May 15th) where Purple hopes that the added-value right across its mattress offerings will finally move the financials in a positive direction. All eyes now are on how the launch will fare out and if demand can inch up somewhat from what we have been used to.

'New Look' Purple Innovation

Therefore with advertising spending set to ramp up once more going forward, it will be interesting to see if Purple & its high-end offerings in particular (GelFlex Grid Technology) can relate better to more affluent buyers which is what the company is after. Purple's marketing initiatives will revolve more so around the quality of a person's sleep (benefits) instead of the technology in the mattresses. By marketing areas such as 'instant body adaptation', 'pressure relief', and 'temperature balance', Purple aims to get to the real trigger points within its customer base which can then lead to elevated numbers of high ticket sales.

Time will tell if the presentation of the new Purple brand can gain traction through the back end of this year. Furthermore, it appears management knows it needs to close the loop on its marketing offline as high-ticket premium items would most likely prefer to be seen first by customers (either through the showroom or wholesale partner channel) before buying the product in earnest.

Although sales have dropped significantly in Purple in recent times, they are still cheap (forward P/S of 0.61) especially compared to this sector in general (0.82). Cheap sales along with Purple's growing margins and near-term bullishness in the stock's technicals (all buoyed by what is expected in the latter half of this year) all strengthen Purple's investment case from a long standpoint. Nevertheless, the principal area of concern remains Purple's profitability for the following reason.

Profitability Uncertainty Remains

Although Purple's gross profit margin as mentioned rose to 39.5% in Q1 as opposed to 35.1% in the same period of 12 months prior, operating costs ($65.2 million) remained elevated. Furthermore, with marketing costs now beginning to ramp up once more, Purple needs to be efficient in this area as much as possible. The reason being is that Purple's net profit remains firmly in negative territory (-$23.3 million in Q1) and analysts who cover this stock do not believe Purple will be able to report positive earnings until the end of fiscal 2024.

Irregularities when it comes to earnings invariably affect the cash-flow statement as cash flow is essentially derived from net profit. Cash from operations came in negative at -$13.5 million in Q1 which led to $60+ million of common stock being issued in the quarter. Dilution has been a recurring pattern in Purple as $98 million of stock was issued in the Q1 of last year also. Suffice it to say, the number of shares outstanding now comes in at over 105 million and this is a trend investors need to be aware of.

For example, Purple's keen forward-sales multiple of 0.61 would be far lower but for the strong dilution which has taken place in recent years. The reason sales are cheap from a valuation perspective is because of the depressed share price and not for any other reason. Therefore, investors looking to get long Purple at present should size up the impact of more dilution in their investment in an environment of negative profitability which is expected to last for some time to come.

Conclusion

Therefore to sum up, although shares of Purple Innovation seem to be riding the crest of a wave at present with its recent launch, elevated risk remains due to the company's poor profitability and sustained dilution. Let's see how the second quarter turns out. We look forward to continued coverage.

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