PRPL - Purple Innovation: Not The Best Situation To Be In

2023-12-11 20:19:06 ET

Summary

• Purple Innovation reported a decline in revenue and a significant loss in Q3 FY23, raising concerns about its high debt.
• The technical chart for PRPL is weak, indicating a risky investment.
• The company's weak financial performance, declining revenues, and reliance on advertising make it unlikely to recover in the near future.

Purple Innovation ( PRPL ) manufactures cushions and mattresses. PRPL announced its Q3 FY23 results. It struggled in terms of revenue growth, and it posted a huge loss, which is concerning considering its huge debt. The technical chart of PRPL also looks weak, which makes it risky. Hence, I assign a hold rating on PRPL.

Financial Analysis

PRPL posted its Q3 FY23 results . The revenue for Q3 FY23 was $140 million, a decline of 2% compared to Q3 FY22. The major reasons for the decline were lower demand for home-related products due to the adverse market conditions and lower DTC revenue. The DTC revenue declined by 5.2% in Q3 FY23 compared to Q3 FY22. The decline was mainly due to lower sales from e-commerce. Its gross margin for Q3 FY23 was 33.8%, which was 41.3% in Q3 FY22. The main reasons for the decline were a channel mix shift in revenue and higher costs due to the transition to the new products.

The net loss for Q3 FY23 was $36.1 million compared to an income of $1.9 million in Q3 FY22. It incurred a non-cash impairment charge of $6.9 million in Q3 FY23. Apart from this, the $12.6 million increase in advertising expenses affected its profitability. The financial performance of PRPL was weak, and the company posting loss is a major concern because the condition of its balance sheet is concerning. Its total debt is around $155.1 million, which is more than the market capitalization of PRPL. So, the declining revenues and profitability of the company are quite concerning. The growth it experienced during COVID-19 times was solid, but since last year, it seems that it has been going downhill. The management is relying heavily on advertising for the sales of its products. So, even if it sees revenue growth in the coming quarters, I believe it might still struggle with profitability. Now, regarding revenue growth, the management has provided revenue guidance for FY23, which is around $520 million, which is 9.7% lower than FY22's revenue. Considering the lower consumer spending due to high inflation, it will be tough for the company to recover from this. So, the current condition of PRPL doesn't look great.

Technical Analysis

PRPL is trading at $1.25. The chart of PRPL is quite painful. It has been like a nightmare for its investors. In 2021, it reached a high of $40.8, and in just two years, it has fallen to $1.25. One might think that the stock might have hit the bottom after falling so much. But I would advise that you don’t try to catch a falling knife. The most recent candle is a huge green candle, but it might be a trap, so investing at the current level might be risky. I believe we might only see a reversal if the stock price breaks the $5 level, and breaking the level is not important; the stock price should stay above the $5 level for at least one month. If it does, then only one can think of buying it. But for now, I think one should avoid it at all costs because, currently, there are no support zones to support the stock price. So, the downside risk is quite high.

Should One Invest In PRPL?

It is looking financially, fundamentally, and technically weak. These are not the only concerns I have. Even the shareholding pattern of PRPL looks weak.

Institutions own 39.8% of the shares in the company, which is way below my benchmark of 60%. Low holding of institutions often leads to volatility in share price fluctuations, which is evident in the case of PRPL. So, the current situation of PRPL looks dicey, and the recovery might take time. Hence, making any new positions in it might be risky, so I assigned a hold rating on PRPL.

Risk

Their DTC channels account for the majority of their direct-to-consumer sales. Through their partnerships with their wholesale partners, they have been growing their business into the wholesale distribution channel, but there is no guarantee that they will continue to have success with these partners or that the new locations they have planned will be profitable.

It's possible that their attempts to increase sales through wholesale channels may be fruitless. In connection with these agreements, they can extend credit terms, which might put them at risk of unpaid or delayed invoices. Furthermore, they might give these partners fixtures that are challenging to recover or reuse. Sales to wholesale clients and new product offers may not be as profitable as their DTC strategy and existing products, if at all, and they might not be successful enough in these additional endeavors to recover their investment costs.

Bottom Line

PRPL is struggling with growth and profitability, which is concerning because the debt that they have is huge. Additionally, PRPL's price chart looks weak. Its share price is like a falling knife. With a weak outlook for the coming quarter and high inflation affecting consumer spending, I believe they might struggle to grow revenues. So, considering these factors, I would advise not making any new positions in the stock. Hence, I assign a hold rating on PRPL.

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