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Will Competition Crush Mattress Stock Casper's Big Dreams?

Mattress maker Casper Sleep (NYSE: CSPR) may look like a nightmare to investors who bought shares during last year's initial public offering. Since then, the stock has dropped more than 68%. Like rivals, Casper had to deal with sluggish demand for mattresses during the pandemic. The global market slipped 0.1% in 2020, according to Fortune Business Insights. This is particularly difficult for a company that's in the early days of its growth story.

In recent times, supply chain problems and higher raw materials prices have added to Casper's woes. This wouldn't be as problematic if Casper were the only company around to ensure you get your dose of shut-eye. But rivals abound, from market leader Tempur Sealy International (NYSE: TPX) to fellow smaller competitor Purple Innovation (NASDAQ: PRPL). And that may be the biggest problem of all for Casper. Let's take a closer look.

Image source: Getty Images.

The Casper original

First a little background on Casper. The company got its start making a universal mattress. The idea was that this highly comfortable product would suit everyone. The Casper original promises balanced support and a cool night's sleep.

Since then, Casper has added other models -- from supportive to soft. Casper's design involves three layers of breathable foam that draw warm air in and let cool air out. Gel pods and trademarked support technology ensure comfort.

Casper also sells pillows, sheets, and other offerings. In fact, the company now sells more than 55 products. You can find Casper mattresses in stores -- or get one delivered, rolled into a compact package, thus the name "mattress-in-a-box."

Casper's annual sales have been on the rise. But profit has proven elusive.

In the most recent quarter, the company's North American sales climbed more than 44% to a quarterly record high of $151.8 million. Gross profit increased about 27% to $72.5 million. The adjusted EBITDA loss narrowed by $4.8 million to $6.7 million.

Casper says the supply chain issues and raw materials costs shaved $10 million off revenue in the quarter. And the company expects an effect of $20 million in the third quarter. In fact, Casper predicts these headwinds will weigh on earnings for the rest of the year. Problems in the supply chain have led to unfilled orders. And higher cost of goods has hurt margins.

Casper versus Purple

Considering this situation, it may be difficult for Casper to vie for serious market share in a sea of more established rivals. Right now, Sealy holds the biggest market share at 15%, according to Traqline research. Casper estimates it holds about 3% of the mattress market, while Purple claims about 4%. It's easier to compare Casper and Purple. They're both young mattress-in-a box companies. And their products are based on new, innovative technologies involving layers of foam that promise comfort and support. Purple's pricing is also about on par with that of Casper.

One element that may give Purple an advantage: It manufactures its mattresses. This offers it more control over costs and operations -- especially during times when supply chain issues plague the market. Casper relies on third parties for manufacturing. This makes it more vulnerable.

The competition isn't limited to Purple. I'm thinking of other young companies such as Avocado and Tuft & Needle. Goodbed.com, a guide to buying mattresses, lists more than 500 mattress makers in its directory. I'm not convinced Casper has much of a moat -- a competitive advantage that truly sets it apart from the rest. All of this means it may be difficult for Casper to significantly grow market share -- and earnings.

Casper shares are trading at a discount to Purple and Sealy on a price-to-sales basis.

CSPR PS Ratio data by YCharts. PS = price-to-sales.

But there is a reason for this. Here's a look at quarterly revenue and net income -- and earnings per shares estimates for the next fiscal year.

CSPR Revenue (Quarterly) data by YCharts

Looking ahead, Casper is working to address challenges. The company is expanding its number of suppliers, renegotiating shipping costs, and lifting the prices of certain products. As mentioned above, it's also added items such as pillows that will keep customers coming back more frequently. And, of course, today's supply chain issues won't last forever.

Still, the level of competition remains a big issue -- one that may result in sleepless nights for Casper investors.

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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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