Casper Sleep Inc.
Q2 2021 Earnings Call Transcript

Published: 10 Aug 2021

[Operator:]

Good morning, and welcome to Casper Sleep’s Second Quarter 2021 Conference Call. Today’s call is being recorded. I would like to turn the conference over to Norberto Aja, Investor Relations for Casper. Mr. Aja, you may begin.

[Norberto Aja:]

Thank you, operator, and good morning, everyone. Thank you for joining the Casper Sleep 2021 Second Quarter Conference Call. We’ll get started in just a minute with management’s comments and your questions. But before doing so, let me take a minute to read the safe harbor language. This call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including statements regarding management’s plans, strategies, goals and objectives, anticipated financial performance, industry-wide supply constraints and the inspected impact of COVID-19 on our business. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors discussed in our annual report on Form 10-K for the year ended December 31, 2020, and other filings with the Securities and Exchange Commission could cause actual results to differ materially from those indicated by the forward-looking statements made on this call today. Any such forward-looking statements represent management’s estimates as of the date of this call. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause our views to change. In addition, we may also reference certain non-GAAP metrics, including adjusted EBITDA, which is reconciled to the nearest GAAP metric in the company’s earnings release, which can be found on our Investor Relations website at ir.casper.com. With me on the call today is Philip Krim, Co-Founder and Chief Executive Officer of Casper; Emilie Arel, President and Chief Commercial Officer; and Mike Monahan, Chief Financial Officer. Following their prepared remarks, we will open the call for questions-and-answer session. With that, I’d now like to turn the call over to Philip Krim, Casper’s Chief Executive Officer. Philip, please go ahead.

[Philip Krim:]

Thank you, Norberto, and good morning, everyone. Welcome to Casper’s second quarter conference call. Second quarter revenue represented an all-time quarterly record, with Casper’s North America revenue increasing 45% year-over-year. This shows we are gaining market share and that Casper’s increasing brand momentum continues to drive accelerating demand for innovative sleep products across all of our sales channels. Strong second quarter North America retail partnerships revenue growth of 79% year-over-year reflects the early success of our strategy to grow our points of distribution as well as solid performance from our new trial partners. This channel remains key in our ability to efficiently scale Casper’s North America business and to further diversify our revenue mix towards premium priced products through increased trial opportunities. Our DTC channel delivered its best quarter since the beginning of the pandemic with year-over-year revenue growth of over 31%. Throughout the second quarter, we continued to make progress on our 3 core strategic priorities

[Emilie Arel:]

Thank you, Philip, and thank you, everyone, for joining us today. I want to take this opportunity to expand on a few points Philip made during his prepared remarks and provide you with our thoughts on why Casper’s growth has been and will continue to be the result of our ability to connect with consumers through compelling brand experiences, driving product innovation against our greatest growth opportunities and expanding our customer touch points across physical and digital platforms. Before doing so, I want to first and foremost thank the entire Casper team. We have all been through a lot these past 12 to 18 months, including temporary store closures, supply chain challenges and a number of other disruptions, including on a personal level. And throughout it all, our team has delivered for our customers and partners. You’ve demonstrated creativity, dedication and resilience and you are the reason for Casper’s success. So thank you. Let’s start by talking about the Casper brand and how we’re growing, strengthening and leveraging it. The best example of how we continue to leverage our brand is reflected in the success we are having with our retail partners. We now have more than 25 retail partners that contributed over $50 million of revenue to the second quarter. As Philip mentioned, retail partnerships continue to grow, both in number and in revenue across most of our partners. Retailers see a strategic reason both our brand and our product offering to bring us into their stores. We’re also bringing products to market that have a higher ROI. We continue to see success with our higher-priced products such as the Casper Nova and Casper Wave mattresses. We are also able to secure more slots on the floor and trade out lower-priced beds for higher-priced beds to increase AOV, margins and profit. We are very pleased with the continued results we are seeing from our field rep team who help us unlock the opportunity we see across our partner trial doors. The team is doing a terrific job in helping our retail partners to communicate the value proposition, benefits and unique features of our products more effectively to consumers, helping to differentiate Casper products and more clearly showcasing the elements of innovation, research, quality and design that go into our mattresses, bedding and accessories. As we have all experienced, the way we shop has changed and many of those changes will continue going forward. Flexibility, convenience, engagement and timing have all been leading factors in how we shop. We remain focused on supporting our multichannel distribution network and making sure that we’re creating consistent and effective touch points across our e-commerce experience, our retail partner footprint and in our Casper stores. We see the relevance of our omnichannel strategy growing and see the potential for long-term increased focus on home, more time at home with related consumption impacts. We’ve also shifted our focus on messaging over the past year towards highlighting the more technical aspects of our products. While in prior years, much of our brand messaging centered around the Casper brand itself, we have shifted that focus from talking about the brand to talking about the products themselves and highlighting the R&D that goes into our products for better sleep. It’s important for the consumer to really understand the key benefits such as temperature control, alignment, ergonomics, touch, light and other factors that truly differentiate our offering in the market and help you have a better tomorrow. One of the things we want consumers to experience is the technology behind many of our products. For example, seeing the design, feeling the curated materials and immersing themselves in our full suite of products in our Cooling Collection. With daily use products such as mattresses, sheets and pillows and many other at-home products, performance plays a significant role in brand choice. And showcasing what drives that performance in our product is critical to consumer adoption. The "Love Your Tomorrow" campaign is a great example of that. The campaign focuses on elevating the visibility and appreciation for our mission of helping people achieve their best night sleep for a better tomorrow by bringing the importance of temperature control front and center. This not only supports our Cooling Collection and the benefits it brings, but it helps us to differentiate our products, and more clearly and succinctly communicate a more compelling value proposition to our customers. While early, the campaign has been met with great enthusiasm by both customers and our retail partners, and its impact is just beginning to make a mark on sales of our premium mattresses and suite of cooling products. Almost half of our Nova and Wave mattress buyers are choosing to upgrade to Snow at a $500 higher price point, and our Hyperlite Sheets continue to be our best-selling sheet set. These initiatives are helping us continue our strong conversion rates and to leverage our growing trial opportunities. They are also key in our ability to both upsell and cross-sell our products and thus achieve higher AOVs. To further this trend, we have taken the strategy deployed across our retail stores, where we routinely see higher AOVs and begin to implement a version of it with some of our retail partners. For example, in our recently announced partnership with Bed Bath & Beyond, we opened our first branded shop-in shop at their flagship store in New York City. The ability to bring both our products as well as our unique Casper shopping experience is critical to creating the overall shopping experience we look for and to increase conversion, AOVs and customer satisfaction. As we mentioned in the past, trial opportunities are key and elevating them by allowing consumers to submerge themselves in the Casper Sleep experience, including mattresses, sheets, pillows, blankets and accessories, is even more powerful and yields even more favorable metrics. So while we continue to bring new retail partners on board to join the recent additions of Sam’s Club, Denver Mattress, Mathis Brothers, Nordstrom, Sit’n Sleep, City Mattress and others, our focus will be on increasing our trial doors and reduce the difference between us and our competitors, some of which have multiple times the number of trial opportunities. Regarding direct-to-consumer, this segment continued to be driven by strong e-commerce demand, both in terms of traffic as well as AOV. We saw robust organic traffic to our website, reflecting efficiency and strong brand proposition. Casper retail stores are seeing a return to more normalized foot traffic, and we expect that trend to continue, though like many other businesses, we are closely monitoring the Delta variant and evolving public health guidance and response. To date, we are seeing week-over-week improvements on foot traffic and sales, and we are seeing these improvements across the country as opposed to more regionally focused as was the case earlier this year. So while foot traffic is not back to pre-pandemic levels just yet, Casper-owned stores are growing nicely. Looking ahead, we have a clear vision for our brand, long-term future. We are focused on what it will take to get there. Our innovation continues to enable us to bring world-class products to market and our growing customer base is responding enthusiastically. Our product pipeline is strong, and we are even more deeply connected to consumers than before the pandemic to our brand, our retail partners, our Casper retail stores, our e-commerce platform and through the macro shifts in consumer preferences. With that, I would like to turn the call over to Mike.

[Mike Monahan:]

Thank you, Emilie. We reported second quarter revenue of $151.8 million, a 37.7% increase compared to Q2 2020 and an almost 60% increase versus Q2 of 2019. It’s important to remember that we did not have any revenue outside of North America this year, while we had approximately $5.2 million in revenue from our now discontinued European operations in the second quarter of last year and approximately $5.9 million in the second quarter of 2019. Q2 2021 North American revenue grew by approximately 45% versus Q2 2020. Our North America direct-to-consumer channel revenue was $99.5 million or a 31.3% increase versus the prior year period while retail partnership revenue for Q2 2021 was $52.2 million, a 78.9% increase as compared to Q2 2020. The launch of our Snow mattress line and Cooling Collection resulted in an increased average order value quarter-over-quarter in our e-commerce channel as consumers opted for the premium product. Within the DTC channel, we continue to see consumers return to our retail stores. All 72 of our retail owned stores remained open throughout the quarter with significantly increased foot traffic year-over-year, highlighting the importance of our multichannel approach. Additionally, we continue to see increasing demand from our retail partners, and we are focused on meeting our commitments within that channel. Gross profit was $72.5 million, a 27% improvement compared to the prior year period and resulted in gross margins for the quarter of 47.8%, a 399 basis point decrease. Supply chain constraints resulting in large part from challenging raw materials, logistics and labor supply conditions in the second quarter, increased our unit costs and required us to pay premiums to our manufacturers in order to meet demand. We believe we will continue to see cost pressure through Q3 and into Q4 due to these increased costs, but expect to see lower cost per units towards the end of 2021 as we expect capacity constraints to start to ease. We will continue to be focused on recovering our margins of over 50% in 2022 as we manage our supply chain, cost of goods and overall operations as strategically as possible. Sales and marketing expenses increased 20.2% year-over-year in the second quarter. We deployed more media to extend our reach, but are seeing significantly increased media rates across both our online and offline channels. As a percentage of revenue, sales and marketing expenses declined to 26.3% compared to 30.1% in Q2 2020, reflecting improved overall leverage from our expanded distribution and multichannel strategy. Throughout the remainder of 2021, we anticipate media rates will remain high. However, we will continue to adjust our media mix to maximize our reach at the lowest available cost. General and administrative expenses increased by 14.6% to $48.2 million or 31.7% of revenue versus $42 million or 38.1% of revenue in Q2 2020. We have initiatives underway to reduce this expense going forward. As an example, we reduced our corporate real estate costs by over 50% as we consolidate our operations in the metro New York area and implement a hybrid work model that allows employees to partially work from home. In Q2, we subleased portions of our real estate, which resulted in a onetime charge of $17.5 million that we expect will deliver over $4 million of annual adjusted EBITDA savings in 2022. In addition to saving costs, we believe this will improve efficiency within our overall organization. Depreciation and amortization of $4.1 million for the second quarter of 2021 increased from $3.2 million in the second quarter of 2020 due to previous technology and store-related investments, while interest expense decreased to $1.8 million from $2.2 million. The second quarter generated an operating loss of $33.1 million compared to an operating loss of $22.3 million in Q2 2020. Earnings per share was a net loss of $0.81 in the second quarter compared to an earnings per share net loss of $0.61 in the prior year period. Our adjusted EBITDA loss narrowed to $6.7 million in the second quarter of 2021, representing a 41.8% year-over-year improvement versus the second quarter of 2020. Moving to the balance sheet and our liquidity position. As of June 30, we expect cash and cash equivalents -- where we had cash and cash equivalents of $49.7 million compared to $61.6 million as of March 31, 2021. We feel comfortable with our liquidity position and the health of our balance sheet and in our ability to adequately support the company. We ended the second quarter with $58.1 million of inventory on hand. This quarter-over-quarter increase was largely due to increases of both committed and safety stock for non-mattress items. We expect to reduce our non-mattress inventory stock in the upcoming quarters and achieve a more balanced inventory of mattress and non-mattress products that is aligned with customer demand in the upcoming months. For the third quarter, we expect to deliver $152 million to $159 million of revenue. At the midpoint, this revenue range represents 26% growth over the comparable prior year period. This would lead to a third quarter net loss of approximately $22.6 million to $19.6 million and adjusted EBITDA loss of approximately $12.5 million to $9.5 million. For the full year 2021, we are reiterating our previous revenue guidance to be within the range of $580 million to $610 million. At the midpoint, this revenue range represents 19.7% growth and 25.8% North America growth for 2021. We also expect capital expenditures to be $10 million to $13 million in 2021 as we are making investments into our supply chain and replatforming our website. We continue to effectively manage the business through these dynamic market conditions to support our retail partners and to meet growing customer demand. As it relates to profitability, we remain on the path towards adjusted EBITDA profitability and anticipate achieving that goal during 2022, assuming that our manufacturing and supply chain capacity increases; material shortages, labor and shipping constraints lessen; and input inflation subside as anticipated. In closing, we are successfully making progress towards our goals of gaining market share, expanding our retail partnership footprint and trial doors, improving our operations and more strategically leveraging our resources. I would now like to turn the call back to Philip.

[Philip Krim:]

Thank you, Mike. In conclusion, our performance this quarter once again showcases the power of our brand, our products, our partners, and, most importantly, the talent and dedication of our people. To them, I’m grateful for their unwavering commitment and desire to improve upon every facet of the business and help Casper reach its full potential. In a difficult environment marked by the COVID-19 pandemic, macroeconomic uncertainty and supply chain disruptions, it is because of them that we’ve been able to deliver strong results and demonstrated the strength of our brand. We have come a long way in a short period of time, growing, maturing, improving and learning from our mistakes, and are very encouraged by the continued progress we are making against our goals. With the total addressable market estimated to be nearly $80 billion in the United States alone, we see tremendous upside. As we move forward, we are laser-focused on making Casper what we have always envisioned, one of the world’s leading sleep and wellness brands. I’m confident that the best of times are ahead of us. I would now like to turn the call over to the operator for questions. Operator?

[Operator:]

Your first question comes from the line of Peter Keith from Piper Sandler.

[Peter Keith:]

I wanted to just ask about the gross margin trend. So certainly, the inflationary pressures are well known in the industry. But I guess what stands out is the magnitude of gross margin pressure that you guys are facing. So what’s causing the delay in passing through pricing? It seems like competitors are putting through price increases pretty quickly. And you guys seem like it’s taking a couple of quarters here to pass that through.

[Philip Krim:]

So we did a small price increase earlier this year, and we were doing a larger price increase as of October 1. So we have been moving on the price increase front. I would say the margin pressure reflected in the gross margin is part the inflationary period, but there’s also channel mix shift pressure given the robust growth that we’re seeing in our retail partnership channel. So that’s obviously been a very strong channel that does put a little incremental pressure on the blended gross margins. So it’s multiple factors contributing to the gross margin position.

[Peter Keith:]

Okay. And I was going to follow up on that point with wholesale margins. Is that something, Mike, that you could break apart for us so we can just see what the magnitude of that wholesale shift is versus the inflationary pressures?

[Mike Monahan:]

Sure. Our DTC margins typically are in the mid-50% range. And for wholesale, we’re seeing some pressure in those overall margins than we’ve historically seen, and they’re in the mid-30% range roughly.

[Operator:]

Your next question comes from the line of Matt Koranda from ROTH Capital.

[Matt Koranda:]

Just wondering if you could speak to the magnitude and timing of the price increases. I thought I caught 10/1 from you Philip. And then just how quickly do those flow through the P&L, especially on the wholesale side of the equation? Is it fair to say those are basically just going to offset supply chain headwinds? And then just maybe a little bit of commentary around gross margin trend through Q4 would be helpful.

[Philip Krim:]

Yes. I’ll let Mike comment on the flow-through to the P&L, but the magnitude of the price increases is much more significant than the price increase we did earlier this year. So we’ll have more SKUs and it’s a bigger step up in price on a number of SKUs, more than offset some of the supply chain headwinds. We also expect some of the supply chain costs -- we’ve seen some come down already, and we expect more of those to come down. And we expect to maintain the prices that we’re taking. So long term, that’s why we talked about how we believe that we could get back to 50% plus gross margins. There’ll be a number of factors looking into 2022 that will drive gross margin expansion. The price increase is one. We highlighted the others around expanding our supplier base and using our scale to continue to negotiate better pricing. But Mike, do you want to talk about the kind of flow through and then the Q4 margin?

[Mike Monahan:]

Sure. First, I’ll start with the third quarter. In the third quarter, we have a couple of retail partnership events that will -- where we’re expecting to move higher volumes at slightly lower price. And so overall, I would expect margins in the third quarter to be relatively consistent with what we saw in the second quarter because of that channel mix. As Philip mentioned, we expect to increase prices more towards the beginning of the fourth quarter. And so we’ll start to see that flow through during the fourth quarter, the impact of that. Typically, our fourth quarter in terms of channel mix has a slightly higher percentage of retail partnerships. And so, overall, I would anticipate more gross margins for the remainder of the year factoring in some of the price increases to go up quarter-over-quarter from Q3 to Q4, but still be below the 50% range during this year.

[Matt Koranda:]

Okay. And then what’s the timing for adding additional suppliers? It sounds like that probably takes a couple of quarters to sort of onboard. So we’re looking at a path back to sort of north of 50% gross margins as more likely to occur in the early part of 2022. But can you kind of help us understand timing sort of the path back to the 50% or north of 50% mark?

[Philip Krim:]

Sure. So on the supply chain side -- I’ll let Mike comment on the margin. But on the supply chain side, we’ve been adding suppliers this year. So it’s not something that we’re just starting at this point. We have another very large low-cost supplier that’s coming online as we speak. The supply chain constraint was a factor of despite adding additional suppliers, those suppliers ended up having -- all of our suppliers ended up having less capacity available because of both a shortage of raw materials as well as labor shortages. So the strategy is working to add suppliers and increase capacity within those. And most of our suppliers are adding the capacity within their footprint as well, adding additional manufacturing lines or additional manufacturing facilities. So we think there’s going to be a much bigger capacity within our supply chain and within the industry supply chain moving into 2022. And that will let us shift more of our demand to some of the lower cost suppliers, which the opposite has happened this year. But Mike, do you want to talk about the margin implications of that?

[Mike Monahan:]

Sure. These are some of the reasons why we feel that heading into 2022, we’re going to be in a good position to improve our overall margins. So as Philip talked about, we are bringing on new suppliers and ramping them up during the second half of this year. We expect heading into 2022, that the labor and raw material challenges that we’re experiencing within the supply chain will start to ease. And then as we -- as our overall cost per unit should come down. And then the third piece of it is within the retail partnership channel, as we’re bringing on new suppliers and bringing on new partners, a lot of those partners are more trial doors, which we anticipate selling our more premium products through them, which tend to generate higher overall gross margins within that channel. So as you think about overall, our cost per unit should be in a good position heading into 2022. And just from an average pricing mix perspective standpoint, within the retail partnership channel, we expect that to start to shift more towards those premium products, which we’re excited about going forward.

[Philip Krim:]

Just to add on one more point to that. We ultimately pushed out launching some of these trial opportunities that we had because of the supply chain constraints that we’re seeing. And we focus on our existing relationships and really delivering as much product as we could to our current partners. And so that’s another -- to Mike’s point, another thing that’s pushed out some of the premium product distribution expansion that’s still coming and still online, but was pushed out a bit because of the supply chain constraints.

[Operator:]

Your next question is from Seth Basham from Wedbush Securities.

[Seth Basham:]

Just comparing your gross margin trends relative to some of your peers, it seems like you’re experiencing more cost pressures relative to really a price for them than your publicly traded peers. Now I’m trying to get a better understanding as to why that might be. Do you have less pricing power? Or do you have more cost pressure because you use third-party manufacturing? If you could shed some light on that, that would be helpful.

[Philip Krim:]

I think you’re just seeing the margins. Again, it’s multiple factors driving pressure on the margin in Q2. It was the rapid expansion of the retail partnership channel putting margin pressure on it as well as cost of goods inflation. I think we were perhaps some vertically integrated players see the price increases show up faster given the just-in-time nature of our inventory position. So some of the cost increases from our vendors might hit faster than it would if we had a stock supply of the raw materials that we need to, may hit. So I do think there is a timing difference of how some of the raw material price increases hit our business versus a vertically integrated peer. But overall, we’re buying the same chemicals that’s impacting our business the way that it would even if you were vertically integrated, but there definitely could be some timing differences given the third-party implications. It also means that as raw materials drop, it’s going to show up in our P&L faster, as, again, it’s all being produced in just-in-time.

[Seth Basham:]

Got it. Okay. Two follow-up questions to that. One, would you consider bringing in any of your manufacturing in-house, given some of the challenges you’re facing? And then, secondly, as it relates to your shipping costs, you renegotiate your contract a little over a year ago. Is there opportunity to further reduce that? Did I catch that in your prepared remarks?

[Philip Krim:]

You did. But -- so on your first question, at the right point in time, we certainly have the opportunity to verticalize our business. But we actually think 2022 is set up to be very good for Casper and for our third-party manufacturing footprint. And this goes back to the comment I made earlier, which is that capacity within this industry and capacity within Casper supply chain is increasing dramatically in the second half of this year. That increased capacity is going to allow us to be more aggressive with how we source product and how we use vendors to bid against each other for the demand that’s increasing within our business. So we actually think that our third-party manufacturing footprint is the right business model for us, and it sets us up to have a lot of success in expanding our gross margins back when we move into ‘22 and when we see a lot of this additional supply chain capacity come back online. So we feel good about the position. But like I said, at the right point in time, we certainly could verticalize the business. We obviously have more than enough demand for that, and we’ll look to do that opportunistically down the road.

[Seth Basham:]

And the shipping?

[Philip Krim:]

I’m sorry. And then on the shipping cost, yes. So we are continuing to optimize our shipping and logistics. We talked about a lot of the wins we had with renegotiating shipping contracts, but there’s still a lot of additional benefit to have as we look to optimize our footprint. We’re renegotiating some of our warehousing contracts and partnerships in order to give us a more optimized logistics footprint. And so there’s definitely still room to improve margins based on optimizing our cost structure within the warehousing and logistics part of our business.

[Operator:]

Your next question is from Atul Maheswari from UBS.

[Atul Maheswari:]

Your revenue guidance implies that revenue growth would slow to a mid-single-digit level in the fourth quarter. So why would that be the case given that you would have some additional manufacturing capacity that will ramp later this year?

[Philip Krim:]

We believe that we’ll have additional manufacturing capacity, but we believe that there is still risk within the supply chain overall and that we won’t have the full capacity that we’ll need. And so we’ve put out the guidance based on the assumption that there continues to be a choppy supply chain. Now of course, we’re taking a number of steps to mitigate that. And there’s certainly a path where the supply chain is in much better shape than we’re anticipating. But the guidance that we put out assumes that there continues to be issues. And one of the things that we’ve seen throughout 2021 is just that it’s different issues that are popping up from time to time that are impacting capacity. Labor had become a much more acute issue in the recent period than we had seen prior to that. Now we think labor is getting better as stimulus burns off in different states. And so we are optimistic that improves but we have multiple manufacturing partners who have a real difficult time finding manufacturing labor in this country right now. The raw materials issues that we’ve talked about that started in Q1 took longer to work out for the industry. We feel like it’s in a good position, but it’s still been a choppy backdrop on raw materials. So the guidance we’re providing, I think, is our best view on what happens and it includes being some disruption to our supply chain. Though we do think it gets better in the second half of the year, we don’t think we’re totally out of the woods.

[Atul Maheswari:]

Got it. That makes sense. And then just my follow-up here, circling back on the pricing question. I know you’re taking up pricing on October 1. I’m just curious as to why you’re not taking it earlier given costs have inflated meaningfully. Several of your peers have taken up pricing and demand is still strong. So I guess is the pause because you believe you have less pricing power than some of your larger peers? Or have you seen some elasticity following the first shot of price increase that’s maybe giving you a little bit of pause?

[Philip Krim:]

No. We’ve worked with our retail partners, both on, like I said, prioritizing, flowing inventory to them, and we’ve worked with our retail partners about how we’re going to take pricing. And retail partners need advanced notice. So we provided them that notice and worked with them on pricing many, many weeks ago. And so it’s just the time that they would like for it to work through. Obviously, the DTC channel is easier to change pricing, but we’re very omnichannel focused from our consumer experience. So when we take pricing, we want to make sure that we continue to work with our retail partners, make sure that they’re well coordinated. And what we heard from our retail partners is that we all wanted to work through the summer selling period, get through Labor Day and then that’s when it’s the right time to take pricing. So it was really just a strategic view on what the right time is for the business and for the partners to have a seamless transition to higher prices.

[Operator:]

We have a question from Bob Drbul from Guggenheim Securities.

[Bob Drbul:]

Just a couple of questions from me. I think the first one is I think you talked a little bit on the inventory composition and the non-mattress inventory that you have on the balance sheet. Just wondering if you could talk a little bit about just the sales of what you’re seeing in various non-mattress categories? And just sort of how much pressure -- as you sort of -- as you try to get out of some of that product, how much pressure do you expect from that perspective? The second question that I have is just in the environment that you are and you talked a little bit about some of the marketing plans, I guess when you think about your ability to sort of reach new customers or acquisition -- customer acquisition costs, as you think about what you’re doing with the marketing investment, just wondering how you expect that to really impact, I think, the top line generally overall in the business?

[Philip Krim:]

So two, I guess, kind of questions in there. First, on inventory. We took inventory up very specifically because of some commercial opportunities that we really haven’t talked explicitly about. But the biggest factor driving the increase in inventory is increasing our pillow position. And that’s ahead of load-ins into launching our pillows into every Costco store, launching our pillows into 500 Walmart doors and launching our pillows into Bed Bath & Beyond. So we very purposely built up that position to have inventory to load in and to have safety talks to support those programs. And that’s part of a key distribution strategy, which is to grow distribution, not just of our mattress business but of our other product categories and first starting with pillows. So we’re really excited about expanding our footprint with pillows. We’ve seen the pillars are a great entry product for the brand and that they’ve sold really well with the partners that have had them. And so we will expand our footprint within that category aggressively, and that’s why you’re seeing the inventory position increase. On the sales and marketing side, we’ve been very pleased at our ability to generate sales and marketing leverage and do so with still driving top line growth. Our North American business on a 2-year basis versus 2019 grew over 70%. On a 1-year basis, obviously, you saw the growth of over 40%. And this is while generating leverage in our sales and marketing spend despite media growing kind of at over 50% on a year-over-year basis from a cost standpoint. So media inflation has been a real concern for us and for others. You’ve obviously seen that reported in some of the media partners that we work with, like Facebook and Google. And so we are approaching that in a very kind of real-time way to mitigate that inflationary cost by diversifying our spend, keeping our spend relatively flat, making sure we’re moderating our spend relative to the supply chain constraints. Overall, that’s generating the leverage that we’ve been talking about since our IPO, and we think contributing towards our March EBITDA positive.

[Bob Drbul:]

I guess just one more question is, as you broaden out your retail partnerships distribution with the new partners, new doors, can you talk a little bit about sort of how some of your legacy partners are performing versus some of your newer partnerships? And what you’re really learning as this transpires?

[Philip Krim:]

Yes. So on a dollar basis, most of our retail partnership growth is coming from legacy partners. So we’re doing a good job of growing our business with our existing partners. We’re flowing inventory to them on a priority basis. And that business continues to grow at a really healthy clip. We’re also very pleased with our new partner growth and that’s more of a premium product focus. And so what you’re really seeing is kind of a bifurcation of strategy based on price points and a bifurcation of strategy based on those partners. So with our more legacy -- and I say legacy, there are still 3-year, 4-year-old relationships. So these are new relationships in the grand scheme of things, but we continue to dial in that business. We continue to have partners that love the partnership. They love the Casper brand. They see us bring a lot of goodness to their overall business. And so we continue to work with those partners to build that business. On the new partner front, we see great sell-through. We see partners coming to us wanting more SKUs, wanting more premium SKUs. And there, we look to fill in more and more of a geographic footprint to make sure that we can offer more trial opportunities throughout North America. And so it’s more of a kind of fill in the white space because there’s so much white space on the trial side versus our earliest partners where it’s just optimizing and running that business better and better.

[Operator:]

We have a question from Brooke Roach with Goldman Sachs.

[Brooke Roach:]

Philip, you talked a little bit to delayed rollout of premium trial doors as you focus on satisfying the demand at the current partners. Can you provide any shaping or sizing of that backlog on how you’re thinking about what that trial door expansion could look like over the back half of this year and into 2022?

[Philip Krim:]

It’s a great question. We have a large partner that we’ll bring online in the second half of this year that we haven’t announced. And even with the partners that we’ve announced like Mattress Warehouse, we delayed some of the store openings with them. And so you’ll see a mix of both new partners and existing partners continue to fill out that trial door opportunity as we remain very focused on bringing more trial doors to market in order to drive that premium product selling for customers throughout North America.

[Brooke Roach:]

Got it. That’s really helpful. And if I could just ask one follow-up. There’s been a lot of ground covered on the supply chain and capacity constraints. But I was wondering in the context of capacity strains, can you talk or comment on your decision to continue with the promotional events, both at your own website and also at some of the select wholesale partners versus choosing to fulfill that demand at a higher price point? How you’re thinking about levering the promotional spend versus capacity?

[Philip Krim:]

Yes. No, it’s a great question and something we talk internally about quite a bit. Our view is that consumers expect promotional activity in this category and for us to deliver on the right kind of experience that consumers come to expect that we need to be promotional in market and that’s going to allow us to continue to be competitive. So even despite a constrained supply chain environment, we think being promotional is so critical to getting consumers’ attention and to ultimately capturing the sale. And so we think it’s -- we’re constantly talking about what the right balance is between promotion and supply chain availability and just the overall growth of the business. And I think we’ve done a good job of kind of balancing those different inputs. I don’t think you’ve seen us be as promotional as some others in the industry. And I think that speaks to the power of the brand, the overall demand that we’re seeing and just the demand for our products and markets. So we’re promotional, but I don’t think by any means on the extreme end of promotion that you are seeing others who struggle with not as relevant of a brand or not as good products move to in their playbook in order to try to drive growth.

[Operator:]

Our next question is from Curtis Nagle from Bank of America.

[Curtis Nagle:]

Just I guess a quick one relating to the lease charge. Just wanted to clarify. Is that entirely related to the corporate leases, I guess, in New York and San Francisco? And I guess how should we think about the showroom footprint for the rest of the year, growth plans for 2022?

[Philip Krim:]

I’ll let Mike answer the specifics, but it is entirely related to corporate real estate footprint.

[Mike Monahan:]

Yes. Curtis, this is Mike. That’s true. We consolidated our footprint largely due to moving to a hybrid model. So we’re seeing that work and that’s what our workforce really values. So we did 2 things. We were able to shrink our footprint within our corporate real estate within New York, which is going to save us some money. And then, additionally, we’re moving, as you mentioned, Casper Labs from San Francisco over to the metro New York area, which we believe will increase overall alignment across functions within the company. The savings largely will come in 2022, not 2021 as we’re still transitioning and bringing on board the sublease tenants. So we’ll start to see some of that from an adjusted EBITDA perspective beginning later in Q4 of this year and into 2022.

[Curtis Nagle:]

And then just how to think about the showrooms in terms of the footprint for this year and plans for growth next year?

[Mike Monahan:]

We’re currently sitting at 72 retail stores, and we’re evaluating kind of growth on that side in the near term. Right now, our main focus is we feel like we have a good footprint, and we’re focused as traffic starts to come back really optimizing our omnichannel strategy.

[Operator:]

Your next question comes from the line of Nick Jones from Citi.

[Nic Jones:]

I guess just kind of high-level question. I mean how are you thinking about, I guess, the potential impact of the Delta variant? And then how that ties into consumers’ focus on home. There’s kind of a frenzy of buying on the home throughout COVID. Stimulus checks have been distributed, and I think that’s largely ran out. So I guess from here, I mean, is there any concerns that things kind of head the other way and that may impact demand as kind of the rejiggering of people, deurbanizing and maybe making a lot of these purchases? Are we setting up for maybe tougher comps than expected in the back half and into next year?

[Philip Krim:]

It’s a good question. We’ve certainly been talking about more recently. I think we’ve seen COVID really stress test the benefits of an omnichannel infrastructure. So we were very proud of the growth that we delivered in both our DTC channel this last quarter as well as our retail partnership channel. And if you look at our 2-year growth, it’s very robust. And I think the way we generated that growth was certainly different than we expected pre-COVID. And I think we’re well set up that if consumer behavior does continue to be volatile or dynamic because of the Delta variant that we’re set up to deliver on that no matter where those consumers are shopping. I think it’s still too early to tell, obviously, what will happen on kind of consumer shopping behavior. We haven’t seen store closures or anything like that. And we certainly hope we don’t have to do anything like that. But I would say our omnichannel footprint means that I think that even if there are variations in how people are shopping or trends revert that we’re set up to deliver the demand that we think will persist. So from a category standpoint, we think that housing remains a very good backdrop for the mattress industry. We think that the overall consumer focus on health and wellness will continue to bolster the mattress industry. We’ve also seen kind of, I don’t know, I guess I’d call it anecdotal data around replacement rates coming down within the mattress industry, and we think that’s going to be a kind of good secular tailwind for things. So I guess all of that to say is even with the Delta variant, we think that there’s going to be a very good demand backdrop for the industry and for Casper. And that if the Delta variant does cause changes in consumer shopping behavior that Casper is well situated given our omnichannel infrastructure and focus to capture that demand no matter where it might exist.

[Operator:]

Your next question comes from the line of Lauren Schenk from Morgan Stanley.

[Lauren Schenk:]

I just wanted to ask. I think you were at some industry conferences in the later part of June and had noted that you were sort of largely staying in stock and inside settling a lot of the issues. So was there something sort of structural that changed in the last 6 weeks or so that has sort of been a wholesale change? And then just one clarifying question on path to profitability, just confirming the expectations that you’ll get there in ‘22 on sort of a quarterly basis than on a full year basis, more like 2023?

[Philip Krim:]

Yes. So the big change that happened over the last 6 weeks -- and keep in mind, we’re talking to our manufacturing partners now daily because it’s been such a volatile backdrop. But I think labor was much more of an acute issue over the last 6, 8, 10 weeks than our manufacturing partners or than we expected. And that labor ended up causing a lot less supply than they had expected, than we had expected. And that labor is popping up in just different ways. One week, it’s logistics issues around truck drivers. One week, it’s forklift operators on the docks of where we have a warehousing footprint. Some -- we get just line workers at some of the production facilities that we’re using to make mattresses. So labor ended up being a much more acute problem than we had seen previously. In talking to those vendors, we’re seeing things get somewhat better in the states where stimulus is burning off, but attracting labor across our entire footprint was a real challenge. We hope that’s in a better spot later this year. But I would say that was the biggest difference between kind of Q1 and Q2 when it came to the supply chain. The raw materials are something that we saw getting better. And again, that took a little bit longer than we expected to ameliorate the situation there, but the labor was kind of what emerged more recently as kind of the real linchpin in our capacity. And then, Mike, do you want to talk about kind of the guidance question.

[Mike Monahan:]

From a profitability standpoint, we’ll have more visibility as we get closer to the year. Our expectation is that we’ll reach profitability during 2022, not necessarily on a full year basis, but we’ll have more clarity on that once we get closer to the year and get more visibility into some of the supply chain challenges that we see for next year. As we mentioned earlier, we do anticipate that we will start to see some of those challenges subside, and we’ll enter 2022 from a position of strength. But we’ll have, again, a lot more visibility into that towards the end of this year, likely.

[Operator:]

There are no further questions at this time. I would like to turn the call back to Mr. Krim.

[Philip Krim:]

Thank you, operator, and thank you all for joining us today and for your continued support. I hope you have a good day and stay healthy and safe. Thank you, everyone. Bye, bye.

[Operator:]

This concludes today’s conference call. Thank you for your participation. You may now disconnect.