Casper Sleep Inc.
Q1 2020 Earnings Call Transcript

Published: 12 May 2020

Operator:

Good morning, and welcome to Casper's First Quarter 2020 Earnings Conference Call. Today's call is being recorded, and we have allocated one hour for prepared remarks and Q&A.At this time, I'd like to turn the conference over to Jeff Grossman [ph], Investor Relations for Casper. Mr. Grossman you may begin.
Unidentified Company Representative:

Thank you, operator. I'd like to welcome everyone to Casper's first quarter 2020 earnings conference call.Before we begin, I'd like to remind everyone that 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; our anticipated financial performance; and the expected impact of novel coronavirus 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, 2019 as updated; by the risk factors section of our quarterly report on Form 10-Q for the quarter ended March 31, 2020; and our 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.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 of non-GAAP metrics which are 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.On the call today is Philip Krim, Chief Executive Officer; Emilie Arel, President; and Stuart Brown, our incoming Interim Chief Financial Officer. Philip will provide a brief update on the Q1 results as well as discuss the current operating environment and actions Casper is proactively taking to optimize the business model and incremental color on strong e-commerce performance quarter-to-date. Emilie will provide an operational update, including the rollout of the Company's 2020 mattress collection, as well as retail re-opening plans. And Stuart will then provide more details regarding the financial performance in the quarter. Following their prepared remarks, we'll be happy to take questions.I would now like to turn the call over to Casper's, Chief Executive Officer, Philip Krim.
Philip Krim:

Thank you, and good morning, everyone. I hope you are all staying well. Given the dynamic environment from COVID-19 I would like to spend our time today providing you both a look back on Q1 results as well as a view into what we are currently seeing in the business. Overall, we are pleased with how the business has performed in 2020. And we believe we are set up to not only weather this pandemic, but actually advance our business and financial goals.First, let's dive into first-quarter 2020 results. Our key financial metrics of net revenue and adjusted EBITDA both came in ahead of the expectations, we provided on our last earnings call. Overall, net revenue was $113 million for the first quarter, which represented growth of over 26% from a year ago. Our direct-to-consumer revenue grew almost 13% to $90.3 million. And we ended the quarter with 59 stores, up from 22 a year ago. Revenue from our retail partnerships grew 142.9% to $22.7 million, and we ended the quarter with 20 partners up from 11 a year ago.Gross profit in the first quarter increased 21.6% to $53 million with a gross margin of 46.9%, a 190 basis point decrease versus the prior year. Our adjusted EBITDA in the first quarter was better than expected at negative $22.9 million. The launch of our new mattress 2020 collection is resonating strongly in the marketplace, and we expect the new line to enhance our gross profit margins in the future.Finally, we closed our IPO in the first quarter, and are pleased to welcome many new shareholders to Casper. The IPO raised approximately $88 million in net proceeds putting us in an even stronger competitive position. We ended the quarter, with a cash position of $116 million, providing us with a strong balance sheet and cash to operate in this environment.Now, turning to the current environment. We did want to provide you with a number of updates relating to how the business is operating and performing lately. First, our retail locations and offices have remained closed since mid-March, and we continue to place the health and safety of our customers and team members as our highest priority. We have been very focused on developing and implementing new safety and sanitation protocols in advance of our eventual retail and office re-openings.Second, the outlook we shared on our last call around Casper being well-positioned to serve shifting consumer behaviors has held true. E-commerce is driving our strong sales performance both through Casper.com and our retail partners' e-commerce websites. To-date we have been pleased with Q2 revenue and overall performance.In April, preliminary results show Casper's net revenue grew over 15% year-over-year led by e-commerce growth of over 35% and retail partnership growth of over 20%. Overall, our DTC business grew over 15%, despite our retail stores all being closed in April.While we normally do not break out e-commerce performance from our direct-to-consumer channel, given the exceptional circumstances surrounding COVID-19 and the fact that our retail stores are temporarily closed, we thought the incremental color would help in understanding the strength of our multichannel platform.While we are encouraged with our current revenue trends we are planning for a volatile environment in light of the economic uncertainty and known headwinds from retail closures and winding down Europe.We credit the quarter-to-date e-commerce performance in part to accelerated consumer adoption of e-commerce following the outbreak of COVID-19 and to our team quickly leveraging our digital experience and capitalizing on decreased advertising costs. Our digital strength along with our highly recognized brand continue to be valuable assets as consumers shift to shopping online with brands they know and love.Third, we remain committed to profitability and cash management. We announced a reduction of our workforce across North America and Europe of over 20% as well as plans to wind down our European operations this year. These actions amount to a reduction in operating costs by over $10 million annually and will start to impact results in Q2.And as our retail stores have remained temporarily closed, we announced a retail employee furlough program to minimize our retail operating costs until we are able to safely and responsibly reopen our stores.We are taking advantage of the variable aspects of our cost structure to ensure we minimize costs when appropriate, while having the flexibility to ramp our team up when we have clearance to reopen. Emilie will share more details on our phased reopening plan shortly.Fourth, we have experienced only minor impact to our inventory availability and delivery capacity during this time, none of which have materially impacted our ability to service our customers. This is largely due to our strategic onboarding of new suppliers, increased sourcing capabilities and efficient monitoring processes for all aspects of our product and delivery supply chain, though we are closely monitoring our entire supply chain for potential disruptions.In addition, we believe the impact on commodity prices may provide a tailwind for the business with benefits from declining oil-related expenses tied to logistics and manufacturing costs.Before I hand the call over to Emilie, I want to address our path to profitability. Our flexible business model is built to service our customers no matter how they choose to shop. And this continues to be true even in this dynamic consumer environment as evidenced by our strong e-commerce performance.Despite the temporary closure of our physical locations, we are delivering growth across the business and we look forward to when all of our channels are safely up and running and contributing to our growth. We have taken decisive actions in order to rightsize our cost structure and to refocus our business and capital allocation.We remain focused on executing our numerous ongoing cost reduction initiatives and operational improvements designed to drive financial performance. This includes reducing transportation expenses, as well as mattress production costs, implementing a flexible retail staffing model and lowering customer acquisition costs. As a result of these actions and the strong performance of our e-commerce platform we remain highly confident in our path to achieve positive EBITDA.I'll now turn it over to Emilie to share an update on channel performance including our retail reopening plan, as well as more detail on the launch of our 2020 mattress collection. Emilie?
Emilie Arel:

Thank you Philip and thank you all for joining the call today. I'd like to begin by discussing channel performance starting with our direct-to-consumer channel which includes our website and our owned retail stores.In the first quarter of 2020, our direct-to-consumer sales increased 12.8% year-over-year to $90.3 million. Casper.com performance began accelerating during the second half of March and has continued into Q2. We saw strong, new and repeat customer growth throughout April along with growth in both our mattress and non-mattress categories.As Philip mentioned, we have seen significant strength in our e-commerce performance with preliminary growth of over 35% in April fueled in part by favorable media rates, as well as strong consumer interest, increased traffic and conversion.On the retail side, we ended the quarter with 59 owned retail stores as of March 31, 2020 an increase of 37 net new stores compared to first quarter of 2019. Our owned retail stores have been temporarily closed since March 17.As physical retail begins to reopen in select areas and as consumer shopping behaviors and expectations shift, we are introducing new ways to shop Casper. Starting this week, we will begin offering virtual consultations from select stores. Shortly thereafter, we will introduce one-on-one appointments in our stores, followed by curbside pickup; in each case subject to government regulations and public health guidance. And as always, we continue to offer no-contact delivery. The health and safety of our customers and employees remain our number-one priority and we are implementing a suite of COVID-19-related operating policies and protocols as part of our reopening procedures.Moving on to retail partnerships. In the first quarter, our retail partnerships channel drove 142.9% year-over-year growth in revenue to $22.7 million, accounting for 20% of the first quarter revenue in 2020 compared to 10% in the first quarter of 2019. We ended the quarter with 20 total retail partnerships and continue to see this channel as a big growth opportunity for Casper.Despite some of our retail partners being closed, our retail partnership revenue growth in April was over 20%. We have experienced strong weekly performance during the month of April with many of our key partners such as Costco, Target and Amazon. We are also starting to see several partners reopen as state and local governments ease shelter-in-place mandates.At the end of March, we introduced our 2020 mattress collection. The new collection of eight mattresses is designed to cater to more sleeping preferences and price points. Similar to our new TV advertisements, where you see families unboxing Casper mattresses for the full family, the new line is meant to expand our audience and broaden our customer base. We are pleased with how the collection has been received by our customers and our retail partner, as evidenced by positive reviews and a healthy sales mix. We are also pleased with the smooth commercial execution from the previous line. This successful launch reinforces Casper as a trusted destination for sleep solutions, especially in today's rapidly evolving consumer landscape.Lastly, Lisa Pillette has joined Casper as Chief Marketing Officer. Lisa is a seasoned leader with over 20 years of marketing experience. She joins the company following senior marketing roles at Lacoste, HSN and Ralph Lauren. We are thrilled to welcome Lisa.With that, I'll turn it over to Stuart to walk through a more detailed financial update.
Stuart Brown:

Thank you, Emilie and we appreciate everyone joining us on the call today. With Emilie having given you color on the strong sales performance; let's shift to the rest of financial results. Casper earned $53 million in gross profits in the first quarter of 2020, an increase of 21.6% from last year's first quarter. Gross margins were 46.9% in the first quarter, a 190 basis point decline year-over-year.The decrease in gross margin was driven by both a 130 basis point charge associated with the change in logistics providers, as well as discounts associated with clearance sales of prior models in advance of our new mattress launch at the end of the first quarter of 2020. The new lineup has meaningfully higher projected gross margins and that lineup began shipping in earnest in the first week of April, while we expect the change in logistics providers to reduce transportation costs beginning in the second quarter.We have a large number of other supply chain initiatives underway, aimed at reducing product unit costs, including qualifying new suppliers and counter-sourcing components and packaging of our mattress and non-mattress products. As Philip mentioned earlier, we also believe, we may see potential benefits from declining oil prices, impacting our freight and logistics as well as our foam production costs. We have an experienced team focused on taking cost out of our supply chain and are confident we will continue to see progress in our gross margins this year and beyond.Moving to sales and marketing expense. Sales and marketing expense as a percentage of sales was essentially flat year-over-year in the first quarter of 2020. This reflects our disciplined approach to the efficiency of our spend, even as we increased our overall investment in sales and marketing year-over-year.Importantly, our performance marketing dollars, which represent the vast majority of our marketing dollars, continue to be used to profitably acquire e-commerce customers. Additionally, there is relatively minimal incremental investment needed to support our own retail stores and our retail partnerships driving natural leverage in sales and marketing as a percentage of revenue.As Philip mentioned, we have seen multi-year highs in e-commerce marketing efficiency in the beginning of the second quarter, as we capitalize on favorable media rates and increased consumer demand.Moving on to contribution margin, which is a metric we use to evaluate the business and is defined as gross profit less sales and marketing expense. Contribution margin is effectively the profit after we acquire a customer and sell a product. Contribution margin dollars increased 10.9% to $15.5 million in the first quarter of 2020 compared to the first quarter of 2019, driven by higher revenues and disciplined marketing spend.However, contribution margin as a percentage of net revenue decreased 190 basis points in the first quarter compared with the year prior, impacted by costs associated with the change in logistics providers and the clearance sales, which I mentioned earlier. We expect contribution margin will benefit going forward from the logistics change and the new mattress collection.General and administrative expense in the first quarter of 2020 was $48.3 million, an increase of $17.4 million from prior year. General and administrative expenses increased, as we invested to support our growing business, particularly with the operating costs of 37 net new retail stores compared to the first quarter of 2019, as well as additional investments in software and product development and new public company costs. General and administrative spend as a percentage of net revenue was up 820 basis points in the first quarter of 2020 compared to the prior year.Adjusted EBITDA loss was $22.9 million in the first quarter of 2020. And adjusted EBITDA margin, which we define as adjusted EBITDA divided by revenue, was negative 20.2% in the first quarter, a decline of 420 basis points compared to the prior-year period, impacted by lower gross margin year-over-year and increased investment in G&A expense. However, based on our growth outlook and the cost actions we have implemented, as Philip mentioned earlier, we remain confident in our path to achieve positive EBITDA by the middle of 2020, consistent with our previous outlook.One final note, given the evolving economic landscape, we will not be providing full-year guidance, but we do want to provide some incremental information around our new store plans and capital investments. We are reducing the number of planned new retail openings in 2020. And based on this updated store growth outlook, we expect 2020 capital expenditures to be below $15 million.I'm excited to be part of the Casper team. Casper has built an enviable brand in a short period of time and I see a great opportunity to continue the growth trajectory, while simultaneously executing on our path to profitability. It is energizing to be part of an organization with focus and passion and I look forward to contributing to the delivery of Casper's strategic growth plan.I'd like to turn the call back over to Philip for a few comments before we open it up to Q&A. Philip?
Philip Krim:

Thanks Stuart. We're happy to have you on board. In closing, we are pleased with our Q1 results and our strong performance to date in Q2. While we continue to look at a variety of scenarios for how the rest of the year might play out, we believe we are well positioned to outperform our competitors.Our DNA is rooted in digital and we pioneered e-commerce for this industry. We believe e-commerce adoption has been accelerated for consumers within our industry, during the COVID-19 pandemic and that Casper will continue to be a trusted destination for sleep solutions in this rapidly evolving consumer landscape. Our flexible business model will continue to serve customers however they would like to shop.Further, our award-winning sleep products and incredible brand resonate well with our happy and engaged customers, who are now focused more than ever on getting the best night of sleep possible. We will also continue to make deliberate decisions to reduce costs and ensure a strong cash position. We are executing on our plans with a focus on achieving profitability, while investing in growth and providing better sleep for our customers over the long-term.That ends the formal remarks for today and we'd like to now open it up to Q&A where Greg Macfarlane will also join us.Operator, I'll turn it back to you.
Operator:

Thank you. At this time, we will be conducting our question-and-answer session. [Operator Instructions] In order to allow for as many questions as possible, we ask that you please limit your questions to one question with one related follow-up. You may then reenter the queue for any additional questions. Your first question comes from the line of Peter Keith with Piper Sandler. Peter, your line is open.
Peter Keith:

Hi. Thanks. Good morning, everyone and congrats on the new mattress launch. I did want to dig into the e-com channel. As you pointed out, Philip, that e-com is in your DNA. And so, I have a two-part question on this. When you look forward, are you thinking about perhaps allocating more capital to e-com, just to leverage the change in consumer shopping behavior?And, secondly, with the e-com growth of 35%, while very strong and impressive it is a bit below some of your other peers in this space and within the online home furnishings space. So is there anything that has maybe hindered the growth in the last month? Our do you feel like maybe you left some sales on the table with the advertising strategy?
Philip Krim:

Hey, Peter good morning. Great questions. So the nice thing about having digital core to our DNA and e-commerce strength is that this is all a very natural for us. And what I mean by that is we look at allocating dollars to marketing spend into our e-commerce channel on a day-by-day week-by-week basis. And it's something that we control with really fine knobs and levers as we look at the business. And we are constantly looking at the data of what we see. And we're learning more every day about consumer demand and the channel shifts and that is something we feel totally comfortable dialing up or down based on whatever we are seeing.And so as it relates to allocating more capital in the future, it's something that we are going to continue to look at the data and make the decisions based on real-time insights. And it's something that we feel very comfortable doing and that we have a great deal of expertise at the team level doing that.And to your question on the 35% growth, for us again, we felt that there was room where we could have taken up spend, but we don't need to drive volume to keep a manufacturing line open or solve for certain volume thresholds. We felt that if we kept spend conservative it would allow us to learn about what was going on in the consumer marketplace. We felt very good about the 35% in growth in April. And we don't need to push volume in order to see real improvements to the bottom line, which is what we've been very focused -- like we said profitability and cash preservation.Especially, as throughout April, we saw the land beneath us settling and we got more clarity about what the consumer picture would look like. So we felt good with what we achieved. The big question when you benchmark us against others will be marketing spend. And that was something where we took a conservative view on what we wanted to do with marketing and not trying to chase growth; really focused on bottom-line improvements.
Peter Keith:

Okay. That's helpful feedback. Maybe a question for Emilie just on store openings. So it looks like there's protocols on -- we'll call it, slower store openings with appointment only. Just thinking about Memorial Day selling period coming up do you think you'll have any stores that are fully open? And what are the discussions like with some of your retail partners that are closed right now?
Emilie Arel:

Yes. So hi, Peter. We're going to continue to obviously pay attention to state and local guidances as we think about the opening of our stores, so the mall and street locations. And like I said in the remarks, we're going to have a phased reopening plan focused on the health and safety of our employees and our customers. That will include virtual appointments, curbside pickup one-on-one appointments in the store and then eventually a full opening. That includes queue management, increased sanitation, and safety protocols for both customers and our employees. I think as we think about Memorial Day, we'll continue to look at the environment and how our retail partners and our own retail stores are ramping up. And it's really just going to be a day-by-day decision as we think about that.
Peter Keith:

Okay. Sounds good. Thank you very much guys and good luck.
Philip Krim:

Thanks, Peter.
Operator:

Your next question comes from the line of Alexandra Walvis with Goldman Sachs. Alexandra, your line is open.
Alexandra Walvis:

Good morning. Thanks so much for taking the question here. My first question is for Philip on the advertising market. You shared some detailed comments on this on the last call and I wonder if you could update us on what you are seeing and thinking. Where are you seeing -- or how have media rates trended through the quarter? Where are you seeing the biggest increases in efficiency? And any thoughts on how this could play out over the next few months?
Philip Krim:

Yeah. Hey, Alex good morning. So we continue to see a very I think positive landscape in the advertising and marketing world for Casper. So we continue to see CPMs and media rates be well below where they were prior to COVID-19 and where they were in 2019 and before that. We have seen some inquiries from the bottom with CPMs in the online world, but we continue to see big dislocations in the off-line world.And as you know, Casper spends across all channels of media. We're able to flex in and out. Having that fungible approach and portfolio-based approach to our marketing spend allows us to exploit different media efficiencies and opportunities as they come up. And so again, this is an environment that Casper can play really well.We believe that the media landscape will continue to be dislocated throughout the rest of the year and an area that will be a good tailwind for us as we look to gain sales and marketing leverage in the business. So we continue to see ad rates below where they were and strong viewership in channels like TV and online streaming video services as well.
Alexandra Walvis:

Fantastic, super clear. And then my second question is on clearance and promotionality. It weighed on the first-quarter gross margin. I wonder if that was a greater-than-anticipated impact. And I wonder if you could talk about how you are expecting promotionality and the impact on gross margins to progress going forward.
Philip Krim:

Yes, great question. The promotional period in Q1 did extend a little bit longer than we had initially expected, as we sold down our inventory in our previous lineup and ramped up building, the mattress 2020 lineup. As we talked about the mattress 2020 launch has gone exceptionally well. That's a higher-margin lineup. And part of the promotional strategy in Q1 was to sell down the old inventory which we did very effectively. And that did weigh a bit on the margins in Q1.But in Q2 and going forward given the mattress 2020 launch and what we see today and going back to our traditional promotional playbook, we think that margins normalize back above that 50% gross profit margin range that we had talked about back in February and March.
Greg Macfarlane:

One – if I can jump in too. Hi, Alex. It's Greg. One additional benefit of the additional promotions that we ran to wind down the 2019 model line is that it does help with buyer's remorse. So when a client – customer buys one of our older mattresses right before the new mattress changeover and then they see the new mattress lineup be offered, we have historical data that suggest that there is a little bit of an increase in returns.But by putting it on discount you actually discourage that behavior. So that's data that we had historically and we continue to experiment on that. But that's something that we also think will benefit gross margins here in the next couple cycles as returns work through the system.
Alexandra Walvis:

Very interesting and super clear. Thanks guys and all the best.
Philip Krim:

Thanks, Alex.
Operator:

The next question comes from the line of Randy Konik with Jefferies. Randy, your line is open.
Randy Konik:

Thanks. Good morning, everybody. I guess question for Philip. How do you think about – with this lasting changes of consumer behavior likely to be ongoing a little bit longer than we would imagine and you're doing a great job on the e-com side. How do you think about the distortion of capital by channel over let's say the next three to five years? Does it stay the same as you previously thought? Or do you pull the gas pedal back a little bit on store or wholesale partner shift development in favor of more direct-to-consumer through e-commerce? Just curious in how you are thinking about the next few years versus the next few months.
Philip Krim:

Yes good morning, Randy. I don't know that my crystal ball is better than anyone else's in that regard. But I would say – you've heard across a variety of industries that this pandemic has is going to pull forward digital adoption, e-commerce adoption even in B2B enterprise practice just moving to the digitalization of everything. And I think the amount of that pull forward will be dependent on industry by industry and segment by segment.My best belief – and again too early to have any data behind this – but my best belief is that this will continue to accelerate e-commerce within this industry. As we talked about, e-commerce was fairly nonexistent before Casper started. We really helped popularize it. And we think that e-commerce adoption is going to accelerate. The degree to that acceleration who knows? We'll see. But I do think that omnichannel is still going to be very important. I think off-line is going to be an important part of our business, our strategy in the industry.Going into COVID-19, I think it was something in the 70% of the industry so do I think that goes down to 20%, 30%? No definitely not. And I think it's going to be a part of customer journeys going forward but I do think there's going to be a bit of a share shift and an acceleration into e-commerce.And so as we think about capital allocation, we're just going to look at it. And it's really too early to make any serious calls because we need to see what happens as we open up retail both within our owned and operated channel as well as watching what our retail partners do as they reopen. And so we'll learn a lot over the next couple of months and don't need to make a any kind of longer-term decisions on CapEx, but our eyes are wide open. This is something where we are able to look at data in real-time and control how we invest dollars across our business, now focused in the North American markets, but across all three channels that we compete in.
Randy Konik:

Helpful. And then lastly the one thing that – when we look at the numbers, the SG&A came in much better than anticipated and I think that will go a long way in terms of the market getting more confidence in the path to profitability. So maybe expand upon the dynamics around SG&A, how we should be thinking about that in terms of these yardage markers towards getting towards that goal of profitability in the coming quarters. Just want to get some more color there. That would be appreciated thank you.
Philip Krim:

Yeah. Two levers that drive conversion and interest in our business are spending on sales and marketing as well as discounting and promotions. We extended the discount and promotions that we were doing in Q1 as part of the model lineup shift. And as part of that we were able to keep SG&A lower than expected. These are levers that we are getting very good at using within our business to drive different business outcomes.I would say that, the playbook is very different now in COVID-19 time. And so we are re-looking at exactly what the playbook is. Us like everyone else in our industry are very focused on what the right playbook is for Memorial Day weekend and we'll see how big of a dent that is for the industry. But there are multiple levers that we have to drive efficiency. We do think we can continue to get leverage out of our SG&A line. We believe you'll continue to see leverage in our G&A line, given some of the cost reductions we've made there even in a world where growth is well below what we had anticipated again because of COVID-19.So we are very focused in getting operating leverage throughout our P&L and we think that we can continue to make big improvements. And that's why we have continued confidence in our path to profitability. And I think Stuart might have said mid-2020, but I think we are still guiding for mid-2021. We feel very confident in the timelines that we had originally outlined and believe that we have multiple levers throughout the P&L to continue to drive operating efficiencies.
Randy Konik:

Helpful. Thanks guys.
Philip Krim:

Thank you.
Operator:

Your next question comes from the line of Curt Nagle with Bank of America. Curt, your line is open.
Curt Nagle:

Good morning. Thanks very much for taking my questions. The first one, would you be able to just remind us what are the biggest levers in terms of better growth to profit from the product lines? I think part of it is better product cost maybe some mix shift – mix up ASP acceleration. Could you just clarify kind of what the pieces are there?
Philip Krim:

Sure. One comment on mix is it's been interesting as we've seen our e-commerce business grow in Q2 it's actually been very consistent across our models. We see a relatively consistent mix from pre-COVID-19. And we are seeing strength across different customer segments, across all geographies, across all product models. And that said, we believe that the gross profit margin lift though is coming, because we had margins expand with the launch of mattress 2020, which was a complete re-launch of all products. So we were able to cost-engineer some of the products so that hits on cost of goods sold.We also have logistics savings given some contract renegotiations that had taken place in Q1. And there are some other supply chain optimizations that have been hitting in 2020 will continue to hit in 2020 in a pretty meaningful way. And to that – as we talked about managing our supply chain deep through our supply base that is something that we do both to make sure that we have availability given certain factories having issues in COVID-19 time, but it also gives us visibility in how we can meticulously get costs out of the supply base. And so we are looking at multiple levers in the overall cost of goods sold side and logistics side for the business.
Curt Nagle:

Okay. And then just have a follow-up. Just curious if you are seeing perhaps an acceleration in new customers given that – at the moment, we are seeing a big push from retail to online. And just kind of curious what that's done for your customer demographics.
Philip Krim:

Yes, so we've seen real strength from previous customers coming back to buy from us. They're buying mattresses, but they are buying our accessories as well. Our pillow business has been super strong. A lot of that is from new customers but a lot of that is from previous customers.And then we are seeing growth in new customers. And I think the interesting thing is that some of that new customer growth is coming from segments that were newer emerging segments of customers for us as opposed to some of the existing segments.And I guess the way I would boil that down is it doesn't feel like our retail customers are who came online and are buying from Casper. It actually feels like there is a slightly different customer buying from Casper; and that the retail customer who has generally been a more affluent customer slightly higher AOB customer might be waiting a bit more for retail to reopen still going to rely on that channel.And that the e-commerce growth is actually coming from slightly different customers than Casper had previously seen. So, that all fits in the new customer bucket. But it goes back to the overall headline of just broad-based strength in the business; and it not coming from any particular price point SKU or customer segment or geography.
Curt Nagle:

Okay, very good. Thanks for answering the questions.
Philip Krim:

Thanks Curt.
Operator:

Your next question comes from the line of Michael Lasser, UBS. Michael, your line is open.
Atul Maheshwari:

Good morning. This is Atul Maheshwari on for Michael Lasser. Thanks a lot for taking our questions. So, my first question is on the cadence for April. What trends are -- especially on the ecommerce side were trends consistent through the month or was there any meaningful variability week-on-week?And then along those lines did you notice any spike in sales around the time the stimulus checks were distributed?
Philip Krim:

Good morning. We saw consistent strength throughout April. So, as we talked about the ecommerce business kind of accelerated at the end of March and April was consistently strong. I would say we saw a slight uptick when stimulus checks hit, but it didn't feel like it was a big anomaly to the consistent trends that we saw overall. And so the strength continued throughout the end of April and so was pretty broad-based and consistent throughout the month.
Atul Maheshwari:

Got it, that's helpful. And the second question is really in the profile of the ecommerce customer who has transacted with Casper over the past eight weeks. Is this dislocation in the marketplace really giving you an opportunity to attract a new type of customer that you simply weren't doing before? Do you have any insight on that?
Philip Krim:

We do. We see strength -- and this is early data so we are going to dig into this a lot. But our data analytics team provided us insight that we are seeing a little bit over-indexing coming from customers that previously hadn't over-indexed in our ecommerce business.So, I don't want to get into too much detail just because it is still newer data. But it does feel like there are some emerging customer segments that we can lean into and build out and continue to develop it within our e-commerce business that was a bit of a shift pre-April.
Atul Maheshwari:

That's very helpful color. And my last question is on your gross margin. So, what would be the benefit of the new logistics deal? I know you mentioned lower transportation but do you have any additional color on the new deal? And then along those lines do you have any quantification on the extent that transportation costs will be lower?
Philip Krim:

So, it is an ongoing benefit that will start here really in Q2. I don't think we're going to break out the specifics just yet. But it's a fairly meaningful benefit for us on the overall gross margin and does take logistics costs down for us as we look at that on a unit cost basis and on a full company P&L.
Atul Maheshwari:

Thank you and good luck with the rest of the year.
Philip Krim:

Thank you.
Operator:

Your next question comes from the line of Lauren Cassel with Morgan Stanley. Lauren, your line is open.
Lauren Cassel:

Great. Thanks for taking my question. I guess first any additional color you can give around the retail partnerships growth on a same-store basis? So, excluding new partners year-over-year, how is growth looking in the same accounts year-over-year?And then just following up on a couple of the earlier questions. I guess how are you thinking about 2021 store openings? When would you to have to commit to that number? And then any change in the thinking around the long-term store’s fleet size that we talked about during the IPO? Thanks.
Philip Krim:

Good morning, Lauren. Great questions. I'll turn it over to Emilie to talk about that. I don't think we want to get into specific partner-level year-over-year growth, but we're certainly happy to give you a bit more color on what we’re seeing within our retail partnership business. And Emilie can also speak to just how we've been approaching things with our landlord and retail partners.
Emilie Arel:

Yeah. Hi, Lauren. Good morning. So for us the majority of our business on the retail partnership side is done through partners who've been open during this entire period and their business continues to be very solid. We’re starting to see the rest of our partners start to open up as state and local guidelines ease shelter-in-place restrictions. And so we’ll continue to see how fast those partners ramp across the country. And so we feel good about that there.As we think about store openings, we've been in touch with our landlords since mid-March and continue to have conversations about what this looks like on a day-by-day and week-by-week basis. It's going to be different by state, by mall, by outdoor location and so we’re staying very close on those conversations. And we'll continue to think through how we are approaching the rest of 2020 and 2021 in terms of store openings.
Lauren Cassel:

Okay, great. Thank you.
Operator:

Your next question comes from the line of Bob Drbul with Guggenheim. Bob, your line is open.
Bob Drbul:

Hi, good morning guys. I guess, just two questions for me really. I think the first one is; can you talk a little bit more on -- maybe an update on the Glow light, and just your ability to meet the demand? And I guess tying that with the second question is; in terms of the mattress plus like add-on items, can you maybe talk a little bit about shopping patterns that you are seeing either repeat customers or the size of the items in the cart that sort of thing on the e-commerce side? That would be helpful. Thank you.
Philip Krim:

Sure. Good morning, Bob. On the Glow light, the Glow light demand continues to be there. It's a relatively small revenue item for us. And so we've seen strength in our non-mattress products, but I would highlight that strength as really being in our pillow business and in our bedding business as well.The Glow light continues to tick along, but that wasn't what was providing the outsized strength in our non-mattress business. But the Glow light does have sourcing from overseas and we were able to keep the supply chain there intact. So we will continue shipping Glow lights for the rest of the year and don't see any impact coming on that product specifically.For mattress and add-ons, actually, maybe I'll turn it over to Emilie to just talk about some of the strength we are seeing in our non-mattress business and as well as what we’re seeing on the attachments with our mattress orders.
Emilie Arel:

Yeah. As Philip said earlier what we’re excited about is we're seeing a great mix of those new and repeat customers really coming to the e-com site over the past month and seeing a big uptick in non-mattress sales. As Philip said the majority of that is coming from pillow and from sheeting both in our new and repeat customers.
Bob Drbul:

Great. Thank you.
Philip Krim:

Thanks, Bob.
Operator:

[Operator Instructions] Your next question comes from the line of Seth Basham with Wedbush Securities. Seth, your line is open.
Seth Basham:

Thanks a lot, and good morning.
Philip Krim:

Hey, Seth, good morning.
Seth Basham:

My first question is around your new mattress lineup. It looks like you guys have removed the Essential Mattress from your website, but it's available for sale at some of your retail partners online. Can you provide some more insight into how you are thinking about structuring your new lineup?
Philip Krim:

Sure. Emilie, do you want to talk about some of the testing that we are doing there?
Emilie Arel:

Yeah. So we as we have mentioned earlier launched our new portfolio at the end of March. And as -- when we launch new products and as we do promotions and many things in our business we do a lot of A/B testing. And so we started with an A/B test testing two different lineups against each other; and on Friday went into a new test, where we did remove the elements from the site. You can still purchase it and you can still purchase it at a lot of our retail partners. So it is just part of our ongoing testing protocol that we use to maximize the assortment for our customer and for our profitability.
Seth Basham:

Got it, okay. When do you think you'll have a decision made as to what the right lineup is on a go-forward basis? And will you consider offering mattresses at your retail partners that you don't offer your own website?
Emilie Arel:

We are in constant evaluation of what the assortment will look like between our owned retail stores, our retail partners and our e-commerce site. And we'll continue to evaluate what the right assortment is at the right time for the customer.
Seth Basham:

Fair enough. And secondly as it relates to your sourcing plans, I know you are now sourcing some of you mattresses from Vietnam. There's potentially tariffs or duties that are going to be slapped on mattresses coming out of that country as well as others in Southeast Asia. What does that mean for your sourcing plans going forward? Would you shift any of the plans that you've put in place?
Philip Krim:

Yes, great question. Our sourcing approach has always been to build a redundancy of suppliers across all of our SKUs and we have that within our mattress lineup. We have been working with some Vietnamese based manufacturers, but we have redundancy across every SKU within our mattress lineup. This allows us to implement competitive bidding, which is one way that we're able to get cost of goods down from our supply chain. It's also a way to make sure that if there are any supply chain disruptions whether that's caused by regulatory shifts, tariffs, anti-dumping, et cetera that we are able to have plans to make sure that that doesn't impact us in too material of a way.And I think this just speaks to the beautiful part in my mind about, our business model and about having a third-party manufacturing base where we can be really nimble; we can build redundancy of supply chain. We don't need to solve for a certain amount of volume going through our factories. And all of this sets us up to really focus on gross margin expansion and making sure that we always have availability for our customers.
Seth Basham:

Wonderful. And my last question is just around gross margin. You talked about improving outlook going forward. But when we think about the implications from a channel mix standpoint, how much could that benefit your second quarter margins if we see the run rate of sales mix shift in April persist through the quarter?
Philip Krim:

So as we've talked about our DTC business has higher gross profit margins than our retail partnership business. Both DTC and retail partnership businesses were up year-over-year in April, and so we'll see exactly what the mix ends up at for Q2. And obviously, we'll be tracking very closely what the retail store reopening does for our DTC channel. But the margins are consistent in those channels. And what the exact mix is for Q2, we don't have visibility into yet and we're not going to provide guidance on.
Seth Basham:

Fair enough. Thank you very much and good luck.
Philip Krim:

Thanks, Seth.
Operator:

This concludes our question-and-answer session. I will now turn the call back over to Philip Krim for closing remarks.
Philip Krim:

Thank you for all the time today and the interest in Casper. We look forward to updating you on our second quarter results on our next earnings call. We hope you and your family stay healthy and safe. Thank you everyone. Bye-bye.
Operator:

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

Casper Sleep Inc. Q1 2020 Earnings Call Transcript

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Casper Sleep Inc.
Q1 2020 Earnings Call Transcript