Casper Sleep Inc.
Q4 2020 Earnings Call Transcript

Published: 24 Feb 2021

Operator:

Good morning, and welcome to Casper Sleep's Fourth Quarter 2020 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 2020 Fourth Quarter and Full Year Conference Call. We'll get started in just a minute with management's comments and your questions.
Philip Krim:

Thank you, Norberto, and good morning, everyone. Welcome to Casper's fourth quarter conference call. Casper's outstanding fourth quarter financial performance marks a strong finish to 2020, as we established new records for revenue, grew market share and significantly improved our bottom line results. In the fourth quarter, our North American revenue grew 26%, gross margins were above 50%, representing a period-over-period improvement of over 250 basis points, and adjusted EBITDA improved 80% period-over-period.
Emilie Arel:

Thanks, Philip and good morning, everyone. We made significant progress in 2020 and we are just getting started. This past year, we reached more consumers through our marketing, distribution and new product introductions than any year in our history. In 2021, we have exciting plans to build on that momentum. Our near-term goal is focused on making our sleep products accessible to a larger market and we continue to make strides towards that goal. Almost seven years ago, we sold one mattress in one place, casper.com. Now we sell more than 40 sleep products across all of our channels with hundreds of trial locations. We will continue to reach a wider audience leveraging both our direct-to-consumer channel and retail partnerships. As we mentioned on last quarter's call, trial remains an important aspect of the purchase decision. We ended the year with over 20 retail partnerships, adding new national and regional brands. As a result, North America retail partnerships revenue grew 55.4% over 2019 at a relatively low cost.
Mike Monahan:

Thank you Emilie. Hi everyone. I'll provide some specifics around our financial results. In the fourth quarter, we continued to grow revenue and capture market share, while making meaningful progress on our path towards achieving profitability. Consolidated global revenue increased by 18.4% to $150.3 million, compared to $126.9 million in the fourth quarter of 2019, and by 13.1% to $497 million for the year. Our adjusted EBITDA loss narrowed to $3.5 million in the fourth quarter of 2020, representing an 80% year-over-year improvement and a 55% improvement sequentially versus the third quarter of 2020. Despite the ongoing challenges brought on by COVID-19, year-over-year North American revenue grew by 25.8% for the fourth quarter and 17.4% for the full year of 2020. Our retail partnership and direct-to-consumer channels each contributed to this growth. Retail partnership revenue grew 42.8% and 55.4% for the fourth quarter and full year respectively. Our direct-to-consumer channel grew 19.1% and 7.5% for the fourth quarter and full year respectively.
Philip Krim:

Thank you for everyone's time this morning. Casper is at an exciting point in our history. During our first year as a public company, we remain focused on the fundamentals needed to achieve our vision of becoming a sleep destination. To recap, we remain focused on three core strategic priorities
Operator:

Thank you. Your first question comes from Peter Keith from Piper Sandler. Your line is open.
Peter Keith:

Hi. Thanks. Good morning, everyone and congrats on the sales growth acceleration for the fourth quarter. You had mentioned briefly around the supply chain challenges. I guess I want to confirm are those now in the rear-view mirror? Have you gotten through the supply chain issues? And maybe play that out to Q1 as well where you're guiding for some sales acceleration to 7%. Some of your peers have been talking about continued strong trends in Q1. So anything to call out specifically about the Q1 guide?
Philip Krim:

Sure. Good morning, Peter. The supply chain issues, I would not say that they're squarely in the rear-view mirror. I think we've taken steps to be more responsive to a supply chain that's going to remain dynamic in our opinion. We talked about on our last call, we think Casper has a uniquely strong business model in this environment because we can stand up more manufacturing partners, we can expand our supply chain capabilities by bringing on more capacity. And that will allow us to absorb more of the dynamic nature of what's going on in the overall mattress supply chain. So I think it's going to continue to be an issue for the industry potentially, but I think Casper is well positioned thanks to our business model to work through that. I think that's why you saw us be able to fix the supply chain issues fairly quickly in my opinion. And kind of they became acute in mid-to-late Q3 and by mid-Q4, we felt like we were in a much better position and we're able to fulfill the demand which remained strong from the demand signals we saw in Q3 and Q4 based on the ability to kind of flex up with more suppliers and add more distribution partners to the mix. On the Q1 demand, we talked about last call and have said pre-pandemic Q1 is always our seasonally slowest quarter. We agree that there's kind of overall good demand backdrop in the industry and that it continues to be a good time to be in the mattress industry. And we highlighted some of those macro trends earlier around suburbanization and the focus on health and wellness. But just the way our business works is Q1 has always been seasonally the slowest. It allows us to kind of reset some of the products that we have out there and set us up for seasonally stronger demand coming out of Q1 for the rest of the year, which we're excited about.
Peter Keith:

Thank you very much. The other issue that you didn't bring up is just the rising input costs. And so we know that's pretty rampant with chemical costs continuing to inflate. How are you guys managing through that? And should we expect maybe some price increases as the year progresses?
Philip Krim:

Yes. We've been talking about it. Certain price increases are on the horizon for us, although we're trying to be pretty light with those. Again, the way that we believe with our business model that we can best combat some rising input costs is just to build capacity with our supply chain, so that we can shift demand from supplier-to-supplier. And that allows us to mitigate some of this. We do think there is an environment of rising kind of feedstock and input costs. But we think given our supply chain setup with capacity and giving -- having multiple vendors bid on our business. And also our ability to control pricing at the end destination, we can navigate that successfully. And I think that's one of the virtues of having the majority of our business be, DTC and working very closely with our retail partners is that we can navigate if there are changes in the input costs in a substantial way.
Peter Keith:

Okay. That’s helpful. Thank you, Philip. And good luck for this coming year.
Philip Krim:

Thanks Peter.
Operator:

And your next question will come from Randy Konik from Jefferies. Your line is open.
Randy Konik:

Yeah. Thanks and good morning everybody. I guess Philip, Philip I just want to ask more about the retail partner segment. So, you've done a good job of increasing the penetration of that segment. It looks like it's gone up about 2,000 basis points in the last eight quarters to about over 30% of the revenue base. And how do you think about where that kind of penetration should sit over the next couple of years? And then, talk about, -- you've had some very early success -- or good success with these different traffic winners, whether it's Costco, Sam's Club what have you. How are you thinking about incremental partners from here? What type of partners are you looking at to expand that segment?
Philip Krim:

Yeah. Good morning, Randy. And thank you. I agree we've had good success with our retail partner business. And we believe we're in the earliest days of building that out. If you look at it from an addressable market standpoint, retail partnerships are by far the biggest addressable market that Casper has to play in. And we've only been focused on standing that up over the last couple of years as you highlighted. So we believe that it has a long way to continue to grow at a pretty rapid clip. And I would also highlight that our retail partnership base looks very different than pretty much any of our peers. And we think that was a benefit to us. And one of the reasons that it drove such strong growth for the year 55.4% growth in 2020 and over 40% growth in Q4. And it's because our partners had navigated 2020 successfully with partners like Costco and Amazon and Target et cetera. As we've talked about kind of towards the end of last year and into this year we are very focused on expanding our trial presence. And I think bringing more trial opportunities for our consumers is going to be key to capturing more market share within the mattress side of things and in particular on the high-end of the mattress side of things. So you'll see us continue to focus on bringing more partners online with an emphasis on trial opportunities where consumers can lay on our products, compare our products. And that's why we highlighted that we brought on a professional sales team to work with those trial partners to make sure that we're standing up the brand in the right way delivering a unique and differentiated experience to consumers. And we think overall that's key for us to capture share in that channel.
Randy Konik:

And then, just to expand upon that, with the sales team you just mentioned that you hired. I mean is it fair to say that, you've seen a meaningful increase in, sell-through rates around those retail partners? And then, on top of that is it also fair to say that inventories on hand at the channel partners -- or retail partners is kind of below where it maybe normally is because of inventories that have been pretty lean across all areas of retail? How do you -- how do you think about that?
Philip Krim:

Sure. So, on the sales team side, I would say the sales team has had a fairly immediate, measurable and meaningful impact on conversion rates which we mentioned and thus sell-through. So we're really pleased by that. And it's been a great unlock for us and I think a key part of operating within that channel. So you'll continue to see us invest in that. And then, on inventory levels, we understand that our retail partners are keeping lean inventory levels. We don't have a long track record of understanding kind of what normal looks like with some of these partners, because most of them were stood up fairly recently. But we work with our partners. And again, this is I think the nice part about our DTC heritage and our business model is that we can flow goods to our partners very quickly. We can do drop ship for them. We have a very nimble omni-channel infrastructure in place, so that we can provide our partners, however they want to manage their inventory. And we think that's one of the reasons why some of the retail partners are really excited to sign-up with us and why they see us as a flexible partner moving through a dynamic consumer landscape.
Randy Konik:

Thanks. My last question is on your retail stores. You said that business was down, but it sounded like it improved on a sequential basis. You are talking about expecting subdued traffic. But how do you think about when a return to a little bit more, I guess, inflection potential in traffic or -- and/or sales patterns could occur in that channel of the business?
Philip Krim:

Sure. Emilie, do you want to talk about what we're seeing within our retail store channel?
Emilie Arel:

Yes. Hi. Good morning. So as we said nearly all of our markets are open today and we really see markets with more relaxed COVID restrictions having higher foot traffic. So traffic is a challenge to predict and we know that, but we are optimistic about the back half of the year when it comes to traditional retail. We do think foot traffic will continue to begin to return to normal levels as widespread vaccine distribution happens. And we're really proud of our team for as we mentioned things like virtual appointments and curbside pickup and really innovating within this environment to make the most of every customer that walks through the door.
Randy Konik:

Got it. Thanks. Helpful, guys. Thank you.
Philip Krim:

Thanks, Randy.
Operator:

And your next question will come from Atul Maheswari from UBS. Your line is open.
Atul Maheswari:

Good morning. Thanks a lot of taking my question. Phil, I wanted to circle back on the first quarter. Why is it going to see a sequential slowdown in revenue growth compared to the fourth quarter – especially, considering that the industry backdrop is still pretty supportive? Is there any specific call-out that you have that's limiting revenue growth this quarter?
Philip Krim:

If you recall Atul, we mentioned this on the last call as well that Q1 is going to be a slower quarter for us. And it just has to do with how we're managing our partners with how our business works is Q1 is always seasonally slower. And we understand it's a step back from the reacceleration we've seen on a sequential basis with quarterly growth, but this was something that we talked about on the last call that we have known as just how we manage our business. And it gives us a chance to kind of reset some of the product and distribution opportunities that we have in order to be set up for success throughout the rest of 2021.
Atul Maheswari:

Got it. And then as you look forward past the first quarter our math would suggest that you need like around 22% to 23% revenue growth to achieve your sales guidance. So at this point what's giving you confidence that revenues will accelerate following the first quarter given that there could probably be some challenges in the second half of this year as wallet share shifts back to travel and entertainment and away from home?
Philip Krim:

Yes. So when we look at the data and when we look at 2020, especially if you zoom out, certainly 2020 played out very different than we expected. But stepping back we still delivered 17.4% for the year in our North American business growth versus the previous year. And as we talked about we're early days of building out distribution. That distribution is working well. We continue to see growth in our e-commerce as well as our overall digital business with partners like amazon.com and other dot-com partners that we work with. And when we look at how the year will play out, we believe that we do have the opportunity to take share and grow in an accelerated fashion even beyond what we saw in 2020 which we were proud of to be able to deliver over 17% growth last year. So we just did a bottoms-up build on the opportunities in front of us that we've seen based on the performance to-date and that's how the forecasts came together.
Atul Maheswari:

Got it. Very helpful and good luck for – first half coming year. Thank you.
Philip Krim:

Thank you, Atul.
Operator:

And your next question will come from Bob Drbul from Guggenheim Securities. Your line is open.
Bob Drbul:

Hey. Good morning. A couple of questions for me. The first one is can you talk a little bit on return rates -- product return rates either on casper.com or partners like how that has influenced the business, sort of, 2020 versus 2019 and your expectations in this 2021 embedded guidance that you're giving us? And then the second question is can you talk a little bit about just the outlook -- specifically shipping expense in the fourth quarter, but the outlook for shipping and delivery expense in -- even in the first half of this year? Those two topics would be helpful.
Philip Krim:

Sure, Bob. Mike, do you want to talk a little bit more about returns and shipping expense?
Mike Monahan:

Sure. Good morning, Bob. On the returns piece, we are seeing -- we're consistent with prior years in what we're seeing. So in general, we've talked about we believe we're lower than the overall industry average. We haven't given out specifics around that percentage, but we haven't seen material changes to what we've seen in the past. On the shipping, as you think about gross margins going forward, you remember, we rebid our shipping contract at the beginning of April of 2020. And so, specifically in Q1 on a year-over-year basis, we expect to see improvement as a result of that renegotiated contract and we saw improvements in Q4 as well. So I would expect to over the next -- over Q1 to show improvement there and continued improvement from that on a year-over-year basis just a little bit less as we comp that new contract.
Bob Drbul:

Great, thank you.
Operator:

And your next question comes from Matt Koranda from ROTH Capital. Your line is open.
Matt Koranda:

Hey, guys. Thanks. Just on the very near term, I wanted to understand how we're thinking about how gross margins sequentially flow into the first quarter and how that's built into the first quarter guidance. And then, maybe if you could talk a little bit about the cadence of gross margin improvement through the remainder of the year, that would be helpful.
Philip Krim:

Hey, Matt, good morning. Mike, do you want to take the margin question?
Mike Monahan:

Yeah. Hello. There are -- if you look year-over-year in Q1 2020, we did -- our gross margins were roughly 46.9%. So I would anticipate seeing a meaningful improvement in that year-over-year. It's largely driven by two things. The first is the shipping terms that we talked about. The second thing is the overall product mix. We continue to see improvements in terms of our product mix portfolio and some of the pricing we've been able to push through. That would help gross margins throughout the year. So as you think about it on a year-over-year basis, we didn't give specifics but both for the first quarter and through the full year, I would expect to see a decent amount of improvement versus the full year of 2020.
Matt Koranda:

Okay, helpful. And then, one other clarifying question. I don't know if I saw the positive EBITDA for the second half guidance reiterated, but just wanted to clarify. Is that still on the table for 2021?
Mike Monahan:

Yeah. We're reiterating what we said on the third quarter call.
Matt Koranda:

Okay, great. And then lastly just in terms of the 2021 outlook. It's been covered a little bit but maybe I just want to put a finer point on it. The retail partnership sales is there anything quantifiable in terms of number of new retail partners we should expect in 2021? Maybe you could talk a little bit about sort of sell-through at existing retail partners and how that's going relative to kind of sell-in expectations on the retail front for 2021.
Philip Krim:

Sure. Emilie, do you want to talk about that one?
Emilie Arel:

Yeah, hi. So we don't have an exact number of partners that we're going to talk about today, but I would say we continue to partner with brands that understand the value proposition of Casper and can really help us bring our brand to more consumers across North America. We, as Philip had mentioned, onboarded some new partners in Q4 and are starting to see those take off which we're very excited about. And I would just put a finer point on what Philip had mentioned and I mentioned earlier about the professional sales team that we onboarded in the fall. And really their role is to be in the store to spend time with the retail partners to make sure they understand how we think about sleep as the key differentiator in our products and how we really want to work directly with the consumer to get them in the best bed for the best night's sleep. And so we can -- we are excited to continue to strengthen those relationships with the partners as we go throughout this year.
Matt Koranda:

Great, thanks, guys. I’ll jump back in queue.
Operator:

Your next question comes from Curtis Nagle from Bank of America. Your line is open.
Curtis Nagle:

Good morning. Thanks very much. Wondering if you could talk about your advertising plans for the year, I guess just how to think about it from a dollar and a rate basis. Just thinking about I guess the industry at large. Some of your larger competitors are investing a good bit more. So, yeah, how do you guys fit into that?
Philip Krim:

Yeah. Good morning. Going back to what we mentioned, we continue to be a very data-driven marketing organization and so we let kind of the data drive how we think about it. And we do believe that there's room to expand our overall marketing budget for the year, but also focus on driving more sales and marketing leverage for the business. So we think that trend can continue into 2021. And in part that's because we believe that e-commerce will be a robust channel for us, but also using our dollars to drive the omni-channel presence of our business.
Curtis Nagle:

Okay. Makes sense. And yeah, I don't think we touched on this, but I guess any commentary on performance of – revenue contribution from your existing versus new partners within wholesale?
Philip Krim:

So we don't break that out specifically, but we're very pleased that revenue and growth continues to build with our existing partners and that's driving the majority of dollars in the channel. So that business continues to comp very nicely. And then we're pleased with building new business with new partners, which there's a ramp when we stand those up. So we think those are ramping nicely as well.
Curtis Nagle:

Okay. And then maybe just one last quick one. So I understand you're not building or putting up too many stores this year I think 10. Why not just invest more generally in CapEx? At least, just looking at the dollar amount you gave relative to sales it's only about 2%, which I don't know seems a little light for your company. So yeah, I mean, just kind of how do you think about capital allocation kind of this year and going forward?
Philip Krim:

Yeah. It's a good question. And it doesn't change our long-term desire to build out stores, but we're just going to be kind of data-driven on timing, which is in large part informed by what we believe how COVID vaccines distribution plays out for the year. So this year we're going to be pretty slow to add new doors, but long term we believe that's a core part of our strategy. And CapEx obviously is needed to stand up stores. But it's not needed to drive growth through our e-commerce channel and it's not needed in a big way to drive growth in our retail partnership channel. So it's really just a question of how retail evolves and how we come out of the pandemic and how we get the vaccines distributed. Our view is that, that will drive increases in retail store sales and foot traffic, and when we see that happen, we'll get back to opening up doors down the road.
Curtis Nagle:

Okay. Thanks very much. Appreciate it.
Philip Krim:

Thank you.
Operator:

And your next question will come from Nick Jones from Citi. Your line is open.
Nick Jones:

Great. Just two questions. First on the product launches expected this year are these – are some of the products going to be new products that aren't in kind of the offerings today, or are they largely upgrades to what's out there already? And then the second question is on the D2C channel. Can you give us some color on how much of the conversions are driven by performance marketing and how that might be impacted by IDFA deprecation and I guess the looming third-party cookie deprecation on Chrome? Thanks.
Philip Krim:

Hey, Nick both great questions. So, on the product side of things, we're going to continue to increase products in categories that we operate in, including our mattress category. So we're really excited about some of the innovation that we'll be taking to market in that, and we'll also bring new products and new categories to market as well. So more to come on both those fronts. On the marketing front, we definitely have been talking about for some time now the changes in data privacy and some of the deprecation that we're going to see later this year. We do think that it's going to impact kind of the industry at large from a direct marketing standpoint, but that we've had good advanced notice on it and have been working on other ways that we think we can drive performance in the channels. And we don't think that performance media at large is going to take a material hit. I just think we're going to have to rely on different data points and different tools to drive optimization. And we've been working on those and that includes bigger lifts like multi-touch attribution platforms and media mix modeling platforms, as well as different ways to measure end user engagement and quantify the impact our marketing is having on conversions and driving traffic et cetera. This is an area, where we think, we do have some real core competencies and expertise. And so, we think kind of having a dynamic landscape there will actually play to our strength long term.
Nick Jones:

Great. Thank you.
Operator:

And your next question will come from Lauren Schenk from Morgan Stanley. Your line is open.
Lauren Schenk:

Great. Thanks. I just wanted to ask about the longer-term real estate strategy. Obviously, 10 stores in 2021, which I think is prudent, but are you still thinking about a store fleet of 200-plus stores long term, or has that sort of evolved over the past 12 months or so?
Philip Krim:

Hey Lauren good morning. No, we still think we can easily support 200-plus stores. So, in our view, no matter how bullish of an expectation you have on how e-commerce scales over the next several years for this industry offline and retail is going to be really a big part of the industry, a big part of the consumer experience and we don't think that goes away. And we think the best way to lure them out and try Casper products is in a Casper store. And so, we're pleased with how those stores have performed despite foot traffic declines due to COVID. And long term we think that that can be a very large profitable channel for us. And when we see, some of our peers like Sleep Number offer I think 600 doors something in that ballpark, we think we have a long way to go to kind of fill out distribution geographies with our stores, so that we can bring the best experience to more and more consumers throughout North America.
Lauren Schenk:

Okay. Great. And then just one follow-up on the new product launches. Just curious from sort of a mattress SKU count perspective, what you think the right number is over the medium to long term. I think in the past, maybe you had talked about having too many choices was overwhelming to the consumer. So, just kind of wondering what you think the right SKU count is for mattresses specifically.
Philip Krim:

Yes. It's a great question. And we definitely don't believe in kind of SKU proliferation for the sake of SKU proliferation, which we think is kind of a legacy way of thinking in this industry, where you just launch different SKUs and different mattresses for different price points. For us, we take more of an innovative lens to how we can launch new products and more of an approach on how do we bring more solutions to satisfy more people's preferences to market. So you'll see some real innovation with the products that we're going to take to market within our mattress category. We're really excited about that. We think it's kind of a next-level opportunity for us, when it comes to sleep quality. In particular, these are on the higher end side of the overall line and we think there's a really compelling reason for these to be a part of our overall mattress mix. So, we'll be very judicious with how we bring new products to market. And we think, there's still plenty of room to fill out additional consumer preferences within our lineup and we'll do that over time.
Lauren Schenk:

Thanks so much.
Philip Krim:

Thanks, Lauren.
Operator:

And your next question will come from Seth Basham from Wedbush Securities. Your line is open.
Seth Basham:

Thanks a lot and good morning. My first question is around retail partners' revenue growth in the fourth quarter. Can you provide some color on how much of that growth is driven by sell-in versus sell-through?
Philip Krim:

Sure. The vast majority of it was sell-through. There's some timing with retail partnerships always at the end of the quarter. But overall, as we talked about earlier on the call, retail partners in this category in this industry take pretty lean inventory positions. So the majority of it is sell-through, but there is some timing around sell-in versus sell-through.
Seth Basham:

Got you. And as we think about the guidance for Q1 as well as 2021, can you provide some color around, how much growth you're expecting or what the growth rates are in the DTC channel relative to the retail partner channel?
Philip Krim:

Sure. Mike, do you want to talk about how we've thought about that one?
Mike Monahan:

Sure. We haven't given specifics between the two channels, but I can give a little color around that. As we think about the DTC channel, we've largely modeled in that modest growth for our retail stores in the back half of the year. That's the one factor that is difficult for us to judge when the stores will open up. So, we leaned into -- our expectation is that e-com will grow a little bit faster than the retail stores. And certainly, if we have the ability to see foot traffic come back that would be helpful to the DTC channel. On the retail partnership side as -- we continue to see improvement from our sell-through with existing partners and we've also been in talks with a number of different potential partners that we're really excited about. And so, we're expecting to see growth in the back half of the year from the combination of those two drivers.
Seth Basham:

Got it. So for the first quarter and the full year, would you expect that the retail partner channel will outgrow the DTC channel?
Mike Monahan:

Where we sit today, I'd rather not give specifics around that. But as we -- from where we sit, I would anticipate to see retail partnerships grow a little bit more than the DTC channel this year correct.
Seth Basham:

Got it. Thanks. And the last thing, as it relates to the guidance, just thinking about some of the components within SG&A. Where should we be expecting more of the operating leverage? Is it going to be in advertising or G&A in the first quarter and 2021?
Mike Monahan:

We've modeled in -- I would expect it to be more on the G&A side, just for the first quarter, than on the sales and marketing.
Seth Basham:

And for the full year?
Mike Monahan:

For the full year, we expect contribution -- we don't give the specifics between the two, but I would expect to see leverage on both those lines on a year-over-year basis as it relates to full year.
Seth Basham:

Thank you, very much.
Operator:

I have no further questions in queue. I turn the call back over to Philip Krim, for closing remarks.
Philip Krim:

Thank you, operator, and thank you all for the time today and for your interest in Casper. We hope you, and your families stay healthy and safe. Have a good day. Thank you.
Operator:

Thank you everyone. This will conclude today's conference call. You may now disconnect.

Casper Sleep Inc. Q4 2020 Earnings Call Transcript

Other Casper Sleep Inc. earnings call transcripts:

Casper Sleep Inc.
Q4 2020 Earnings Call Transcript