Casper's Private Return: What It Means for DTC IPOs

Casper to Return to Private Ownership

Casper, a company previously funded by venture capital, has announced its intention to become a private entity through an all-cash deal. Following its initial public offering (IPO) in early 2020, Casper encountered difficulties as a publicly traded company.

A significant portion of its market value diminished as its financial performance failed to meet investor expectations.

Sale Details and Share Price

The acquisition price is set at $6.90 per share, representing approximately a 94% increase compared to the closing share price on November 12, 2021, according to the company’s calculations.

Initially, Casper offered its shares at $10 during its IPO, with the price briefly exceeding $15 before declining to as low as $3.18 per share.

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Why Casper's Situation Matters

The planned departure of Casper from the public market is noteworthy because it illustrates the potential challenges faced by direct-to-consumer (DTC) companies. Analyzing Casper’s struggles offers valuable insights, particularly as other companies like Sweetgreen and Rent the Runway pursue public listings.

It’s important to acknowledge that not all DTC businesses are identical, and Casper’s model isn’t purely DTC. However, Casper’s experience serves as a practical case study of the difficulties a company can encounter after going public.

Cash Flow and Rescue Opportunities

A review of Casper’s financial data reveals that cash flow was a primary concern. The company’s stock performance likely hindered its ability to address these issues independently.

Conversely, the depressed share price created an opportunity for an external acquisition.

Implications for the DTC Landscape

The broader implications of the Casper situation for DTC companies are complex. A detailed analysis will follow, but first, let’s examine the key financial figures.

Understanding these numbers is crucial to grasping the full scope of Casper’s journey and the lessons it offers to the wider DTC sector.

The Reasons Behind Casper's Sale

Looking back, Casper’s decision to sell may appear predictable, yet it’s important to recall the company briefly regained favorable pricing momentum earlier in the year.

However, following that summer peak, Casper experienced a second period of declining stock value, reaching a point where it became a clear acquisition target.

What caused Casper to lose its initial momentum? During the second quarter earnings report, the company achieved a slight revenue increase ($151.8 million), but reported a larger-than-anticipated loss of $33.7 million. Furthermore, Casper projected only modest revenue growth for the third quarter, when compared to the previous quarter.

Similar results were observed in Q3, with the company marginally exceeding revenue expectations ($156.5 million) while simultaneously incurring greater losses than forecast ($25.3 million).

These consecutive earnings reports largely explain the rationale behind Casper’s sale; the company was simply too unprofitable and consumed too much cash to continue operating independently. The following data points illustrate the situation:

• Casper’s cash and equivalents as of December 31, 2020: $88.9 million.
• Casper’s cash and equivalents as of September 30, 2021: $43.1 million.
• Cash used by Casper’s operating activities over the three quarters ending September 30, 2021: $38.4 million.

These figures clearly demonstrate a trajectory towards depleted cash reserves. A company doesn’t immediately cease operations upon reaching zero cash. Operating with minimal cash can alarm suppliers, potentially leading to demands for upfront payments, which further intensifies the financial strain.

Therefore, Casper essentially faced two potential paths forward: a sale or additional capital raising.

Seeking further investment would have been a common strategy, but the company’s share price presented a challenge. To secure funding, Casper would likely have needed to issue more stock. This would have resulted in shareholder dilution and potentially further depressed the share price. Given the already low per-share value, a substantial number of shares would have been required to generate sufficient funds for continued operation.

Consequently, a sale became the more viable option. This allows Casper to transition out of the public market and potentially restructure its operations under new ownership.

In essence, Casper’s growth rate was insufficient to maintain investor confidence and a robust share price. When additional funding was needed to sustain operations, the company’s diminished value limited its options. This is our assessment of the situation.

The Implications of Casper's Exit for Direct-to-Consumer Businesses

Direct comparison of direct-to-consumer (DTC) companies to software businesses is often inaccurate. Software typically benefits from substantial margins and consistent, recurring revenue streams.

Casper, conversely, operates with reduced margins and a considerably slower rate of recurring revenue, as mattresses are not frequently repurchased. Coupled with growth rates that didn't meet expectations, it became challenging for public investors to assign a high valuation to the company.

Furthermore, Casper appeared to struggle with achieving operational leverage. This means that increases in revenue did not translate into corresponding improvements in profitability. Consider the following:

While this data doesn't include Casper’s most recent Q3 results, it illustrates the company’s difficulty in converting revenue growth into enhanced profitability over time.

The experience with Casper provides DTC companies considering an IPO with specific criteria for success. They must either demonstrate rapid growth, where initial losses are acceptable due to anticipated share price increases and the capacity for self-funded expansion, or they must effectively reduce losses while growth slows, presenting a value proposition to investors rather than solely a growth narrative.

Having struggled to achieve either of these, Casper has opted to sell. This framework can be applied to companies like Warby Parker, Rent the Runway, and Sweetgreen. It’s important to note that consumers purchase items like eyeglasses, clothing, and salads more often than mattresses.

Key Takeaways for DTC Companies

• Rapid Growth or Profitability: DTC brands must prioritize either substantial growth or demonstrable profitability to attract public investors.
• Operational Leverage is Crucial: Revenue increases must translate into improved profit margins.
• Product Purchase Frequency Matters: Businesses selling frequently purchased items may have an easier time achieving consistent revenue and growth.

The Casper situation highlights the challenges faced by DTC companies in the public market. A clear path to profitability, or exceptionally strong growth, is essential for long-term success.