Purple Innovation Attempts Rebound After Earnings Dive

Shares of mattress maker Purple Innovation NASDAQ: PRPL are waking up after tumbling more than 32% on March 4, following a disappointing earnings report.

 The Utah-based company reported 2020 revenue of $648.5 million, up 51.4% from $428.4 million in 2019.

 Yearly net income was $10.9 million, an improvement over 2019’s loss of $12.4 million.

 On an adjusted basis, net income was $49.6 million, or $0.78 per share. For 2019, that was $8.6 million, or $0.16 per share.

 Despite results that look good on the surface, Wall Street punished the stock for missing analysts’ estimates. The Street was also disappointed with Purple’s guidance of 30% to 36% year-over-year revenue growth in 2021.

 Analysts are now expecting full-year earnings per share of $.086, which would be a 32% increase over 2020. That consensus estimate was revised lower in the past month.

 In the fourth quarter, Purple reported earnings of $0.07 per share on revenue of $173.9 million. Those were year-over-year increases of 250% and 40%, respectively.

 In actuality, 2020 could have been worse for Purple. Although the company’s brick-and-mortar retail locations shuttered early in the Covid crisis, many have since reopened and the company ramped up its online sales.

 Proprietary Purple Polymers

 In addition, few analysts predicted how the “stay home” trend would benefit so many companies, including those in the home decor and home improvement spaces.

 Purple uses its patented technologies, including its Hyper-Elastic Polymer, in the mattress manufacturing process. It uses a proprietary grid system to support a person’s body while sleeping. The color of the mattress and the grids are, of course, purple.

 In addition to mattresses, the company manufactures and sells pillows, seat cushions, sheets, bed platforms and even pajamas.

 The mattress industry hasn’t exactly been sleepy in recent years. Established companies such as Tempur Sealy International NYSE: TPX are industry leaders. Tempur Sealy owns brands including Tempur-Pedic, Sealy and Stearns & Foster.

 Sleep Number NASDAQ: SNBR is another leader in the category. It’s steadily grown earnings over the past seven years.

 Upstarts have been waking up the industry, though.

 In addition to Purple, relatively new entrants such as Leesa, Casper Sleep NYSE: CSPR, Tuft & Needle and Helix made strides with their mattress-in-a-box products.

Reverse Merger With SPAC

 These are delivered directly to the buyer’s home. When removed from the plastic wrapping, the mattress expands to its full size.

 The newer category entrants made a name for themselves advertising on podcasts and other social media, in addition to traditional TV ads.

 Purple has a trading history that will sound familiar to investors in 2021. The company, founded in 2016, completed a reverse merger with SPAC Global Partner Acquisition Corp. in early 2018.

 Global Partners went public in 2015, and evaluated dozens of acquisition targets before sealing the deal with Purple.

 Because the transaction was structured as a reverse merger, Purple’s stock chart begins in 2015, but that’s actually the chart for the former SPAC entity. 

Earnings Battered Stock’s Price

 The recent post-earnings meltdown resulted in a year-to-date stock price decline of 5.37%.

 However, the stock’s performance looks much better on a one-year basis, with a gain of 164.60%.

 Purple’s stock climbed out of a price consolidation on December 24, and rallied to a high of $41.08 on January 25. From there, it traversed above its 50-day moving average in an orderly fashion, but couldn’t overcome resistance between $40 and $41.

 The current pullback may end up being constructive for the stock; the March 4 low of $23.72 undercut the $24.24 low of the previous base, posted on November 11. When a stock falls beneath the low of its previous base structure, that resets the base count, and clears the decks for new investors to enter at a lower price.

 The stock is fairly volatile, with a beta of 1.29. With a market cap of $1.92 billion, it’s at the upper end of what’s typically considered a small cap.

 Purple closed Tuesday at $31.17, up $1.38, or 4.63%, from Monday’s finish. If the broader market continues its nascent rally, it wouldn’t be a surprise to see Purple go along for the ride.

 Investors may want to wait for proven support along a key moving average before jumping in.