Four things to learn about D2C economics from Casper’s S-1
Believe it or not, Casper will be the first IPO of the VC-backed D2C brand era — prior exits in the space (e.g. Harry’s, Bonobos, Dollar Shave Club) have been acquisitions. There’s a number of private D2C unicorns, including Allbirds, Away, Glossier, and Kendra Scott, that aren’t far behind Casper, and this IPO could have significant implications for their eventual exits.
Casper’s S-1, which was released last Friday, paints a fascinating picture of how these brands hope to be valued by the public markets. There’s a lot not to like — Casper raised $340M in equity funding to get to $357M in revenue, and is only growing 20% YoY. Casper is unprofitable with questionable unit economics, is operating in a crowded space, and has been less capital efficient than some competitors (see this comparison with Purple).
However, it’s important to give the company credit for what they’ve accomplished. They’ve achieved significant scale and brand awareness in a relatively short period of time — despite being founded less than six years ago, Casper has served 1.4M customers and has 31% brand awareness among U.S. consumers. It can be hard to change consumer behavior, and Casper deserves a lot of credit for making it common to buy a mattress online.
We want to provide a fairly balanced analysis, so we’ll highlight four things we learned (both positive and negative!) about Casper’s metrics and positioning for the IPO that we think are particularly important in evaluating the D2C economy more broadly.
- Casper doesn’t consider itself a mattress company — it’s the leading player in the “sleep economy,” which may involve expansion into surprising categories like medical devices.
This one isn’t too surprising, as Casper has been heavily leaning in to the “Nike of sleep” brand. The company sells 27 products, from mattresses, sheets, and bed frames to glow lights, dog beds, and weighted blankets. It took 18 months from the original mattress debut in 2014 for Casper to launch its second product, pillows and sheets. The pace of product innovation has exploded since then— the last 18 months have seen the launch of three new mattresses, a refreshed bedding line, a nightstand table and bedframe, and a wireless bedside light, as well as an online media site, a quarterly magazine, and a “Sleep Channel” on YouTube and Spotify.
Casper sees sleep as a new “third pillar of wellness” — a market sizing report from Frost & Sullivan puts the current U.S. sleep economy at $79B, and the global sleep economy at $432B. While the majority of this market ($285B) is composed of categories where Casper is already active (bedroom furniture, bedding, and mattresses), another $40B is in CPAP devices and medical diagnostic services. Casper is increasingly focused on developments in “non-traditional categories” like medical machines, connected devices, and services like sleep programming and counseling.
D2C brands won’t want to trade in public markets like typical retailers, which typically see a 2–3x revenue multiple. Expanding beyond physical products into medical devices and software could justify a larger market size, more sustainable growth, and a higher margin business. However, it may be tough for public investors to bet on Casper being able to successfully expand to these new categories where they have less expertise and less brand authority.
2. Physical stores seem to be working for Casper, and they plan to triple down on brick-and-mortar retail over the next few years. However, true cash-on-cash payback is still unclear.
It seems counterintuitive that digitally native brands would open physical stores, as one of the benefits of selling online is avoiding overhead costs, which enables lower prices and a better product. However, Casper currently operates 60 physical stores in North America, and plans to more than triple this in the next few years. Casper’s stores are 1,750–2,250 square feet (about half the size of the typical U.S. mattress store), and stores operating for one year or longer generate $1,600 in annual net sales/sellable square foot. This is significantly ahead of other mattress stores, many of which generate a maximum of ~$1,000 in sales per square foot.
It’s difficult to assess profitability of the stores. Casper reports that stores open longer than a year are “four-walls profitable,” which accounts for revenue less operating expenses, but excludes set-up costs and non-allocatable marketing, G&A, and other expenses (some have argued that this metric is outdated). The company expects stores to be cash-on-cash profitable within 18–24 months, which is about average for retail — though the S-1 is not specific about how many of the current stores have reached this level of profitability.
From a consumer engagement and brand awareness perspective, the stores appear to be working. The average consumer spends 25 minutes in a Casper store, and the company has seen ~2x faster growth in D2C sales in markets with a physical Casper store compared to markets with e-commerce only. Casper’s AOV for retail stores of $820 for the nine months ended September 30, 2019 is also 15% ahead of the company’s e-commerce AOV of $710. We expect physical expansion to become increasingly common in D2C, as founders of companies like Away and Winky Lux have also reported higher sales or retention in markets with physical stores.
3. Casper is still first-purchase profitable — but LTV/CAC looks fairly weak, and marketing spend may be trending in a troubling direction.
Casper doesn’t reveal customer acquisition costs, but does state that they have remained first purchase profitable (gross profit minus marketing) from 2017 through Q3 2019. The company spent $422.8M on marketing from 2016 through Q3 2019, and has served 1.4M customers since 2014. If we conservatively calculate CAC by allocating all of those customers to 2016 and beyond (which is clearly not accurate, but gives a lower CAC as more customers are “assigned” to the same spend), this yields a $302 CAC.
We can estimate a ~$765 AOV for Casper, given a $710 AOV for e-commerce and an $820 AOV for retail channels. Given refunds, returns, and discounts of $80M on gross revenue of $392M, we can calculate that ~20% of revenue is either refunded or discounted. We (conservatively) assume that 5% of this is true refunds and that discounts are already accounted for in AOV, and therefore adjust the AOV down to $727. Given Casper’s 16% repeat purchase rate (we assume 1 repeat order per repeat customer, which might not be accurate*), this gives us $843 in lifetime revenue per customer — at a 50.7% gross margin, this implies an LTV of $427.6.
*We also assume the AOV of the first order is the same as the AOV of the second order — the S-1 states that repeat customers “most frequently return to purchase the same product.”
These numbers yield an estimated LTV/CAC of 1.4x for Casper. This is likely fairly conservative, as it uses a current LTV (we have AOV numbers for 2019, and AOV has increased over time) but a historical CAC from 2016–2019 (and we would expect CAC increased over this time range). There are a few directions this ratio could go. If the company continues to grow gross margin (up to 51% for 2019 vs. 43% in 2016) through better manufacturing or higher margin products, or further increases AOV or repeat purchases, LTV will improve. However, with rising CACs on the digital channels that D2C brands rely on, we also wouldn’t be surprised to see this number creep up.
1.4x isn’t a very exciting LTV/CAC ratio for a company that is positioning itself as a consumer tech business (we’d ideally like to see 3x+ even for a non-tech D2C brand). However, Casper’s sales and marketing spend as a % of revenue has been fairly consistent over the last eight quarters between 35–40% — this implies that Casper may be able to continue to scale the business without CAC skyrocketing.
4. Though Casper now sells through other retailers, D2C continues to dominate revenue. This has positive implications for Casper’s brand, but may limit revenue expansion via partnerships.
Casper sells not only on its own site and stores, but also through other retailers. According to the company’s S-1, Casper has 18 retail partners. This includes stores like Amazon, Costco, and Target, which many D2C brands have famously avoided due to pricing pressure and lack of control over the customer experience. Casper has been selling on Amazon since 2015, in Target since 2017, and in Costco since 2018.
Despite the size of many of these partners, 83% of Casper’s revenue for the first nine months of 2019 came from D2C purchases. This is a slight decrease from 88% D2C revenue in 2018, but it’s still somewhat surprising to see that these huge retailers are driving such a small portion of Casper’s revenue. As expected, gross margins are also lower for retailer sales than from the company’s own channel.
There are tradeoffs to D2C brands partnering with other retailers. Companies like Harry’s (and later, Dollar Shave Club) benefited significantly from appearing in Walmart and Target. However, products like mattresses typically have a longer lead time to purchase, are difficult to transport, and seem to be less suited to discovery in other stores (it’s rare to stumble upon a mattress and make an impulse purchase). Casper’s retailer partnership revenue numbers may not be encouraging to similar brands looking to big box retail to give their revenues a boost. However, it’s also possible that customers are discovering Casper in more traditional stores and then purchasing online — which is positive for Casper’s brand awareness and ability to convert customers on a higher margin channel.
Conclusions
We’re interested to see the public market’s reaction to this IPO, but aren’t expecting it to be particularly positive. Casper is both unprofitable (with widening losses) and not growing particularly quickly, a tough combination in today’s market conditions. Casper does make a profit on the average order, which can’t be said for every D2C company, but the LTV/CAC is relatively low (even with our fairly generous assumptions). We don’t yet see a true “tech” component of Casper’s business that could scale near-exponentially with limited marketing spend — though some of the product expansion ideas mentioned in the S-1 could get them there.
Getting a peek at Casper’s metrics has made us even more curious about the other D2C brands we use (and love!) — how many of them have business models that will eventually be able to survive without VC funding? We’re curious to see if any of these brands will successfully make the case that they deserve to trade at a higher multiple than traditional retail companies. We’ll also be looking to see how multiples of later stage D2C brands at exit (either IPO or acquisition) trickle down to early stage brands raising VC rounds.
We’d love to get your thoughts on anything you found to be particularly surprising in the S-1 that we didn’t cover — tweet us @venturetwins!
We’re excited about the D2C economy more broadly, and have recently been spending time on software companies that provide infrastructure for next gen brands. If you’re a founder working on something in this space, email us at twins@crv.com!
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