Here’s What Casper Going Private Means Next For The Mattress Company

Private companies going public and then returning to private status are not such a rare occurrence anymore. But Casper seems to be doing the 360-degree flip in record time.

Casper Sleep CSPR , which only went public in February of 2020, announced this morning that it had agreed to be acquired by New York investment Durational Capital Management in a deal expected to be completed by the first quarter of 2022. That two-year spin in the public marketplace, while probably not a record, still is pretty fast and ends what has not been an especially pleasant ride for the company. After breaking through the $13 a share mark when it went public the stock has bounced around ever since and has traded under $5 since the summer. The buy-out is for $6.90 a share, a 94% premium over its Friday closing price.

The reasons for that poor stock performance are not too hard to figure out. Even as its total revenues rose, it losses continued to widen and its third quarter results released in conjunction with the go-private news showed a $25 million net loss, up from $16 million a year ago and also more than analyst forecasts.

Casper, one of the earlier direct-to-consumer players in the mattress space when it started up in 2014– and certainly the most visible with its high-power advertising and marketing campaigns – diversified into additional products like sheets and bedding, lighting and other sleep-related accessories. It had already begun opening its own stores when it started third-party distribution of its products, first with West Elm but then with big box national retailers like Target TGT , Bed Bath & Beyond BBBY and Nordstrom JWN . At last count its products could be found in close to two dozen retail brands in addition to its own online and in-store selling.

Durational, founded in 2017 by former hedge fund investment managers Matthew Bradshaw and Eric Sobotka, describes itself as focusing on “investing in consumer businesses with a long-term horizon and implementing operationally focused strategies.”

In its self-description of its management style on its website it says, “Durational brings a distinct approach to private equity by utilizing pattern recognition, non-linear thinking and analysis, long-term strategies, and collaboration with best-in-class management teams.” Impressive sounding, though probably not all that different in intent, if it is in language, to many other private equity investment firm mantras.

Durational currently owns Bojangles, the fast-food chicken chain, but says it has made previous investments in Churchill Downs, the home of the Kentucky Derby, and poultry processor Sanderson Farms SAFM , both of which it subsequently exited. This appears to be its first home furnishings investment.

The deal raises two big questions: why did Casper do it and what happens next. The answer to the first, such as it is, comes from the company in a statement attributed to CEO Philip Krim about the deal: Casper’s board “evaluated a range of strategic and financial alternatives over several months and determined, after careful consideration, that the transaction proposed by Durational is superior to all other alternatives available.” Interestingly, in conjunction with the deal, Krim, a Casper founder, is being replaced by Emile Arel as CEO. Arel spent the earlier part of her career on the merchandising side of Target and Gap GPS but more recently was a CEO first of Amazon subsidiary Quidsi and then plus-size apparel resource FULLBEAUTY, where according to her LinkedIn bio, “she led the Company through a debt restructuring and put them on the path to a digital transformation.”

She has been with Casper since September 2019 as president and chief commercial officer.

And it will be her job, no doubt, to answer that second question as to what happens next. Obviously her overriding challenge will be to get the company profitable. While its sales have continued to rise, its operating expenses including customer acquisition costs have continued to be a drag on earnings. To fix this, it may require a major change in its business model, either further expansion of its in-store business or a broadening of its product offerings to move into higher-purchasing-frequency merchandise. Competitors in the mattress business like Nectar have gone the latter route, expanding into other home furnishings under the Resident Home brand.

Other competitors have chosen different routes. The mattress brand Tuft & Needle was bought by bedding giant Serta Simmons in 2018 in what was described at the time as a merger. Purple, another brand in the space, went public before Casper, in 2017.

Like other direct-to-consumer players such as Warby Parker, which recently went public, Casper found its basic business model flawed, requiring its move into physical retailing. Warby Parker now gets more than half its revenue from its in-store operations.

Whether Casper will open more stores (it currently has about 70 in North America), choose to expand its distribution with additional retailers or move into other merchandise spaces will be closely watched going forward…although now those answers will be safely tucked behind the closed doors of private equity.