IPO Alert - Eve Sleep

From the Sunday Times:

CEO of Carpetright, Wilf Walsh, said he had "read about a matress company that floated on AIM this week, raised £35M, is now valued at £140M but last year made a loss of £11M".

"I don't know if Diane Abbott is the CFO there."

Bonitabeach

No position.

Did a bit of research on Eve. They do not make the beds, apparently made in Newcastle. There are several other products on the market at similar prices. Reviews on their website are only the good ones. Check Amazon for other reviews, some mention too hot and too hard. Good points are marketing and reviews are good, negatives high marketing spend, no moat, not unique product. Could take off on back of marketing/hype but I think it's quite risky and if there is a downturn soon I can't see them surviving.

Being a bit more honest and can I respectfully suggest that anyone who would buy this float in the aftermarket should consider not investing themselves. Of course there is a probability that this will be a success but a huge amount has to go right. There are simply much better risk/reward ratios out there.

I just can't see why anyone would buy this stock. £12m revenue in 2016 and hugely loss making. It is meant to be a low cost disruptor but the mattresses don't appear very cheap. Mattresses are also an infrequent purchase that are often driven by trusted brands. Having said that a lot of reviews for Eve are very good. But surely most of the attributes can be copied (this isn't high technology).

A key issue for me is that Eve Sleep has to continually spend a significant amount on marketing. For other companies such as Made.com the marketing covers all of their product lines. Are people going to "think of mattresses and think of Eve". I don't think so. The bull points I guess are that the mattress market is large but there are so many other brands out there.

I find memory foam too hot in summer, it's fine in winter, just my experience and yes there are lots of £100 off offers around at the moment. £500-£600 is a lot of money just for a mattress, I bought a Warren Evans bed and mattress for about £400. Probably good profit margin though.

I saw an advert for Eve on TV yesterday. The foam mattresses appear to be very similar to Tempur which I tried for a few weeks a couple of years ago. I couldn't get on with it so went back to a good old spring mattress. Having discussions with people regarding foam and traditional spring mattresses people seem to either love or hate them.

Revenue growth looks impressive but it seems a long way from becoming profitable which is a big turn off. I find buying at the IPO too risky. As a Minervini follower, I like to see a base form and a breakout before investing. So not for me but good luck!

To help with research I have done a quick little table of Eve vs competitors in the UK. I would say Made.com is a serious competitor as it is well-known (it sells furniture) and markets itself very well. Its products are also good quality. The downside with Made is that it doesn't allow ratings of its products; I personally wouldn't want to buy a mattress unless I was sure others rated it highly. Also if Casper expand in the UK (I am unclear if it has fast delivery times like Eve) then that could be a problem.

Eve doesn't seem to have a particular USP or moat in my opinion, at least in the UK market. Presumably it's just going to blow loads of cash on marketing and undercut the opposition. I don't see that as a great business model in this instance. Purplebricks (LON:PURP) has reach through its agents and a much larger marketing budget than any competitor; I don't see an equivalent USP here other than maybe in Europe there is less competition for Eve?

Thinking about it further I do think Simba has done very well by teaming up with John Lewis. Unlike its rivals you can now go into a reputable department store to try out its mattress. This is surely a big advantage over Eve?

I'd be interested to know more about its competitors. Simba has done a lot of marketing and I see now has a deal with John Lewis. Swoon editions, another popular new furniture company, also does it own mattress and I am pretty sure Casper is available in the UK? What if you don't like memory foam mattresses? I suppose it might expand in time to cover other types of mattress.

Interesting concept though and I'll have a peak at the IPO documentation. Some of the traditional companies like Bensons for Beds and Dreams have very tired looking shops (pun intended).

Another issue is that some of the traditional retailers have slow delivery times in my personal experience. I had to wait several weeks for my last mattress to be delivered which wasn't especially fun when I was a first time buyer with only a milkpan and a garlic crusher to count among my possessions.

Good institutional support -
Woodford 18.6%
Octopus 13.8%
DN Capital 11.6%
Channel 4 3.1%
Standard Life 3%
Hargreave Hale 3%

source: Admission Document

Take note that there is already competition in this space from Nigel Wray backed company, Simba.

Hi James -
The article does raise interesting questions.
The key question to my mind is, has this company got a business model which, when it reaches scale and critical mass, will produce above average profits, above average gross and net margins and great cashflow?
Unfortunately the admission document does not have enough information to help us answer this.
Looking at its bigger US rival, Casper, which Eve is copying lock stock and barrel, we can't do a look-across in a meaningful way. They too have published little in terms of financial data.
So this is high risk investment. It might become in term of share price trajectory, the next G4M, AO World, PurpleBricks, etc . Or it might not. That is why my investment made this morning is tiny, less than 1% of my portfolio.

I found this article a well-researched overview which can answer a couple of basic questions:

http://uk.businessinsider.com/eve-sleeps-ipo-valuation-growth-2017-5?r=US&IR=T

I was one of the first eve customers in the UK to buy their mattress back in march 2015 - it was so good I've bought another 3 since!! If they have more happy customers like me then they will do very well.

I see eve as a fantastic investment potential and a bit like Gear4Music but they are starting with their core own branded product (with higher margins), with the opportunity to expand with other white label and or partner brands to expand product range. Most importantly they believe in test & learn but led by a strong brand message / creative so they will iterate fast, find many little winners, be locally relevant as they expand globally but not go off brand message, which means big wins over time.

I have also been super impressed with their online marketing and TV advertising mix - its clear they are doing a lot of test & learn to optimise TV and the channel 4 equity deal was inspired in return for free ads. The messaging is strong but most importantly they are driving towards a break even where this then becomes a fly wheel. Others like Trivago and purplebricks have done this brand building model on TV really well to build scale and direct traffic rather than paying margin to distributers. It's also a great one for bypassing competitors who lack scale or who rely on google for traffic which is certainly the case with all the traditional mattress and bricks and mortar stores. On that point, many of their competitors are loosing out to them on google paid search as a) eve have a better value prop / price b) the competitor sites are really weak / poor converting so will be stealing some easy wins there.

The use of amazon is really impressive as they can use it as a volume driver and way to build scale in new markets and volumes with manufacturers enabling them to expand easily in US and Europe. One thing i'm most interested to track is that although Casper in the US is the big online matress player here, increasingly i'm seeing the most successful ecommerce companies that scale internationally come from markets like Europe / Asia, as they have to believe in test & learn and localisation at their core, and the US brands struggle to compete and grow efficiently in non english speaking markets. If eve can grow scale in Europe then they will have a profitable business at scale, that they can then use to invest to grow and compete in markets like the USA. In my industry it is most clear with players like Booking.com and Trivago who are winning against Expedia & Tripadvisor due to this exact reason.

Right better stop typing and start buying some eve shares!