💥Projection Poppycock: Casper vs. Mattress Firm💥

🛏 Casper Joins Long List of Unicorns & Prospective IPOs 🛏

News emerged this week that Casper — the direct-to-consumer mattress company that is now becoming less-and-less direct-to-consumer and more-and-more brick-and-mortar (solo, and at Costco and Target) — intends to join the frenzied rush of money-losing companies headed towards a public offering in the midst of once-inverted yield curves and fears of recession. The appetite for IPOs is so frenetic that Lyft’s IPO was over-subscribed after a mere two days of roadshow — this, notwithstanding the fact that the company (a) has blown through crazy piles of money and (b) is unsure of its business model and whether it will ever even earn a profit. It then priced above the high end of its initial range and then popped like a champagne cork once shares opened for trading.

Source: Yahoo Finance

Because, you know, whatevs: details shmetails. IPO!!*

The Information got its hands on some leaked Casper financials (paywall) and…spoiler alert! It, too, “continued to lose money” ($18mm in Q3). That said, in Q3 of 2018, the mattress maker reportedly had net revenue of $105.3mm (a 60% YOY increase) on $34.9mm of marketing spend (“only” a 12.9% increase), projecting net revenue of $373mm for fiscal year 2018 and $8mm of EBITDA for 2019. Per The Information, here is a summary of Casper’s financials:

Source: The Information

Also:

Casper’s presentation also contained bullish forecasts for the future, with net revenue jumping to $1.655 billion and $2.135 billion in 2022 and 2023 respectively, and EBITDA of $33 million and $450 million during those years. (emphasis added)

For North America, which accounts for the vast majority of the company’s business, ecommerce represented over 68% of its third quarter gross revenue, while retail was just over 11%. (emphasis added)

The Information piece includes no data points about the number of stores that Casper ultimately expects to deploy for its growth push but CNN reported last year that Casper hopes to have 200 stores by 2021 (a figure reiterated by Fortune in the tweet below). News surfaced recently that Casper also just closed on a $100mm Series D financing provided by, among others, Target Corp ($TGT), the CEO of Canada Goose Holdings ($GOOS) and the former co-founder and chairman of Crate & Barrel. Total funding is up to $340mm. Per Fortune, “[t]he startup will use the capital to expand internationally and grow its physical retail stores.”

DTC startups opening up stores at a time their competitors are closing stores is one of the most amusing ironies that must piss off traditional retail execs so much!https://t.co/nGrKRNUkpJ pic.twitter.com/vcTvzvORV3

— Sar Haribhakti (@sarthakgh) March 28, 2019

$W $AMZN Will be interesting to see the optimal store count for e-commerce retailers who are opening stores to primarily increase online marketing efficiency. The top 75 cities account for roughly half the population in the United States, so maybe 50-100ish? https://t.co/ZgWbFhvZKv

— Gavin Baker (@GavinSBaker) March 29, 2019

In total, those are some bullish projections considering the competitive landscape:

The online mattress market has seen increasing competition in recent years from retailers including Amazon and Walmart. There are also other startups, such as Purple and Tuft & Needle, which was acquired by the mattress manufacturer Serta Simmons Bedding last year. A large mattress store chain, the Mattress Firm, filed for bankruptcy protection last year, which Casper noted in its presentation as a favorable event for the competitive landscape. (emphasis added)

Oy, Mattress Firm. SAVAGE BURN, BRO!! 🔥

Speaking of Mattress Firm, we have projections there too: thank you bankruptcy!! And this allows for a fascinating juxtaposition.

Source: Mattress Firm Disclosure Statement

With a fraction of the brick-and-mortar presence, Casper projects to have net revenue that is merely $300mm less than Mattress Firm by 2023! How’s that for a commentary about disruption, e-commerce and brick-and-mortar retail? Note that Mattress Firm expects to have $630mm in fixed store expenses (for approximately 2500 stores)** while Casper would have approximately $127mm. Per The Information:

“Casper said each new store in the U.S. typically involves $635,000 in capital expenditures and $70,000 in inventory, with an average payback of less than 24 months.”

If we’re doing our math right, that means Casper has a significantly larger per-store capex spend than Mattress Firm. On the plus side, unless they’re total frikken morons (or trolls), Casper likely won’t have competing stores sitting literally across the highway from one another.*** So, there’s that.

CEO Philip Krim once said, “We’ve never been anti-retail — just anti-mattress retail.”

ANOTHER SAVAGE BURN, BRO!! 🔥🔥

He also said:

"Normally you open a store, have to build presence, then the store loses money and eventually pays back after many years," Krim said. "We have such a productive digital business that we’re profitable on day one of opening a store."

(PETITION Note: not sure how you’re “profitable on day one of opening a store” when the average payback is “less than 24 months” but who are we to call out competing narratives?)

Casper projects $450mm in EBITDA by 2023. In contrast, Mattress Firm projects merely $274mm. Casper has the benefit of landing brick-and-mortar space at a time when landlords are more forgiving with rents; it also has the hyped-up DTC narrative blowing at its back — a clear contrast to the old and stodgy market view of Mattress Firm (which, to be fair, also was able, over the course of its bankruptcy, to renegotiate a meaningful number of its leases with landlords). Said another way, Casper simply seems better positioned to omni-channel its way to success while incumbents like Mattress Firm continue to play catchup. 

Now, these are projections, right? So, query which kind of projection is more full of sh*t? Startup projections or bankrupted debtor projections? It’s a coin flip. In reality, the competitive posture of Casper vs. Mattress Firm four years from now is anyone’s guess. More likely than not, one or both of them are overly optimistic here. But if Casper is right about its projections, that could lead to a significant surprise for Mattress Firm. And given Mattress Firm’s previous strategies, would you want to put your money on Mattress Firm over Casper?

Continue to short strip mall landlords.

*****

Elsewhere in sleep disruption, S&P Global Ratings downgraded Serta Simmons Bedding LLC from B- to CCC+, stating:

…operating performance deteriorated in the fourth quarter of 2018 well below our expectations due to large volume declines with top customers and industry headwinds, leading to adjusted leverage increasing to near 11x as of Dec. 29, 2018.

😳

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*Who stands to make money from such an IPO? Investors include Target Corp. ($TGT), Lerer Hippeau Ventures, IVP and New Enterprise Associates. Leonardo DiCaprio, Kyrie Irving and 50 Cent are also early backers.

**Mattress Firm had approximately 3250 stores on its chapter 11 bankruptcy petition date. According to certain bankruptcy materials, the company indicated that it would shed approximately 700 locations.

***Callback to “Mattress Firm Finally Rips the Band-Aid Off (Short Landlords),” wherein we wrote:

Thanks to an overly aggressive growth-by-acquisition strategy, you could essentially turn left and see a Mattress Firm, turn right, see a Mattress Firm, and turn around and see a Mattress Firm. 

And the company actually noted in its bankruptcy filing:

While these acquisitions have allowed Mattress Firm to enter major markets in which it previously did not have a significant presence, and to significantly expand its share of the retail market, they also left Mattress Firm with too many newly-rebranded stores in close proximity to existing Mattress Firm stores. The result has been a significant increase in Mattress Firm’s occupancy and related costs and a negative impact on the profitability of hundreds of its stores. There are many examples of a Mattress Firm store being located literally across the street from another Mattress Firm store.

💣Diebold. Disrupted.💣

Are Point-of-Sale & Self-Checkout Systems Effed (Short Diebold Nixdorf)?

Forgive us for returning to recently trodden ground. Since we wrote about Diebold Nixdorf Inc. ($DBD) in “💥Millennials & Post-Millennials are Killing ATMs💥,” there has been a flurry of activity around the name. The company…

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#BustedTech's Secret: Assignment for the Benefit of Creditors

Long Private Markets as Public Markets

⚡️🤓Nerd alert: we need to lay a little foundation in this one with some legal mumbo-jumbo. Consider yourself warned. Solid payoff though. Stick with it.🤓⚡️

Allow us to apologize in advance. It’s summer time and yet we’ve been nerding out more often than usual: on Sunday, we dove into net-debt short activism, for goodness sake! We know: you want to just sit on the beach and read about how Petsmart implicates John Wick. We get it. Bear with us, though, because there is a business development aspect to this bit that you may want to heed. So attention all restructuring professionals (and, peripherally, start-up founders and venture capitalists)!

Recently the Turnaround Management Association published this piece by Andrew De Camara of Sherwood Partners Inc, describing a process called an “assignment for the benefit of creditors” (aka “ABC”). It outlines in systematic fashion the pros and cons of an ABC, generally, and relative to a formal chapter 11 filing. When the bubble bursts in tech and venture capital, we fear a number of you will, sadly, become intimately familiar with the concept. But there’ll be formal bankruptcies as well. ABCs won’t cut it for a lot of these companies at this stage in the cycle.

Let’s take a step back. What is the concept? Per Mr. De Camara:

An ABC is a business liquidation device governed by state law that is available to an insolvent debtor. The ABC procedure has long existed in law and is sometimes addressed in state statutes. In an ABC, a company, referred to as the assignor, transfers all of its rights, title, and interest in its assets to an independent fiduciary known as the assignee, who liquidates the assets and distributes the net proceeds to the company’s creditors. The assignee in an ABC serves in a capacity analogous to a bankruptcy trustee in a Chapter 7 or a liquidating trustee in a Chapter 11.

He goes on to state some characteristics of an ABC:

• Board and shareholder consent is typically required. “If a company is venture-backed, it may be required to seek specific consent from both preferred and common shareholders. It is possible to enter publicly traded companies into an ABC; however, the shareholder proxy process increases the difficulty of effectuating the ABC and results in a much longer pre-ABC planning process.”

• There is no discharge in an ABC.

• Key factors necessitating an ABC include (a) negative cash burn + no access to debt or equity financing, (b) lender wariness, (c) Board-level risk as a lack of liquidity threatens the ability to pay accrued payroll and taxes, and (d) diminished product viability.

And some benefits of an ABC:

• ABC assignees have a wealth of experience conducting liquidation processes;

• The assignee manages the sale/liquidation process — not the Board or company officers — which, as a practical matter, tends to insulate the assignee from any potential attack relating to the process or sale terms;

• Lower admin costs;

• Lower visibility to an ABC than a bankruptcy filing;

• Secured creditors general support the process due to its time and cost efficiency, not to mention distribution of proceeds; and

• Given all of the above, the process should result in higher distributions to general unsecured creditors than, say, a bankruptcy liquidation.

Asleep yet? 😴

Great. Sleep is important. Yes or no, stick with us.

ABCs also have limitations:

• Secured creditor consent is needed for use of cash collateral.

• Buyers cannot assume secured debt without the consent of the secured creditor nor is there any possibility for cramdown like there is in chapter 11.

• There is, generally, no automatic stay. This bit is critical: “While the ABC transfers the assets out of the assignor and therefore post-ABC judgments may have no practical value or impact, litigation can continue against the assignor, and the assignee typically has neither the funding nor the economic motivation to defend the assignor against any litigation. In addition, hostile creditors may decide to shift their focus to other stakeholders (i.e., board members or officers in their capacity as guarantors or fiduciaries) if they believe there will likely be no return for them from the ABC estate.”

• Assignees have no right to assign executory contracts, diminishing the potential value of market-favorable agreements.

• No free-and-clear sale orders. Instead you get a “bill of sale.” Choice quote: “A bill of sale, particularly from an assignee who is a well-known and well-regarded fiduciary, is a very powerful document from the perspective of creditor protection, successor liability, etc., but it does not have the same force and effect as a free-and-clear sale order from a bankruptcy court.”

The question right now is, given the robust nature of the capital markets these days, should you care about any of the above? Per Pitchbook:

This is a golden age for venture capital and the startup ecosystem, as illustrated by PitchBook's latest PitchBook NVCA-Venture Monitor. So far this year, $57.5 billion has been invested in US VC-backed companies. That's higher than in six of the past 10 full years and is on pace to surpass $100 billion in deal value for the first time since the dot-com bubble.

Fundraising continues at breakneck speed. Unicorns are no longer rare, and deal value in companies with a $1 billion valuation or more is headed for a new record. The size of VC rounds keeps swelling. Deep-pocketed private equity players are wading in.

Signs of success (or is it excess?) are everywhere you look. On the surface, delivering a resounding verdict that the Silicon Valley startup model not only works, it works well and should be emulated and celebrated.

But what if that's all wrong? What if this is another mere bubble and the VC industry is in fact storing up pain…?

That's the question posited by Martin Kenney and John Zysman—of the University of California, Davis, and the University of California, Berkeley, respectively—in a recent working paper titled "Unicorns, Cheshire Cats, and the New Dilemmas of Entrepreneurial Finance?"

Instead of spending millions, or billions, in the pursuit of unicorns that could emulate the "winner-takes-all" technology platform near-monopolies of Apple and Facebook and the massive capital gains that resulted, VC investors and their LP backers could instead be buying a bunch of fat Cheshire cats. Bloated by overvaluation, and likely to disappear, leaving just a smile and big losses, since many software-focused tech startups have no tangible assets.

They then ask whether there’s more here than meets the eye. More from Pitchbook:

The problem is that this cycle has been marked by easy capital and a fetishization of the early-to-middle parts of the tech startup lifecycle. Lots of incubators and accelerators. "Shark Tank" on television. "Silicon Valley" on HBO. Never before has it been this easy and cheap to start or expand a venture.

Yet on the other end of the lifecycle, exit times have lengthened, as late-series deal sizes swell, reducing the impetus to IPO (in search of public market capital) or sell before growth capital runs out.

So, what’s the problem?

…in the view of Kenney and Zysman, the VC industry lacks discipline, seeking disruption and market share dominance without a clear path to profitability. You see, VC-fueled startups aren't held to the same standard as existing publicly traded competitors who must answer to investors worried about cash flows and operating earnings every three months. Or of past VC cycles where money was tighter, and thus, time to exit shorter.

We’ll come back to the public company standard in a second.

The interesting thing about the private markets becoming the new public markets (with funding galore) is that when the crazy frenzy around funding (PETITION NOTE: read the link) eventually stops, the markets will just be the markets. And all hell will break lose. The question then becomes whether a company has enough liquidity to stem the tide. What happens if it doesn’t?

An ABC may very well be a viable alternative for dealing with the carnage. But with private markets staying in growth stages privately for longer, doesn’t that likely mean that there’s more viable intellectual property (e.g., software, data, customer lists)? That a company has a bigger and better San Francisco office (read: lease)? That directors have a longer time horizon advising the company (and, gulp, greater liability risk)? Maybe, even, that there’s venture debt on the balance sheet as an accompaniment to the last funding round (after all, Spotify famously had over $1b of venture debt on its balance sheet shortly before going public)?

All of which is to say that “the bigger they come, the harder they fall.” When the music stops — and, no, we will NOT be making any predictions there, but it WILL stop — sure, there will be a boatload of ABCs keeping (mostly West Coast) professionals busy. But there will also be a lot of tech-based bankruptcies of companies that have raised tens of millions of dollars. That have valuable intellectual property. That have a non-residential real property lease that it’ll want to assign in San Francisco’s heated real estate market. That have a potential buyer who wants the comfort of a “free and clear” judicial order. That have shareholders, directors and venture capital funds who will want once-controversial-and-now-very-commonplace third-party releases from potential litigation and a discharge.

Venture capitalists tend to like ABCs for private companies because, as noted above, they’re “lower visibility.” They like to move fast and break things. Until things actually break. Then they move fast to scrub the logos off their websites. What’s worse? Visibility or potential liability?

And then there are the public markets.

A month ago, we discussed Tintri Inc., a California-based flash and hybrid storage system provider, that recently filed for bankruptcy. Therein we cautioned against IPOs of companies with “massive burn rates.” We then went on to highlight the recent IPO of Domo Inc. ($DOMO) and noted it’s significant cash burn and dubious reasons for tapping the public markets, transferring risk to Moms and Pops in the process. The stock was trading at $19.89/share then. Here is where it stands now:

In the same vein, on Monday, in response to Sunday’s Members’-only piece entitled “😴Mattress Firm's Nightmare😴,” one reader asked what impact a potential Mattress Firmbankruptcy filing could have on Purple Innovation, Inc. ($PRPL), the publicly-traded manufacturer and distributor of Purple bed-in-a-box product. Our response:

And we forgot to mention rising shipping costs (which the company purports to have mitigated by figuring out…wait for it…how to fold its mattresses).*

And then yesterday, Bloomberg’s Shira Ovide (who is excellent by the way) reported that “Cash Wildfire Spreads Among Young Tech Companies.” She wrote:

It’s time to get real about the financial fragility of young technology companies. Far too many are living beyond their means, flirting with disaster and putting their investors at risk. 

Bloomberg Opinion examined 150 U.S. technology companies that had gone public since the beginning of 2010 and were still operating independently as of Aug. 10. About 37 percent had negative cash from operations in the prior 12 months, meaning their cash costs exceeded the cash their businesses had generated. 

A handful of the companies, including online auto dealer Carvana Co., the mattress e-commerce company Purple Innovation Inc. and health-care software firm NantHealth Inc., were on pace to burn through their cash in less than a year, based on their current pace of cash from operations and reserves in their most recent financial statements.

In addition to Purple Innovation, Ms. Ovide points out that the following companies might have less than 12 months of cash cushion: ShiftPixy Inc. ($PIXY), RumbleON Inc. ($RMBL), RMG Networks Holding Corp. ($RMGN), NantHealth Inc. ($NH), Carvana Co. ($CVNA), and LiveXLive Media Inc. ($LIVX).

She continued:

The big takeaway for me: Young technology companies in aggregate are becoming more brittle during one of the longest bull markets ever for U.S. stocks. This trend is not healthy. Companies that persistently take in less cash than they need to run their businesses risk losing control of their own destinies. They need continual supplies of fresh cash, which could hurt their investors, and the companies may be in a precarious position if they can’t access more capital in the event of deteriorating market or business conditions.

It’s not unusual for young companies, especially fast-growing tech firms, to burn cash as they grow. But the scope of the companies with negative cash from operations, and the persistence of some of those cash-burning companies for years, was a notable finding from the Bloomberg Opinion analysis.

Notable, indeed. There will be tech-based ABCs AND bankruptcies galore in the next cycle. Are you ready? Are you laying the foundation? Are you spending too much time skating to where the puck is rather than where it will be?

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*We’ll take this opportunity to state what should be obvious: you should follow us on Twitter.

But, seriously, and more importantly, we know we tout the disruptive effects of the direct-to-consumer model. But make no mistake: we are WELL aware that a number of these upstarts are going to fail. Make no mistake about that.

😴Mattress Firm's Nightmare😴

Mattress Firm May File for Bankruptcy (Long Cardboard Box Manufacturers)

Source: PETITION LLC

⚡️Nerd alert: we need to lay a little foundation here.⚡️

For the uninitiated, a First Day Declaration (“FDD”) typically accompanies a chapter 11 petition when a debtor-company files for bankruptcy. The FDD is the first opportunity for a representative of a chapter 11 debtor to sell a particular narrative to the Bankruptcy Judge and other parties in interest; it sets the tone for the company’s “first day hearing,” which is the first formal appearance the company makes in bankruptcy court (typically within 24-48 hours after filing for chapter 11). The FDD is a descriptive document that often spells out the what, why and when of a company’s demise. Nearly all FDDs follow the same format: they (i) provide some color about the declarant, (ii) describe the history and nature of a business, (iii) delineate the capital structure, (iv) outline the events leading to bankruptcy, (iv) articulate the hopes for the bankruptcy case, and (v) summarize the relief sought on the first day. Lawyers often request that the FDD be admitted into the record at the first day hearing (subject to cross examination of the declarant).

Frustratingly, lawyers also often seem compelled to regurgitate the FDD once at the podium at the hearing. This is typically the role of the senior most partner on the matter, i.e., the person who — as it relates to certain firms — probably knows the least about the company, why it’s in bankruptcy and how the hell its going to grind its way out of it. We’re not entirely sure why they feel the need to do this: the judge has presumably read the papers. Perhaps they feel it’s necessary to repeat the narrative to set the tone for the case and establish credibility (more important in controversial cases than in uncontested hearings); perhaps they just like hearing themselves speak; or — the most likely justification — perhaps they bill by the hour and need to justify their (a) existence, (b) exorbitantly high billing rate and/or (c) first billing on the case caption. Maybe it’s all of the above. In any event, this custom is exactly the opposite of what lawyers are taught in law school: be concise and to the point.

We often like to imagine what the FDD would look like in certain situations. Long time PETITION readers may recall our mock FDD for Remington Outdoor Company. Well, we’re at it again. This time for Mattress Firm Holding Corp. Hopefully this will spare the estate some expenses.

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Direct-to-Consumer Retail Gets Big Funding

Away, Hims & Parachute All Get Growth Capital

This week was a big financing week for startups. In addition to the Pillpack purchase noted above, there was a ton of action in the direct-to-consumer consumer products space that should definitely have incumbents concerned.

Away, the NY-based “thoughtful” startup that makes travel products that “solve real travel problems” raised $50mm in fresh Series C funding from prior investors Forerunner Ventures, Global Founders Capital and Comcast Ventures. The company intends to use the funds to tap into global markets, expand its product line and continue its clicks-to-bricks initiative with six new retail stores in the second half of 2018. The company recently moved its headquarters within New York City in part thanks to a $4mm Empire State Development performance-based tax credit through the Excelsior Jobs Program.

Hims, the one-year old SF-based company that sells men’s prescription hair and sex products, raised $50mm in Series B-2 funding at a $400mm post-money valuation. Investors include IVP, Founders Fund, Cavu Venture Partners, Thrive Capital, Redpoint Ventures, Forerunner Ventures (notice a pattern here?), and SV Angel.

Earlier this year, beauty products maker Glossier raised $52mm in Series C funding (and subsequently added Katrina Lake from Stitch Fix to its board of directors), shaving company Harry’s raised $112mm in Series D funding, and athleisure brand Outdoor Voices raised $32mm.

But, wait. There’s more: here, there are a variety of startups going after your kitchenware and your bed. Parachute announced this week that it raised $30 million in Series C funding led by H.I.G. Growth Partners. Other investors include Upfront Ventures, Susa Ventures, Suffolk Equity, JAWS Ventures, Grace Beauty Capital and Daher Capital. With three stores currently, the company intends to take the funding to, like Away, expand its clicks-to-bricks plan with 20 more locations in the next 2 years.

Meanwhile, mattress e-tailer Purple is (strangely) doubling-down on its relationship with Steinhoff-owned Mattress Firm, the struggling bed B&M retailer. The tie-up now includes Mattress Firm locations in Sacramento, Austin, DC, Chicago and SF. We hope Purple has baked in bankruptcy protections into its deal agreements so that there’s not question as to ownership.

If you don’t think all of this has incumbent CPG executives worried, you’re not paying close enough attention.

Not to mention the private equity bros:

More from Ryan Caldbeck’s interesting thread here.

Slight tangent: note that nowhere is there any mention of disruption from consumer product subscription boxes.