PRPL - Team Research Report

Student Investment Fund
Equity Research Report

Analysts: Josh Christensen, Jordan Joynt, Abraham Lopez, Diana
Nguyen, Suraj Ramkumar, Lew Taylor, Alexa Van Komen
7 April 2020
Table of Contents
Table of Contents .................................................................................................................. 1

Executive Summary ............................................................................................................... 3
Investment Thesis ....................................................................................................................... 4
Business Model ..................................................................................................................... 5
Business Overview ...................................................................................................................... 5
Company History......................................................................................................................... 6
Competitive Advantage and Strategic Initiatives ....................................................................... 7
Patents and Intellectual Property ............................................................................................... 8
Revenue Growth and Breakdown ............................................................................................. 10
Products .................................................................................................................................... 11
Customer Satisfaction and Brand Recognition ......................................................................... 21
Research and Development ...................................................................................................... 22
Product Pipeline ........................................................................................................................ 22
Supply Chain.............................................................................................................................. 23
Cost Structure ........................................................................................................................... 26
Industry and Market Analysis .............................................................................................. 28
Industry Structure and Overview ............................................................................................ 28
DTC Competitors ...................................................................................................................... 29
Profitability ............................................................................................................................... 30
Key aspects of DTC companies ................................................................................................ 31
Industry Innovation .................................................................................................................. 33
Macroeconomic Drivers and Industry Outlook ....................................................................... 34
Competitive Landscape ............................................................................................................ 37
Porter’s Five Forces .................................................................................................................. 38
Industry Comparable Statistics ............................................................................................ 39
Industry Comparables ............................................................................................................... 39
Stock Performance .................................................................................................................... 41
Financial Analysis ...................................................................................................................... 42
Common-Sized Statements Analysis......................................................................................... 47
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Corporate Governance and Employees ................................................................................ 51

Management ............................................................................................................................. 51
Board Structure ......................................................................................................................... 53
Compensation ........................................................................................................................... 54
Key Initiatives & Say-Do Ratio ................................................................................................... 55
Earnings Performance ............................................................................................................... 58
Ownership Structure ................................................................................................................. 59
Insider Trading .......................................................................................................................... 61
Employees and Culture ............................................................................................................. 62
Risks.................................................................................................................................... 65
Ownership Risk ......................................................................................................................... 65
Rapid Growth ............................................................................................................................ 66
Reputation ................................................................................................................................ 67
Size & Suppliers ......................................................................................................................... 68
COVID-19 ................................................................................................................................... 69
Recession .................................................................................................................................. 70
Debt........................................................................................................................................... 71
Growth Strategies ............................................................................................................... 72
Earnings and Valuation ........................................................................................................ 74
Overview ................................................................................................................................... 74
Income Statement .................................................................................................................... 74
Balance Sheet............................................................................................................................ 75
Cash Flow .................................................................................................................................. 75
Revenue Build ........................................................................................................................... 76
Balance Sheet Assumptions ...................................................................................................... 78
Valuation ................................................................................................................................... 80
Conclusion........................................................................................................................... 85
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Executive Summary
Purple Innovations (also referred to as “Purple” and “the Company” throughout this report)
was founded in 2010 and is currently headquartered in Lehi, Utah. Purple manufactures,
markets, and distributes advanced-technology mattresses through direct-to-consumer and
retail distribution channels. The Company’s current market is within the United States, but it
plans to expand internationally. Purple is a relatively new competitor in the mattress and
bedding industry but has experienced rapid growth since going public in 2018. It is the first
publicly-traded direct-to-consumer mattress company and a market leader in this vertical, both
by revenue growth by and customer satisfaction.
The Company earns revenue from the sales of its unique mattresses and complimentary
bedding products. Purple also manufactures and sells other premium comfort products. The
Company’s non-mattress offerings are broken out as “other” in its financial statements and
include pillows, sheets, weighted blankets, duvets, bed frames, seat cushions, and additional
comfort products. All of Purple’s cushioned offerings are made with its proprietary Purple Grid
in a highly efficient, vertically integrated manufacturing process. Purple’s products are sold at
competitive prices with flexible financing options.
The mattress industry is characterized by high fragmentation and low product innovation. The
last major mattress design shift was in the 1990s, as companies modernized materials from coil
springs to foam. Nearly 30 years later, foam remains the industry standard as manufacturers
have not invested in major innovations. This stagnation in technology has resulted in minimal
product differentiation and competitive advantages for existing companies. Purple, with a core
competency in innovation, has been able to break the status-quo and take advantage of
consumers’ desire for cutting edge comfort. This value add is supported by Purple’s demand
backlog and reports of customer satisfaction through reviews and awards.
Purple’s operations are vertically integrated, allowing it to benefit from proprietary

manufacturing capabilities, research and development, and marketing. Cost savings and
omnichannel distribution are recognized as primary benefits that create immense value for the
Company. Most importantly though, Purple’s vertical integration shortens the information
feedback loop, allowing for rapid innovation and adaptation to consumer preferences and
product line responses. This factor will allow the Company to continue its history of consistent
revenue growth, allow the company to reach profitability, and scale operations effectively.
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Investment Thesis
We believe Purple is dramatically undervalued at $5.24 per share. Our target price for Purple is
$10.03 per share, offering a potential upside of 91.4%. The recent market drop caused by
COVID-19 concerns has greatly increased this upside and has created a valuable opportunity for
investors. This pricing opportunity, paired with Purple’s competitive advantage and market
positioning, provides a unique opportunity to outperform the market. The Company trades on
the NASDAQ under the ticker “PRPL.”
Our investment thesis is as follows:
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Business Model
Business Overview
Purple Innovations is a US-based comfort technology company that makes and sells premium
mattresses and complimentary products. Its offerings are distributed via a direct-to-consumer
(DTC) channel and in retail locations throughout the country. The Company is based around
material innovation and manufacturing techniques that are proprietary to Purple. Offering the
first real change in mattress materials and construction in the last 30 years, Purple’s primary
products consist of a gel-based Hyper-Elastic Polymer (HEP) formed into a cushioning grid (think
of a giant, stretchy, elastic purple waffle). This grid is the foundation of its proprietary collapsing
column technology, that provides both support and cradling qualities in Purple’s mattresses
and cushions.
The Purple Grid is the first challenger to memory foam, the most popular component of
mattresses today. Purple’s HEP maintains all of the benefits of great mattresses made from
memory foams, with none of the negatives. Stretching to more than fifteen times its resting
size and then immediately recoiling, the Purple Grids perfectly distribute weight, remain
temperature neutral, limit motion transfer, and instantly adapt to users as they move. While
fundamentally interested in achieving the highest levels of comfort and sleep for its customers,
Purple focuses on the belief that the best sleep starts with the best possible sleep surface and
the best possible bed. Purple’s technology is developed and engineered with extensive science
and research, supporting the Company’s claim of creating the “best mattress that has ever
been made.”
Resoundingly positive customer responses and a loyal brand following have reinforced this
claim, giving way to the promotion of new product developments and launches. Avid online
advocates promote the spread of the brand through word of mouth and extensively positive
reviews. With clear value propositions backed by technological innovations and scientific
research, Purple is positioned to offer the next evolution in mattress and bedding products.
Purple’s innovative material science also creates an opportunity to expand into virtually any
lying, sitting, standing, or cushioning product, allowing for extensive revenue opportunities.
Purple is based in the US, providing the opportunity to tap international markets, which has the
potential to grow revenues dramatically.
Purple is a valuable company and an attractive investment for the following reasons:
• Purple’s proprietary grid has allowed the Company to create distinctly different
products in the mattress industry, which previously had little to very little differentiation
in products.
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• The technological differentiation in Purple products makes its cushions more

comfortable than the competition, solving many of the recurring problems seen in foam
mattresses.
• Purple’s technology is patented, giving it a protected competitive advantage.
• The Company focuses extensively on research and development and brand recognition,
allowing the Company to continue building market share.
• Its technology can be applied to many products and industries. The Company has
already expanded its complimentary products to include pillows, sheets, seat cushions,
dog beds, and more. These future applications are highly valuable due to Purple’s core
competency in comfort innovation, not just mattress construction.
• Purple has proprietary manufacturing processes and is vertically integrated which leads
to major cost benefits and advanced research and development efforts.
Company History
Tony and Terry Pierce, a rocket scientist and a mechanical engineer, originally founded Purple
Innovations as a cushioning technology for NASA. The brothers soon transitioned their
technology into the medical industry, designing patented “Floam” seat cushions meant for
wheelchairs and hospital applications. Expanding further into applications within medical and
other appropriate markets, the Pierces’ products were licensed and “used in seats, critical-care
medical beds (Hill-Rom), footwear (Nike), ankle/knee braces (Johnson & Johnson), golf bag
straps (Top-Flite), neonatal intensive care (preemie baby) ‘nests,’ surgical positioning cushions,
surgical tourniquet cushions, ballet cushions, industrial knee pads, and more.”
In 1996, the Pierce brothers upgraded their proprietary foam and invented Hyper-Elastic
Polymer, a uniquely soft and strong material that could stretch up to fifteen times its normal
size. Molded into a grid design, HEP was extremely durable and never took a body impression,
all characteristics differentiating it from foam products. Additionally, HEP was less expensive to
produce, further increasing the material’s value. Tony and Terry then “licensed [HEP] to makers
of critical care medical beds (Stryker Medical); consumer mattresses in Europe (Svane by
Ekornes), Japan (Francebed), and Australia (Sleepmaker); backpack straps (Jansport); shoe
insoles (Dr. Scholl’s Massaging Gel and Sof-Sole); pillows (Sleep Innovations); soft-catch toy
balls (Nickelodeon); wheelchair cushions (EquaPressure).” 1
1
Purple webpage – History tab
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Despite the lucrative licensing business model, the brothers wanted to increase HEP’s
application scope, so that everyone could experience the true value proposition of the grid
technology. So, in 2013 the Pierces invented the “Mattress Max,” a large, proprietary machine
that produces huge slabs of their now purple-colored HEP slabs. The Mattress Max can be
thought of as a massive waffle iron, producing giant purple waffles that are then cut to needed
sizes and assembled into a variety of products. Since manufacturing takes place in-house, the
brothers were able to easily take advantage of DTC distribution capabilities and build a website
to launch the Purple Innovations company.
In 2018, Purple went public through a reverse merger process with a special purpose
acquisition company (SPAC) to raise capital and meet the rapidly rising demand for its products.
Prior to its entrance to the public markets, Purple had bootstrapped its operations without
accepting any growth financing in exchange for equity. Its first product, a king-sized mattress,
was funded with a Kickstarter campaign in 2015. This has allowed the Pearce brothers to
maintain majority ownership to this day. The reverse merger process and ownership structure
are discussed in depth in the Corporate Governance section of this report.
Purple still manufactures in its Grantsville, Utah facility and recently invested in building several
new Mattress Max machines, enabling the Company to increase product output. As of 2019,
Purple has a positive EBITDA and is continually improving its production capabilities. As the
Company continues to improve operations, we expect profit margins to increase as revenues
grow from further domestic sales and anticipated international expansion.
Competitive Advantage and Strategic Initiatives
Purple’s longevity and future growth depend on its ability to establish a secure competitive
advantage that differentiates it from the rest of the comfort industry. We employ the VRIO
framework to analyze Purple’s competitive landscape. This framework asks four basic
questions, designed to uncover a firm’s long-term strategy and its competitive advantage.
Valuable – How does Purple exploit an opportunity to generate value for consumers?
Purple has established value for customers by creating unique sleep and seating products that
have brought improved comfort, health, and enjoyment into its customers’ lives. Purple has
materially updated an outdated industry. This value is proven by its demand backlog, customer
support for new product offerings, and vastly positive customer responses.
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Rare – Is Purple’s capability to produce such value in the hands of a relative few?
Traditionally, Purple has been a DTC mattress provider but with progress towards a balanced
omnichannel distribution strategy, it is uniquely positioned to offer products wherever the
customer wants to be served. This is rare because traditional mattress companies cannot ship
directly, due to the construction of their products, and DTC companies won’t sell through
wholesalers because their products compete on price and are virtually indistinguishable.
Purple’s proprietary components and processes allow it to do both because its products offer a
competitive price point, verified comfort, and DTC capabilities.
Inimitable – How challenging is it for other firms to imitate?

Purple’s differentiating factors are protected by over 100 patents and trademarks which protect
the company from imitators. Purple also offers more than just beds. It has grown into a highly
regarded brand and offers an ecosystem of products for loyal customers. A Casper or Sleep
Number seat cushion would be unlikely to find success, because it is simply foam and fabric.
Reputable brand awareness and a financially viable, truly differentiated product are very
challenging to build. These factors make it hard for a competitor to imitate Purple.
Organizational – Is the firm ready to capture value?

Purple has proven its competency as a technology innovator in the industry. As the market
leader in DTC, manufacturing, technology, and marketing, Purple is poised for future growth
and profitability. It has the capability to meet rising levels of demand, introduce higher-margin
products, and expand to new markets.
Purple has a proven history of innovation that has resulted in a primary product that provides
unmatched comfort. Its products do this through pressure relief, support, temperature
neutrality, and responsiveness. Manufacturing expertise and proprietary technologies give
Purple the ability to effectively execute progressive growth strategies and offer consumers the
products they desire. As Purple grows revenues, its brand has followed in stride, primarily due
to its omnichannel distribution and viral marketing campaigns. Along with the introduction of
new products and entrance in emerging markets, we believe these advantages will lead Purple
to above-average growth, both for revenues and for its share price.
Patents and Intellectual Property
Purple is a technology leader and in order to protect its intangible assets, it relies heavily on
patents and trademarks. While the Company’s most recognizable inventions are the Hyper-
Elastic Polymer (the Purple Gel grid material) and the Mattress Max machine (the grid’s
production machine), Purple owns or has exclusive access to over 100 patents. The
manufacturing expertise, trade secrets, and technologies that are covered range from specific
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cushions to processes to the bags in which the mattresses are shipped. 2 These patents protect
Purple’s intellectual property both domestically and internationally but are sometimes licensed
to other manufacturers under unique circumstances. 3 The following figure expands on the
benefits of the HEP Purple Grid.
The patents that contribute significant value to Purple’s operations are expected to expire at
various dates over the next 14 years. While information regarding the expiration of each patent
is not readily available, assuming a standard 20-year patent life, the most critical elements of
the grid, the material (Patent 7,964,664) and the construction (Patent 8,919,750), expire in
2031 and 2034, respectively. 4,5 It is also worth noting that both of these patents are assigned to
EdiZONE, LLC, a Pearce brothers company, and then licensed exclusively to Purple.6
Purple’s proprietary technology has been backed by several awards. JD Power, the international
data analytics and consumer intelligence company, named Purple the highest-ranking mattress
in the Bed-In-A-Box category of the 2019 Mattress Satisfaction Report.7 This speaks to Purple’s
proprietary comfort technology and the resulting consumer responses.
2
https://purple.com/patents
3
2018 10-K pg.13
4
https://purple.com/patents
5
USPaTO, Patent Search tab
6
USPaTO, Patent Search tab
7
JD Power website
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Revenue Growth and Breakdown
As seen in the following chart, Purple has significantly increased its revenues every reported
year. With about 45% revenue growth from 2017 to 2018 and almost 50% growth from 2018 to
2019, Purple has demonstrated its high product demand and an ability to expand quickly. 8 This
is primarily driven by a dramatic increase in mattress sales.
The following chart shows a revenue breakdown by product segment: mattresses and other
(including seat cushions, pillows, bedding). 9 Mattresses have made up the vast majority of
revenues for the last three years. This makes sense as Purple’s primary marketing, distributing,
and research and development efforts have surrounded its mattress segment. The Company’s
other products are primarily add-ons to provide additional revenue streams. These products
offer higher margins but bring in less revenue because they have significantly smaller price tags,
are only sold through Purple’s website and showrooms, and are not emphasized or marketed as
much as the mattresses. However, the promising sales growth in all products has promoted
further research and development, all centered around creating the best sleep and comfort for
customers.
8
2019 10-K pg.51
9
2019 10-K pg.51
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Additionally, Purple has opportunities to continue expanding geographically. It can do this

domestically by entering more retail fronts at existing wholesale locations, and internationally
by signing new contracts with foreign wholesalers. The Company plans to eventually sell and
distribute internationally, beginning with Canada and expanding further from there.
Management outlines this international expansion as a goal for 2020, providing growth
prospects years into the future, as Purple continues to compete in the sleep market.
Products
Sleep - Mattresses
The Company’s mattresses are currently its primary product, as they are promoted, distributed,
and ultimately sold the most frequently. The mattresses utilize the unique benefits of the
Purple Grid, making them extraordinarily different from any other mattress on the market. The
Purple Grid makes the mattress temperature neutral, movement isolating, and body adaptable
while the user moves. The grid also collapses under pressure points, softening where the user
needs relief while simultaneously retaining firmness where users need support.
Purple mattresses perform all functions better than any other competitor because of its
proprietary and unique design. Most other mattresses provide a uniformly firm surface,
neglecting the varying degrees of firmness that the body needs to maximize its sleep potential.
These problems stem from the same basic construction; most mattresses are made with foams,
meaning they compete based on brand image and price point, rather than on product
differentiation.
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As seen in the matrix above, Purple has clearly differentiated itself based on its actual mattress
product, while competing with premium-priced beds. The only other company who uses a non-
foam, gel-based bed is IntelliBed; however, IntelliBeds are extremely expensive and compete in
the luxury bedding industry, with their least expensive bed priced at $6,000. This benefits
Purple as it is the only competitor in the middle to high priced mattress market with distinctly
differentiated products that better suit customer needs.
The Purple Mattress is the original mattress designed by the Company. It consists of two inches
of Purple material above a foam base and is the firmest of the mattresses. Because of this, the
Purple Mattress is recommended for back-only sleepers. As the cheapest mattress offered, it is
priced between $650 and $1,500 depending on the size. Customers buy it primarily online to try
Purple’s products at the minimal cost, not realizing its less versatile body-type target. The
competitive and relatively low price makes it one of the most frequent online sellers; however,
it is also the most frequently returned product.
After conversations with Mattress Firm and Purple showroom employees, we learned that the
majority of customers returning Purple mattresses want to upgrade to a newer Purple product
instead of simply returning from dissatisfaction (we were not given exact return percentages).
We also learned that once Mattress Firm started carrying Purple’s newer-models for test
mattresses, the return rate dropped from around 6% to 3% because people were able to find a
better product fit while shopping.
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The Purple Hybrid is the step up from the Purple Mattress. It is called the Hybrid due to its
construction, which includes two inches of Purple material on top of a base of individually
wrapped responsive-support coils. This design enhances the effects of the Purple Grid. A layer
of support foam is also placed into the construction mix, adding additional cushion and weight
distribution. The Purple Hybrid is slightly softer than the Purple Mattress, but is still the firmest
of the Hybrids, making it ideal for back sleepers. Ranging from $1,300 to $2,600, the Purple
Hybrid competes well with middle-market mattresses.
The Purple Hybrid Premier comes in two designs. Each design and name corresponds with the
inches of the Purple Grid that top the mattress. The thickness of the grid affects the structural
support of the columns, meaning a taller grid is a softer mattress. This is due to the increased
ability for the Purple Grid to collapse under bodyweight. The 3 and 4 are recommended for side
and hybrid sleepers (people who sleep on both their sides and backs), as it allows for more
relief to pressure points such as the shoulders and hips. The same individually wrapped support
coils and supportive foam layers are also found in the Hybrid Premier. The Purple Hybrid
Premiers are the most frequent sellers in stores (specifically Purple Showrooms). These designs
also have the lowest rate of return. This makes sense as these products contain the best
technology and quality, maximizing the sleep results for users. Priced towards the premium
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mattress market, the three-inch ranges from $1,900 to $3,400 and the four-inch ranges from
$2,500 to $5,000 (based on mattress sizes).
To further showcase its success in the market, Purple’s mattresses have won several prestigious
awards. We expect Purple to win more awards as it develops more customer attention through
increased sales and the expansion of distribution demographics. Currently the awards include:
• Ranked in the top 5 for Best Mattresses 2020, and

• #1 in J.D. Power 2019 mattress satisfaction report.
Sleep – Pillows
As of November 2019, Purple rolled out a brand-new pillow design called the Harmony Pillow.
After a year and a half of research and 50 prototypes, the “best pillow on the market,”
according to Purple, was launched. This was followed by extremely positive feedback from
customers. All stores carrying the pillows, including Purple showrooms, Mattress Firms, and
others, sell out within days of restocking, due to the immense consumer demand.
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The core of the pillow is hypoallergenic Talalay latex, surrounded by a thin layer of Purple Grid
Hex material, creating the perfectly soft, yet supportive pillow, respecting every preference.
The pillows have a one-year warranty but last far beyond that. The Talalay latex essentially
never breaks down, offering years of quality sleep.
Harmony pillows come in two sizes, relative to thickness, and are priced at $159 each. The price
point places the pillows in a premium bedding market, where the pillows have competed well
thus far. Most competitors making premium pillows compete on different combinations of
synthetic materials and feathers, with little differentiation between them.
Reviews have been nothing but positive for the Harmony pillows. After visiting the Purple
showroom in Lehi, UT and testing out the pillow ourselves, we would agree with the positive
attention. They truly are outstandingly comfortable. The Harmony pillow has outsold company
and market estimates and is expected to continue doing so as it further penetrates the pillow
market.
Purple also sells the Harmony's predecessor, the Purple Pillow. These are the first pillows the
Company created and are much firmer than the Harmonies, as they are made of a thicker slab
of purple grid surrounded by foam sheets. The Purple Pillows have also sold well but are not as
versatile in preference as the Harmony. The original Purple Pillows are priced at $99 and still
compete within the premium pillow market.
While Purple’s pillows are typically sold as an add-on product to complement its mattresses,
the company’s new pillow products, such as the Harmony, are selling well on their own. This
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means customers are buying pillows without necessarily buying a Purple mattress first. This
suggests that Purple has a large opportunity to continue diversifying into different sectors and
growing new revenue streams. This assumption is supported the Pearce brothers’ success
licensing HEP cushioning technology to various industries, prior to Purple’s founding.
Pillows offer a relatively low-cost way to test Purple’s technology. Customers have expressed
curiosity through their willingness to buy a unique and high-quality pillow that offers a big
improvement in sleep quality for a relatively small investment. This is also beneficial for Purple
as it increases total sales, brand awareness, and acts as a gateway for consumers. The result is
an easier purchase decision that leads to further mattresses and accessory purchases.
Sleep – Sheets and blankets

To complement its fast-selling mattresses, the Company has developed Purple Sheets and
Purple Duvet blankets. Purple’s bed sheets are made of a bamboo-spandex blend. These sheets
pair with Purple mattresses and pillows as the spandex allows the sheets to stretch and flex,
enabling users to get the full effect of the Purple Grid. Bamboo makes the sheets soft,
lightweight, breathable, and even flame resistant. 10 Sheet sets consist of a fitted sheet, a loose
sheet, and pillow covers. Customers can choose between neutral colors, including white, tan,
grey, and purple. Sheet sets range in price depending on the bed size; twin sizes (the smallest)
are priced at $99 and king sizes (the largest) are $129. Purple’s Duvets have a similar design,
focused on outward airflow and temperature regulation. The Duvet line includes warm weather
and four-season editions, which cost $159 and $179, respectively.
These products do not sell as frequently as Purple’s pillows and mattresses, despite their low
cost and high-quality. Purple does not promote its sheets and duvets as stand-alone products
because they are considered complementary. As a result, few people go to Purple to buy only
sheets or duvets but instead include them as add-on products. However, premium sheets have
an average lifespan of only two years (compared to mattress’ lifespan of ten years) so they act
10
https://researchspace.auckland.ac.nz/handle/2292/25550
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as recurring revenues to stabilize sales of less-frequently purchased products, like mattresses. 11

These products complete the bedding line but are not a competitive advantage as Purple is not
focused on disrupting the fabric industry. Purple will often run promotional discounts were
mattress buyers are offered discount codes or even free sheets with their purchase. These
promotions increase mattress sales but negate the larger margins and lower shipping costs that
these complimentary products have.
In addition to the basic bedding accessories, Purple has also partnered with Gravity, a designer,
manufacturer, and distributor of weighted blankets. Backed by extensive research, the blankets
range from 15-35 pounds each and promote higher quality sleep. These blankets are proven to
reduce stress by decreasing nervous system activity and releasing serotonin, in a phenomenon
called “Deep Pressure Stimulation.” 12 The blankets are sewn in a grid pattern, with each square
acting as a pocket to hold glass beads for even weight dispersion. Gravity makes the weighted
portion of the blanket, while Purple provides the cover. One side of the blanket is made to be
warm and cozy, while the other side is designed to be cooling and comfortable.
The Gravity blanket is promoted as an add-on bedding accessory in Purple’s product line, but it
is the only full size weighted blanket on the market. However, it mainly serves to reinforce
Purple’s tech-forward business model to a wider range of consumers. The revenue and cost
terms of the relationship with Gravity are not publicly disclosed. The blankets cost $299 each.
Sleep – Bed frames

The Purple PowerBase is a premium product in Purple’s sleep segment that offers adjustable
comfort. The primary features include customizable positioning, the ability to lower and raise,
and resonant-frequency massages to target specific body zones and help users fall asleep. The
PowerBase also includes additional features including under-bed lighting, USB ports for
11
https://www.nbcnews.com/better/pop-culture/here-s-how-often-you-should-replace-everything-your-
bedroom-ncna844686
12
https://purple.com/weighted-blanket
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charging, and a one-click button to return the bed to sleep mode. All functions of the
PowerBase are controlled by a simple wireless remote. Since these features are housed in the
frame, it is compatible with all Purple mattresses. There is also an option for partner customers
to purchase a split-king for individual adjustments and preferences. The PowerBases range in
price from the XL twin at $1,399 to the split king at $2,798.
The Company also offers less technologically advanced bases. The traditional line of bases
includes the Purple Foundation and the Purple Platform Bed. Purple mattresses need fully
supportive frames and both of these options provide that. The Foundation is designed in a
modern chic style for both function and appearance, while the Platform Bed is designed to
serve price-sensitive customers and offer maximum storage underneath. The Foundation costs
$429, while the Platform Bed costs just $129.
Sit – Seat cushions

As discussed earlier, Purple cushions originated in the medical field where they are used to
make wheelchairs more comfortable and more ergonomically healthy. While the Company has
since expanded successfully into other products, Purple has maintained and expanded its line of
seat cushions. While not top-selling products for the Company, seat cushions have attracted
additional customers who do not yet want to invest in a mattress but still want the benefit of
the grid technology. Or, customers who have invested in a mattress and want to see the Purple
effects in other aspects of their lives. With three current types of seat cushions, Purple covers a
wide array of customer needs.
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Purple’s seat cushions target older customers in need of back support and pain relief while
sitting through daily activities. The Everywhere cushion is meant specifically for travel (airplanes
and vehicles), errand running (short car trips), and bleachers/stadium entertainment. Priced at
$39, the Everywhere cushion is affordable and easy to transport.
Priced at $79, the Royal cushion is larger and thicker than the Everywhere, allowing for
portability, but with a bit less discretion. The Royal is meant to be used on hard chairs, office
chairs, gaming chairs, for hobbies (e.g., sewing, music, art), and soft chairs or sofas.
The Royal creates an opportunity for Purple to sell business-to-business (B2B) in addition to the
current business-to-consumer (B2C) route. Large and small companies are continually looking
for ways to keep their employees healthy and happy, and this cushion is a great opportunity for
companies to do just that. In the future, Purple could pursue this B2B channel by writing
contracts, similar to those with wholesalers, to supply cushions to companies for their office
staff in discounted bulk orders. This is a great value proposition for Purple and could potentially
expand the cushion revenues significantly. Purple has not yet sold B2B, primarily because of its
focus on other channels; however, we see the Company implementing this distribution
expansion within the next few years as it looks to find more markets to expand into.
The third and highest quality seat cushion is the Ultimate cushion. Designed for sitting on hard
and soft chairs, extended sitting sessions, trucking, and office chairs, the Ultimate cushion
provides the best back support and relieves the most pressure and is priced at $129. As Purple
continues to expand, the Ultimate provides great opportunities to tap into the medical field.
Wheelchairs, waiting rooms, operating tables, hospital seats, and doctors’ offices are all places
where the high-end Ultimate cushion could be sold. We expect this B2B distribution option to
become prevalent in Purple’s business model within the next few years as it starts focusing on
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and emphasizing these additional applications more with the growth and expansion of the
Company and its resources.
Purple is still researching and testing new cushions that can be applied in specific industries,
including automotive, medical, camping, and any other day to day scenario, that involves
sitting.
Other
To take advantage of additional revenue streams and add-on products that the Purple material
can be applied to, Purple has recently started selling products such as sleep eye masks and dog
beds. These products sell well with brand-loyal customers that love Purple products and are
invested in the brand image. These additional products are seen as a great way for Purple to
keep releasing products from the pipeline, while simultaneously building and maintaining brand
loyalty. While sold primarily online and in Purple showrooms, we think these products will
expand into additional product lines as Purple releases newer and upgraded versions over the
next few years.
The Premium Weighted Sleep Masks are another collaboration product with Gravity. The masks
contain half of a pound of evenly-distributed glass beads, promoting a more restful and relaxing
night sleep. Selling at $29, the masks complement other Purple products such as the Weighted
Blanket and Harmony Pillow. This offers a relatively small, but additional revenue streams for
Purple.
20 | P a g e
The Purple Pet Bed is another application for the Company’s proprietary grid. The product is a
way to further integrate the brand into customers' lives and to get repeat sales from returning
customers. Constructed of the Purple Grid and supportive foams, the pet beds are encased in
an ultra-durable, antimicrobial odor-resistant fabric designed for an extended life-span and
easy cleanup. The pet beds do not yet contribute a material amount to revenues and are priced
at $149 each, making them a premium pet product.
Customer Satisfaction and Brand Recognition
With over 42,000 five-star ratings on its website (out of 76,525 total), Purple successfully
exceeds customers’ expectations. This is extremely important in the sleep and bedding
industry, as prospective customers rely heavily on brand reputation that is formed around
current users’ experiences, that are expressed in reviews. Brand image is a vital sign in the
bedding industry as an indicator of quality and comfort. In the premium products sector, this is
especially true as customers rely on brand knowledge to determine the top-of-the-line
products. Customers interested in this kind of product are less interested in price than in
results. Additionally, offering premium products can act as a status standard for customers.
Building a brand image focused on making the best the market offers, can drive recognition and
brand loyalty which culminate in increased sales.
Purple’s products only get one negative review (1 or 2 stars) for every 22 positive reviews (4 or
5 stars). This is extremely positive information as other bedding industry competitors typically
see 1 bad review per every 10-15 positive reviews, meaning Purple is getting overall better
reviews and is successfully satisfying its customers. Continued user and fan excitement will help
build the Company’s brand and reputation, which will accelerate future growth and increase
repeat sales.
21 | P a g e
Research and Development
As mentioned earlier, Purple’s research and development (R&D) began over 20 years ago with
the Pearce brothers. Developing the first major mattress innovation in decades, the Purple grid
has provided the platform and capital to expand comfort technology offerings for consumers.
While costs related to research and development in FY 2019 increased by 84.4% over the prior
year, it amounted to only $3.86 million, or 0.9% of total revenues. 13 With 2019’s increases in
operational capacity, Purple is geared to meet the demand for existing products and focus
energy on new products. Research and development costs are anticipated to increase again in
2020 as Purple expands its product line and comfort technologies.
Purple’s research and development department, known internally as the Innovation Team, is
focused on three main areas: developing new comfort technologies, applying existing
technologies to new products, and developing alternative machines and processes to maximize
manufacturing efficiency. The Innovation Team uses a process of rapid-iteration prototyping
and testing to receive feedback and better serve customer needs. Purple’s direct-to-consumer
channel provides a short feedback-loop that results in easily interpreted consumer data, while
its vertical integration allows for timely applications of the findings. It is because of these
internal abilities that Purple continues to innovate. The R&D team is headed by Tony and Terry
Pearce, as Co-Directors of Research and Development.
Product Pipeline
Purple’s HEP grid technologies create an ideal opportunity to expand into just about any
comfort and cushioning product. While Purple’s current focus is mattresses, the Company does
not consider itself a “mattress company” but rather, a cushioning technology company that saw
an opportunity in the mattress industry. Purple’s technology can be applied to most sitting,
lying, and standing scenarios, creating ergonomically healthier situations for every person.
Purple has discussed expanding into many new areas through product development and
licensing. Some areas include camping, home, and office mats, hospital and medical needs, and
automobiles and bikes. The extensive potential for new applications gives the Company a
unique ability to expand into new revenue streams while maintaining the original mission
statement and brand.
Just as Purple has paired with Gravity to create and sell unique products, we see a major
opportunity for Purple to continue partnering with other related brands and expanding its
product lines from there. This offers synergistic relationships in terms of cost, revenues, and
customer acquisitions. Collaboration products allow Purple to target new consumers, primarily
13
2019 10-K pg. 51
22 | P a g e
the existing customers of the partner company. Once these second-degree customers purchase
and use Purple’s collaboration products, they see the quality and benefits and are more likely
to seek out Purple’s other offerings. Purple does not explicitly state its product pipeline, but we
anticipate future products will be centered around partnerships with other manufacturers and
alternative applications of existing technology.
Supply Chain
Suppliers
Purple acquires its raw material inputs from third-party vendors who supply polyurethane
foam, oil, springs, adhesives, and the ingredients for the Hyper-Elastic Polymer. Since the
suppliers provide raw commodities, Purple is transparent in its dual-sourcing of key
components. It does this to avoid becoming too reliant on a single supplier, which could result
in the degradation of purchase terms. While the commodity market is highly fragmented,
certain raw material ingredients in Purple’s HEP are specific enough that there is only one
viable supplier. 14 Despite the unique components, Purple does not suggest any suppliers
account for a significant portion of the cost of goods sold and does not disclose any specific
information regarding the relationships.
With the increase in operational capacity, Purple has been able to improve its efficiency in
processing raw materials. In 2019, raw materials accounted for 34.0% of inventory, compared
to 46.7% in 2018 and a staggering 81.1% in 2017. 15
Manufacturing process
The foundation of Purple’s business is in part, its core competency surrounding the
manufacturing process. Through its protected manufacturing expertise, Purple is able to
capitalize on its technological innovation by virtue of the proprietary trade secrets surrounding
the process. While the manufacturing of Purple Gel is unique on its own, machines like the
Mattress Max allow the Company to actually turn the Hyper-Elastic Polymer into a usable
product on a large scale.
The downstream segment of Purple’s supply chain has a high level of vertical integration. The
Company has integrated its operations to include research, engineering, manufacturing,
packaging, distribution, and marketing. This is considered to be a significant competitive
advantage to Purple and not something that is shared by its competitors. As mentioned in the
Research and Development section, the result of this vertical integration is a real-time feedback
cycle that allows for the nimble execution of R&D findings. DTC competitors such as Casper rely
14
2018 10-K pg. 113
15
2019 10-K pg. F-18
23 | P a g e
heavily on outsourced manufacturing, while traditional manufacturers such as Sleep Number

and Tempur Sealy, focus on the assembly of components and the use of wholesale retailers to
distribute mattresses. Those three competitors also outsource marketing, unlike Purple. 16
Purple currently has five Mattress Max machines, with the sixth to be in use by the end of the
first quarter of 2020 and the seventh following soon after. The construction of the ninth and
tenth machines are in preliminary phases and should be in use by 2021.17 Purple also attributed
some of its 2019 success and ability to fulfill product demand to its new third-party logistics
partnership. This new technology, provided by SnowFlake, offers a cloud-based data warehouse
used to improve production efficiencies by connecting Purple’s departments to a single
source. 18,19
While vertically integrated operations have benefited Purple, it is seen as a necessary

precaution to protect its proprietary products and manufacturing processes. This further
safeguards against competition and allows for controlled licensing agreements. Certain
products offered by Purple, including the mattress bases, sheets, mattress protectors, blankets
and duvets, are outsourced and resold. The products that rely on third-party manufacturers and
are either designed by Purple or offered in a partnership agreement, as in the Gravity
collaboration.
The manufacturing process for mattresses and cushions are as follows:

1. The R&D team designs and prototypes potential products until something viable results.
All materials are housed at the manufacturing centers so alterations can be made with
zero lag from suppliers.
2. Once the products are ready for production, manufacturing is done in that same
building. This process includes the making and molding of the Hyper-Elastic Polymer, the
sizing and assembly of the different foam and spring components, and the enclosure of
the components in their fabric case. Information surrounding the Mattress Max machine
is limited, but Purple shares that it is zero-waste by recycling all of the excess Purple
Gel.
3. When the completed product is fully assembled, it is inspected, inserted into a plastic
sleeve, and vacuum sealed in a compression chamber. The result is a mattress that is
one-sixth of its original thickness and ready to be rolled up into a package.
16
CapitalIQ & 10-K for Casper, Sleep Number, Tempur Sealy
17
2019 IR conference call
18
https://www.businesswire.com/news/home/20191112005307/
19
24 | P a g e
4. Once packaged, items are processed as inventory and warehoused. A portion of the
finished goods are shipped as freight to wholesale retailers and the rest are shipped
directly to customers (DTC). The DTC products are shipped either via FedEx or with
white-glove couriers, depending on the package weight.
Manufacturing locations
Purple is a Utah-based company, from its founding in Alpine, UT to its current corporate
headquarters in Lehi, UT. Purple’s leadership, design, manufacturing, and distribution efforts
are all done within the state. Following the 2019 transition, its new corporate headquarters in
Lehi house the Purple showroom and about 300 employees. The remaining 575 employees are
either located in the Alpine office or in the manufacturing center in Grantsville, UT.
As product demand grows and customer demand disperses across the nation, Purple has
announced it will begin searching for an Eastern United States operations location. This new
facility would house an East Coast corporate team, manufacturing, and a distribution center.
Mattress Max machines 8 and beyond would be constructed in this new location.20
Distribution
While Purple is known as a leader in the direct-to-consumer bedding category, it is focused on
developing a balanced omnichannel distribution strategy. Purple states its desire to serve the
customer wherever the customer prefers, because different channels mean different
opportunities to learn and try the products.21 By expanding wholesale channels, notably on the
East Coast and West Coast, Purple will be able to expand its realizable market.
The primary driver of 2019’s revenue growth (49.9%) was the addition of over 800 retail stores.
Management has made it clear that in 2020 Purple is expecting 900 retail location additions. 22
Purple’s first retail partner was Mattress Firm for pillows, but the breadth and depth of these
partnerships expanded in 2018 to include Macy’s, Bloomingdale’s, Furniture Row, Denver
Mattress, HOM Furniture, Steinhafels, Raymour & Flanigan and Bed, Bath & Beyond.23 While
the retail channel has increased revenues significantly, the wholesale pricing agreements have
offset some of the gross margins gains in 2019. 24 Purple’s Director of Ecommerce, Jeff Cedeno,
said the DTC channel is significantly cheaper for knowledgeable customers, but the lower
margin retail sales include an implicit advertising cost. 25
20
21
2019 10-K pg.3
22
https://investors.purple.com/file/Index?KeyFile=403235244
23
2019 10-K pg.1
24
2019 10-K pg.51
25
Interview with Jeff Cedeno, 3/5/2020
25 | P a g e
Marketing and advertising

Purple has utilized its integrated marketing team to build its brand reputation and draw
awareness to its products. With its original business model centered around DTC distribution,
customer acquisition costs were high and effective digital marketing was essential for brand
success. Purple’s marketing strategy primarily focuses on digital campaigns and online
advertising but also extends to podcasts and radio, TV, and print media. 26 The high-quality and
humorous marketing content Purple creates has taken advantage of viral efficiencies with a
series of videos amassing over 1.8 billion views between Facebook and YouTube. 27
Marketing costs are a significant expense for Purple, but unlike other DTC mattress companies,
its focus is targeting and audience segmentation. As of December 31, 2019, Purple’s marketing
and sales expenses accounted for 33.1% of total revenues, offering a small decrease from the
prior two years.28 In contrast, Casper uses social media campaigns that result in a high view
count but a low conversion rate.29 Casper’s YouTube channel has a total of only 73 million
views, yet it manages to spend a shocking 70% of revenue on marketing.30
COVID-19
As concern surrounding COVID-19 grows, it is important to note that as of March 3, 2020,
Purple had experienced no effect on its supply chain. In a press release, Purple’s CEO Joseph
Megibow stated there have been no effects from the headwinds and that the Company is
comfortable with its current inventories. As a precaution, Purple is exploring alternative supply
sources and closely monitoring operations.31
At the time of this writing (3/25/2020), we doubt this is still the case, despite no update from
executives. With 2019’s growth in wholesale distribution, we assume the possibility of an
enforced quarantine will dramatically decrease the usage of this channel. However, Purple’s
DTC sales could very well increase, due to consumer’s increased time at home and time in bed.
COVID-19 concerns are discussed in more depth in the “Risks” section of this report.
Cost Structure
Cost of goods sold, or cost of revenues as it is referred to in the financial statements, accounts
for 55.9% of total revenue in 2019. This represents a gross margin of 44.1%, an improvement to
the 2018 gross margin of 39.4%. Purple’s quarterly revenues and cost of goods sold do not
26
2019 10-K pg.7
27
2019 10-K pg.3
28
2019 10-K pg.F-4
29
https://seekingalpha.com/article/4319419-purple-innovation-inc-upside-relative-to-casper-sleep-inc-ipo
30
YouTube, Casper profile
31
26 | P a g e
show significant seasonal fluctuations, just steady growth and a spread starting at the end of
the first quarter in 2019 when gross profit began increasing.32 Cost of revenues includes
manufacturing expenses such as raw materials, production, inspecting, warehousing, and
insuring, the amortization and depreciation of production assets, and costs related to the
delivery of goods to customers. 33
Operating expenses in 2019 accounted for 40.3% of revenues compared to 45.3% in 2018. This
increase led to an operating margin of 3.8%, a small percentage of revenues, but enough to
result in an operating income rather than another operating loss (operating margin of -5.9% in
2018). Operating expenses include marketing and sales, general and administrative, and
research and development. 34 It is important to note that of these operating expenses, 97.0% is
marketing and sales. This is good for Purple because in the coming years, as its brand
awareness rises, the cost of marketing and sales can begin to decrease as a percentage of
revenue. Despite a history of operating losses, Purple believes its market positioning and
manufacturing capabilities will provide sufficient cash flow from operations to fund anticipated
operating expenses, liquidity needs, and growth initiatives. 35
32
2019 pg.F-4
33
2019 10-K pg.49
34
2019 10-K pg.49
35
2019 10-K pg.53
27 | P a g e
Industry and Market Analysis
Industry Structure and Overview
Purple Innovations primarily operates within the bedding industry. This encompasses
mattresses, bed bases and foundations, sheets, mattress protectors, blankets, duvets, and
pillows. 36 Purple has also extended its product mix to include seat and other types of
cushioning. Because of this broad product mix, Purple can also be classified under the broader
category of the home furnishing industry. 37 Home furnishing covers businesses that
manufacture and sell furniture, textiles and related goods to residences, offices, hotels and
others in the commercial space. Product offerings include upholstery, bedding, seating, hearth
products, and fabrics. 38 The industry can be categorized as mature, however due to its broad
scope certain sectors can present lucrative investment opportunities depending on the period
of the economic cycle.
The bedding industry can be broken down into two categories, traditional and non-traditional.
The leaders of the traditional market are Tempur-Sealy and Serta Simmons. Both companies
primarily focus on traditional mattresses. These include constructions that consist of one or
more layers of springs, standard polyurethane foam, or latex foam. Because these companies
and mattress types have been around the longest, they account for a vast majority of the
bedding market.
Non-traditional competitors assemble mattresses using a variety of foam cushions that are
designed to be compressed and shipped in a compact box. As a result, non-traditional
competitors primarily use a direct-to-consumer (DTC) approach. Unlike its counterpart, the
non-traditional market is fairly new which results in a highly fragmented and competitive
environment. Some notable players in the market include Purple, Casper, Leesa,
Resident(Nectar), Saatva and Tuft & Needle. 39 While these DTC companies are highly
competitive, they offer the least product differentiation.
A significant growth factor in the bedding industry has been the expansion of digital marketing
and DTC distribution, driving fundamental change in the market. 40 DTC has been an effective
distribution channel, particularly for younger generations more comfortable with online
shopping and individuals residing in urban environments where mattress transport can be
challenging. However, DTC is unlikely to take control from the prevalent brick-and-mortar
retailers and will more likely complement it by serving a different target market. Consumers like
to test mattresses before buying, due to the expense of the purchase and also the many
36
Purple 2019 10-K pg.1-3
37
Capital IQ Industry Classification
38
www.valueline.com/Stocks/Industries/Industry_Overview__Furniture_and_Home_Furnishings
39
Purple 2019 10-K pg.13
40
Capital IQ Industry Classification
28 | P a g e
options from which to choose. As a result, mattress manufacturers still rely heavily on retail
stores.
While not direct competitors to Purple, it is critical to understand the second channel of
distribution involved in the bedding and home furnishing industries, wholesale retail stores. The
two leaders in the brick-and-mortar retail segment include Mattress Firm (US) and Sleep
Country Canada (CAN), each of which is a leader in its respective country. Outside of the US,
Steinhoff International is the most notable player. Steinhoff is a South African furniture retailer
that operates in Europe, Africa, Australia, and some parts of Asia. 41 Although both Mattress
Firm and Sleep Country are large national bedding retailers, they still have to compete with the
smaller regional retailers, and other channels which include furniture and department stores.
Also, this does not account for the online retailers, only pure-play brick-and-mortar
wholesalers. This makes the retail market highly fragmented and highly competitive.
DTC Competitors
The direct-to-consumer distribution method has created a new generation of companies and
has disrupted the retail landscape. This channel goes far beyond the bedding industry, but due
to the awkward dimensions and size of mattresses, it has found firm footing in the industry,
giving rise to many new companies that distribute directly to consumers, typically through an
online ecommerce website. 42 Essentially, companies employing the DTC channel cut out
middlemen, wholesalers, and distributors. This allows direct-to-consumer companies to cut
operational costs significantly. However, online customers cannot test the products, so DTC
companies must spend a considerable amount more on marketing, promotions, and customer
acquisition than companies selling through retail outlets. According to Veronika Sonsev, an e-
commerce analyst, 78% of DTC companies increased their marketing budget from 2018 to
2019, a rate much higher than its traditional peers of whom 60% reported increases.
Additionally, 81% of e-commerce markets named customer acquisition as a top investment
priority. 43 Again, this reflects the tradeoff between lower operational cost and higher marketing
and customer acquisition costs. Purple is uniquely situated because it takes advantage of both
traditional and non-traditional channels which allows Purple to cut operational and customer
acquisition costs and sell its product at a lower price point.
Unlike traditional startup companies that offer innovative products, processes, or other factors
as competitive advantages, DTC companies compete on their distribution channels. This allows
them to compete effectively with established firms in the industry. In addition to simply
competing, these DTC companies are actively reshaping the traditional wholesale retail model.
41 IBIS Bed & Mattress Stores – Report OD5462

42 www.cbinsights.com/research/direct-to-consumer-retail-strategies/
43
www.marketingdive.com/news/study-dtc-brands-increase-marketing-budgets-dramatically-compared-to-
tra/556033/
29 | P a g e
Consequently, the operational cost savings allow DTC companies to sell their product at a much
lower price point when compared to their traditional counterparts.
Purple and Casper are two notable competitors in the DTC vertical of the mattress industry.
However, there are many other DTC verticals of long-standing mature industries. Several
companies responsible for reshaping industry landscapes include Dollar Shave Club which
operates in the razor industry and The Honest Company which operates in the cleaning and
baby products industry. However, the largest company by far that distributes directly to
consumers is Amazon. While it is commonly known as e-commerce retailer because a large
segment of its revenues comes from shipping products directly to consumers, Amazon does not
manufacture its products. In fact, Amazon’s impact is so large, all other e-commerce businesses
must factor Amazon into their strategies. Ways that companies adapt include using Amazon for
partial distribution or by carving out niches away from the control of Amazon. Although both
options are possible, DTC companies usually opt for the latter. Most bedding companies offer a
segment of their product lines on Amazon, due to the sheer number of users on Amazon’s
platform.
Profitability
Traditional mattress companies rely on brick-and-mortar stores for sales while online retailers
and DTC companies rely on the internet. Although companies such as Amazon operate similarly
to other DTC companies, their business models are fundamentally different. E-commerce
retailers like Amazon have a much broader range of product offerings and they are less likely to
manufacture those products. Online retailers focus specifically on the retail aspect because, as
with traditional wholesalers, they earn a percentage of the sales without the same
manufacturing expenses. In contrast, DTC companies only focus on one or two products but cut
out the commission or brokerage costs. This imposes the challenge of increasing brand
awareness and marketing costs directly onto the DTC company, but it increases margins by
eliminating the price discount required for wholesale agreements.
DTC companies have far more direct customer feedback which allows them to improve their
products with rapid-iteration development and which allows them to establish their brand and
product reputation. When compared to Amazon, traditional retailers offer fewer products.
Although they still have greater variety compared to DTC companies, they are limited by shelf
space. Additionally, traditional companies only stock popular items to sell greater quantities.44
44
www.cbinsights.com/research/direct-to-consumer-retail-strategies/
30 | P a g e
Key aspects of DTC companies
Transparency and limited offerings

Product options for consumers is crucial in building strong customer relationships. However,
too many product options can turn buying into a stressful experience and result in negative
outcomes. Traditional bedding industry consumers often describe their purchase experiences
negatively because of “pushy” salesmen promoting mattresses that do not suit their price range
or preferences. On top of that, specifications and pricing options are often confusing and lack
transparency. Companies such as Purple and Casper saw this as an opportunity. Motivated by
this knowledge, they limited their product offerings, dropped prices, and delivered straight to
the customer's door. Similarly, Harry’s, a DTC shaving razor company used the same concept to
grow its customer base to over 1 million.45 Harry’s offerings focused on only one razor, cheap
blades, and quick delivery.
Purple has also done an excellent job with customer transparency by naming each mattress
after the number of inches of Purple Grid within it. That way, when the collapsing column
technology is explained, customers know a Hybrid 4 is softer than a Hybrid 2. Also, through
increased marketing efforts, including high quality photography and cinematography, Purple’s
customers know the products by construction which helps them make informed buying
decisions.
45
31 | P a g e
Alternative approaches to marketing

Markets utilizing traditional distribution channels often revolve around well-entrenched brands
with ample access to financing. New entrants must quickly make a name for themselves or face
the possibility of fading away. On top of that, traditional companies have the financial resources
to fund millions, or even billions, of dollars on advertising. While such sales and marketing
expenses are even more crucial to new DTC entrants, they often cannot support such costs for
extended time periods.
One strategy that has greatly increased brand viability and leveled the competitive landscape
for such companies is “mindshare advertising.” The basic goal of mindshare is to have
consumers think about one particular brand over others, regardless of its market share or of
the consumers’ actual interaction with its products. 46 This strategy is achieved by companies
purchasing consumer awareness to support its brand or product. If pursued correctly,
mindshare has the potential to turn millions of viewers into supporters and eventually
customers. This can be achieved at a relatively low cost, but the crucial factor is that the
product must be unique and genuine. If consumers sense the promotion is inauthentic, it can
degrade brand reputation.
One main approach to mindshare is by paying celebrities and social influencers to promote a
product. As mentioned in the Business Model section of this report, this method results in high
view count but low conversion. Another approach, which has been proven successful by Purple,
is the utilization of viral efficiencies. This is where companies can take advantage of organic
marketing content that naturally finds its way to the devices of millions of consumers. DTC
companies such as Purple and Casper have employed this mindshare acquisition strategy and
benefited greatly from it. Purple’s in-house marketing team has placed a particular emphasis on
creating content designed to go viral and take further advantage of consumers’ subconscious
preferences.47
Experience
As a result of the narrow product offerings, DTC companies have an opportunity to focus on
quality and purchase experience. DTC companies and e-commerce giants like Amazon are
successful because they have been able to transform the buying experience for customers.
With an emphasis placed on readily available information, a quick check out, and at-home
convenience, many consumers are drawn to DTC sellers. Prior to the DTC revolution, the
customer was responsible for bringing the purchases home or paying a mover to do it. This
required follow up and diminished some of the joy for the buyer, especially for those in the
mattress market.
Purple has invested heavily in providing the best online buying experience possible. The
Company’s website offers product comparisons that are designed to help the customer make
46
https://www.investopedia.com/terms/m/mindshare.asp
47
2019 10-K pg.7
32 | P a g e
quick decisions and buy the product that best suits their preferences. Companies such as Purple
alleviate the headache of buying a mattress by offering an easy-to-use online platform, home
delivery, and free returns. The flexible financing options offered by Purple adds to this
experience.
Social
A significant strength of successful DTC companies is their comprehension of digital and
internet dynamics. Purple is a perfect example. The Company has proven this ability through its
repeated creation of viral ad campaigns, demonstrating the unique qualities of its products.
Purple was able to appeal to differing consumer demographics by differentiating its product
and sharing the power of comfort benefits. The total view count on its popular “Goldilocks”
video was over 70 million. Other DTC companies take slightly different approaches. Casper
focuses on investment on AdWords, with the goal of funneling potential customers to its
website. 48
DTC companies are also able to interpret crucial consumer data. In an interview with Purple’s
Director of Ecommerce, Jeff Cedeno, he discussed the power of consumer reports found both
on the Purple website and on third party sites like Amazon. 49 This consumer feedback can help
DTC companies better target promotions and develop future products that meet customer
desires.
Industry Innovation
The bedding industry has had limited

innovation over the past 150 years. The first
coil spring mattress was introduced and
patented in the 1860s. While coil springs are
still widely popular, the next movement of
product innovation was in 1992 with the
innovation of memory-foam mattresses.
Latex, water, and air mattresses emerged
soon after, in the late 20th century. 50 Very
little market-disruption has occurred since
then, leaving an opportunity for companies
today. Purple has filled this role by offering
the next generation of material innovation. Through its Purple Grid, Purple prides itself offering
the “only comfort technology that instantly and intelligently adapts to [a user’s] body.” 51 The
48
49
Interview with Jeff Cedeno, 3/5/2020
50
Purple 2019 10-K pg.1-3
51
Purple.com
33 | P a g e
Purple Grid conforms to a user’s hips and shoulders to firmly support a user’s natural back
shape. The open-air channels in the grid balance body heat to enable a cool, and restful sleep.
Beds are no longer viewed simply as a place to sleep. Consumers are growing increasingly
aware of the materials and surfaces on which they spend a third of their lives, and companies
are attempting to adapt. 52 Whether the construction consists of memory foam, latex, coils, or a
hybrid, that is only the beginning of the differentiating factors. Some differentiating qualities
include the level of firmness, its ability to distribute heat, motion transfer, material smell, trial
and warranty guarantees, and the overall value to price trade-off.53 While these factors imply a
massive range of mattresses, it really comes down to three primary choices: firmness (hard to
soft), point of sale (DTC or brick-and-mortar), and cost (high to low).
While competing product technology has not changed dramatically, other aspects of the
bedding industry have. With the rise in popularity of e-commerce, new companies have offered
alternative distribution strategies. For example, DTC companies use roll-packing machines to
condense mattresses, allowing companies to ship them to online customers less expensively
and with more ease. In return, this increases operational efficiencies, increases profitability,
and allows companies to scale more quickly. 54 There are over 175 of these “bed-in-a-box”
companies, accounting for about 12% of sales in the $16.5 billion mattress industry. 55
Additionally, following the internet of things (IoT) and consumer products trends, companies,
such as Sleep Number and Eight Sleep, have integrated technology in their bedding products to
create a “smart bed” that senses a consumer’s movement and adjusts the bed’s firmness in
response to a user’s biometric data. For example, the pod offered by Eight Sleep allows for
automated cooling and heating of the bed. Using a smartphone-based app, the bed will also
track deep sleep, REM (rapid-eye-movement), and heart rate to automatically control the
temperature for each side of the bed. 56
Macroeconomic Drivers and Industry Outlook
As of 2019, the global bedding industry market size is $63.86 billion and it is expected to grow
at a compound annual growth rate of (CAGR) of 5.1% from 2019 to 2025. 57 This market growth
is primarily driven by success of the housing sector, which drives consumer spending on home
furnishing. When a consumer purchases a new home, they are likely to furnish it with new
beds. Another major driver is the amount of discretionary spending available to consumers.
According to an IBIS report, the housing sector in the US is worth $166.1 billion and the industry
52
https://www.npr.org/sections/thetwo-way/2015/12/24/460929475/how-do-successful-peoples-sleep-patterns-
compare-to-the-average-american
53
Sleep Advisor Organization: Mattress Comparisons
54 Brooklyn Bedding: 4 Mattress Innovations Changing the Way We Sleep (for the Better)
55 CNCB There are now 175 online mattress companies – and you can’t tell them apart
56 Eightsleep.com
57 Grand View Research: Home Bedding Market Size, Share & Trends
34 | P a g e
revenue is expected to increase at an annualized rate of 1.8% for 2019-2024. Per capita
disposable income growth is expected at an annualized rate of 1.8% over the five years to 2025.
Key trends that have contributed to past industry growth include manufacturing efficiencies,
increased mattress sales driven by an expanding housing market, and consumer awareness of
sleep benefits. 58 The retail industry has seen a 3.3% annual growth increase from 2013-2018.59
The biggest factor has been a post-recessionary jump that has dramatically expanded the
market. This has caused a decline in unemployment and an increase in disposable income per
capita. Consequently, this has boosted home purchasing which has led consumers to outfit
homes with new mattresses. For health-conscious consumers, higher disposable income has
given them the ability to replace older mattresses.
An increase in discretionary income will give customers more money and confidence to spend
on premium mattresses and other bedding products. Additionally, sleep problems along with
consumer awareness of high-quality sleep in relation to overall health can encourage
companies in the industry to develop more advanced products. 60 According to a Harvard article,
more consumers are becoming aware of the three pillars of health. These include nutrition,
exercise, and sleep. The article also talks about the importance of not neglecting sleep, as it
enables the body to repair and be fit and ready for another day. 61 The article talks about how
millennials are more proactive and health conscious than their parents. Millennials are more
willing to spend money on fitness, healthy food, and self-care. Moreover, some companies,
including Purple, are taking advantage of this opportunity by producing viral ads and targeting
specific demographic groups. This segmentation leads to increased consumer awareness
surrounding health-related benefits of superior comfort.
58
www.valueline.com/Stocks/Industries/Industry_Overview__Furniture_and_Home_Furnishings
59
IBIS Bed & Mattress Stores – Report OD5462
60
www.verywellhealth.com/top-health-benefits-of-a-good-nights-sleep-2223766
61
www.verywellhealth.com/top-health-benefits-of-a-good-nights-sleep-2223766
35 | P a g e
Another notable trend in the bedding industry has been the shift in consumer demand to
purchase beds from specialty stores, which are defined as stores that carry a deep assortment
of brands, styles, or models within a relatively narrow category of goods. The demand to
purchases mattresses from specialty stores was 47% in 2014 compared to 19% in 1993. 62 This
was a result of mattress manufacturers differentiating their products. Consequently, this
boosted sales and decreased product returns because consumers started to seek expert advice
which reduced buyer’s remorse.
The last trend includes growth in online sales. Although this industry encompasses a broad
variety of household furniture sales, it gives an insight into the e-commerce landscape. Annual
growth from 2013-2018 was 9.4%, however the stagnant growth in homeownership and a
decline in Consumer Confidence Index are expected to slow the industry in 2018-2023 to
2.6%. 63 Although 74% of revenue share was attributable to offline sales in 2018, online
channels present a huge opportunity for bedding manufacturers. 64 Not only has it led to lower
operational costs, but it has also provided convenience to consumers. Notable bedding e-
retailers in the space include Casper and Saatva and Tuft & Needle, along with online third-
party distributors such as Amazon.com and Myntra. The e-commerce industry is characterized
by strong revenue growth and stable margins; however, mattress manufacturers still have to
focus on retail stores to satisfy traditional consumers who prefer in-store purchases. Over the
past two years, major mattress manufacturers, Tempur Sealy and Serta Simmons, have
experienced a 5% decrease in average unit sales. This is mainly attributed to the 175+ bed-in-a-
box companies focusing on DTC channels. Meanwhile, 45% of the total mattresses sales in 2018
were online purchases. This represents significant growth relative to 2017, when only 35% of
sales took place online. 65
62
63
IBIS Online Household Furniture Sales – Report OD5076
64
Purple.com
65
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Competitive Landscape
As mentioned earlier, the bedding industry is highly competitive. Manufacturers compete on

product features, quality, design, price, and brand reputation. Mattresses can range from just
$150 to over $5,000. The growing popularity of the three pillars of health is likely to drive
consumers to spend a considerable amount on their mattresses, because it is an investment
that supports better sleep. 66
Warranties are also another important competitive component in the mattress industry due to
the premium prices. Warranties have become a standard in the industry and consumers are
skeptical of companies offering sub-standard warranties.
Serta Simmons, Tempur Sealy, and Sleep Number Corporation are responsible for 64.3% of all
mattress manufacturing in the US. The industry is oligopolistic, leaving only 35.7% of the market
to other manufacturers. 67 Due to the dominance of a few players in the industry, it can be
difficult for new entrants to secure primary suppliers and customers. Newcomers including
Purple must engage in heavy marketing expenses to build brand and market reputation to
compete effectively. Brand recognition is extremely important in pursuing licensing agreements
with retailers. Retailers are hesitant to take on newcomers because they pose a risk of weak
product sales and wasted showroom space. Startup costs for new mattress manufacturers can
also be relatively high as they include equipment, machinery, labor, raw materials, research and
development, as well as advertising. 68 The oligopolistic nature of the industry landscape may
66
Brooklyn Bedding: 4 Mattress Innovations Changing The Way We Sleep (for the Better)
67
IBIS Mattress Manufacturing in the US – Report 33791
68
IBIS Adjustable Bed & Mattress Manufacturing in the US – Report OD5330
37 | P a g e
also affect the supply chain as newer or smaller companies may have difficulties establishing
relationships with upstream and downstream suppliers. License agreements with retailers can
be hard to achieve if major manufacturers have already been granted exclusive rights. 69
Porter’s Five Forces
Threat of Threat of Bargaining Bargaining Competitive

new entrants substitutes power of power of rivalry
customers suppliers
Low Threat Low Threat High Threat Low Threat High Threat
Capital Intensive Purple has 100 Customer feedback Purple is vertically The industry is
due to high patents and is critical for Purple integrated mature with many
manufacturing and trademarks competitors
advertising protecting its
requirements differentiating
factors
Purple benefits from a variety of different factors. First, the Industry has experience rapid
changes due to the emergence of new distribution channels. The bedding industry as a whole is
expected to grow at a CAGR of 5.1% through 2025. Second, Purple holds over 100 patents and
trademarks. Coupled with its DTC approach, this has given Purple a unique competitive
advantage. Finally, due to high consumer demand Purple has experienced tremendous growth.
Purple has already captured 3% of the market, whereas Serta Simmons and Tempur Sealy,
which have been around the longest, have a combined market share of 58%. Furthermore, we
believe that Purple will continue its growth and will further grow its presence in the mattress
industry.
69
IBIS Mattress Manufacturing in the US – Report 33791
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Industry Comparable Statistics
Industry Comparables
Purple’s closest comparable companies are in the bedding industry. Purple’s the three most
similar publicly-traded competitors include Tempur Sealy International, Sleep Number
Corporation, and Casper Sleep. The first two are legacy manufacturers that account for the
majority of the market’s revenues, while Casper is a pure-play DTC mattress provider.
Tempur Sealy International (NYSE: TPX) is the world’s second largest bedding manufacturer,
accounting for 26.3% of the industry’s market share. It was founded in 1989. Tempur Sealy is a
narrowly focused holding company that controls operations of Tempur, Tempur-Pedic, Sealy,
and Stearns & Foster. It produces foam and spring mattresses, pillows, and other
complimentary products. 70 Tempur Sealy’s mission is to provide its users with a better night’s
sleep through its premium offerings constructed from the same viscoelastic-foam technology
that NASA developed during the 1970s to serve as a cushion for astronauts. 71 Tempur Sealy’s
foam technology is temperature-sensitive and pressure-relieving. The company has an
international footprint with operations in North America (U.S. and Canada), Europe, Asia-Pacific
and Latin America. Tempur Sealy companies offer mattresses in the premium markets and
compete primarily on brand name.
Sleep Number Corporation (NASDAQ: SNBR) is a designer and manufacturer of mattresses, with
a unique emphasis on smart-beds. The company offers a selection of beds, bases, pillows,
mattress pads and layers, and other bedding accessories. 72 It was founded in 1987. Sleep
Number accounts for 5.5% of market share and is able to differentiate itself by utilizing air-
chamber technology, allowing users to adjust the firmness on each side of the bed. Its
mattresses are constructed with a combination of foam and air, all of which rely on an external
power source and a smart-phone. Sleep Number’s technology attempts to solve common sleep
problems, but it relies on special platform bases to offer differentiating functions and
maximized comfort. Its products compete in the premium market with Purple, but its
technology is significantly different.
Casper Sleep (NYSE: CSPR) is another mattress manufacturer and distributor, but unlike the
previous two, it is e-commerce-centric and has far outpaced the industry’s growth rate. It was
70
Pitchbook: Tempur Sealy
71
Bloomberg: Tempur Sealy
72
Bloomberg: Sleep Number
39 | P a g e
incorporated in 2013. Alongside Purple, Casper was one of the original companies to popularize
the bed-in-a-box and DTC distribution model. Unlike Tempur Sealy and Sleep Number, Casper’s
products offer basic technology that can be manufactured at significantly lower costs and can
be easily outsourced. Casper’s products closely resemble those of other DTC mattress
companies, and it is able to compete by being a low-price leader. Despite these differences,
Casper shares some qualities with Purple including a very similar 2019 revenue and above-
industry revenue growth, although Purple’s CAGR is notably higher. Casper underwent its initial
public offering in February of 2020, so while we have insufficient stock price information for a
meaningful historic analysis, the two years of financial data it provides share a unique
opportunity to compare Purple to its primary DTC competitor.
In addition to these three companies, there are a number of private manufacturers that would
strengthen our analysis, but critical financial information is unavailable. Serta Simmons controls
about 32% of market share and it operates several proprietary labels that compete on brand
and technology. Of all the companies within the space, Serta Simmons offers the widest range
of products, prices, and distribution channels, but it still lacks the technology innovation that
protects Purple’s competitive advantage. The industry also contains many smaller DTC
manufacturers that specialize in geographic segments, customer demographics, and price.
These companies offer a low-cost option for customers, but again lack the innovative comfort
that Purple provides. We see them as minor immediate threats, but without a definite
competitive advantage, we doubt they will survive long-term. There are also small unique
private companies such as Sleep Eight that focus on offering smart-beds to compete with the
products of Sleep Number. These companies focus their technologies on measuring sleep
metrics rather than maximizing comfort. We believe that while they have innovated, their
products are targeted at a very narrow consumer segment that will not pose a significant threat
to Purple.
The three major publicly traded bedding companies allow us to analyze KPIs and valuation
changes in past corrections and recessions. Tempur Sealy and Sleep Number were established
long before the great recession, which gives us an indication as to how companies in the
bedding market recover and react to adverse conditions. This is extremely relevant to the
current market situation surrounding the COVID-19 outbreak. This case analysis can be found
within the Risk section of this report.
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Stock Performance
F
G
A B C D E
Since Purple began trading in February 2018, it has seen mixed performance. The following
points highlight key dates surrounding significant stock movement.
A. During its first quarter of trading, a reported loss for the 2017 fiscal year caused the
price to drop from $13.08 per share to $9.09, a loss of 30.5%. The stock continued to fall
until April 19th, when the stock began to rally in anticipation of Q1 earnings.
B. Unfortunately, Purple announced on May 14, 2018 that it had missed earnings
estimates (-$0.49 per share compared to -$0.06 expected) and its stock fell from $9.94
to $6.53, a loss of 34.3%.
C. The stock price rallied again on May 21, 2018 as insiders began acquiring shares but
quickly tumbled after reporting a miss for Q2 earnings.
D. On October 23, 2018 the Company announced that Joseph Megibow had been
appointed to lead the Company as CEO. This fueled a 20% gain, bringing the share price
to $6.95.
E. Purple’s share price surged again on November 14, 2018 as the Company beat earnings
estimates with -$0.05 per share (compared to -$0.14 expected).
F. Additional key management appointments on October 3, 2019, including the
announcement that Craig Phillips would be moving into the CFO role, caused increased
stock volatility.
41 | P a g e
G. Purple announced a Q3 net profit in November 2019 and the stock began to climb again.
Purple’s stock continued to climb to its 52 week high of $15.76 until February 2020,
when concerns about the coronavirus COVID-19 caused the market to decline.
Despite the price swings over the last two years, investors who had purchased Purple’s stock at
its IPO and held it until the market decline in February would have seen a 57.4% return on their
investment. As a result of this volatile period for Purple, it has a low beta of just 0.68 relative to
an industry beta of 1.30. 73,74 We believe that the industry beta will more representative of
Purple’s future performance, so we have used a beta of 1.30 throughout this report. Despite
the limited period of trading activity, it appears that following the COVID-19 downturn Purple
and its competitors will resume trading on a more level playing field. Recession and COVID-19
risks are explained further in the Risk section of this report.
Within the three-year price performance displayed above, there are several important factors
to note. Purple underperformed the industry and market throughout 2018 primarily due to its
unconventional entrance to the public markets through the specialized acquisition company. It
did not attract the same attention as an IPO would and the low-float made institutional
investment challenging. As Purple released a strong 2019 Q3 report, several analysts were
added, and the share price surged. We believe the six “buy” ratings analysts presented were
responsible for that growth in share price, but then COVID-19 quickly diminished gains. Despite
currently trading near its all-time low, Purple has outperformed its DTC competitor Casper who
is currently down 67% from its February 2020 IPO. Sleep Number and Tempur Sealy’s stock
prices both enjoyed double digit growth prior to the decline, with Sleep Number slightly
outperforming and offering a return of 125% at the peak. Both of these companies have
experienced comparable losses to Purple and Casper in recent months of trading. Mattress
companies are in the consumer discretionary sector which means they exceed market returns
in a bull market but underperform in downturns.
Financial Analysis
Liquidity ratio: Current

Purple innovations has consistently improved its current ratio while its DTC counterpart, Casper
has worsened. This is a result of Purple’s cash and equivalents consistently increasing while
decreasing its accounts payable and accrued expenses during the same period. For Purple, it is
slightly offset by its steady decrease in inventory as it improves its distribution channels.
Conversely, Casper’s accrued expense in 2019 almost doubled from the previous year. This is
73
Pitchbook Public Company Profile (Purple)
74
http://www.csun.edu/~vcfin003/beta.pdf
42 | P a g e
attributed to Casper’s marketing and general trade expenses more than doubling from 2018 to
2019. Tempur Sealy’s increase in inventory and prepaid expenses was offset by a slight increase
in accounts payable and accrued expenses from 2017 to 2019. This caused its current ratio to
remain relatively stable. Conversely, Sleep Number’s low cash accounts and high accounts
payable have kept its ratio below the average. Furthermore, Sleep Number has utilized short-
term revolving credit and increased compensation and benefits.
Liquidity ratio: Quick

Mattress manufacturers have displayed a struggle to hold low inventories, likely due to
distribution bottlenecks and the high cost of individual products. This is seen in the significantly
lower quick ratios relative to current ratios. The company with the most steady and controlled
growth in this category analysis is Purple. Again, it is clear that the company has consistently
improved its ability to cover its liabilities over the past three years. This improvement is
explained by Purple’s decrease in inventory backlog and accrued expense while it
simultaneously increased cash and receivables. Tempur Sealy and Sleep number have remained
relatively low but constant. This is due to their low cash accounts and short-term borrowings.
Casper has varied greatly and showed an overall decline from 2017 to 2019. We see this as a
concern for Casper due to lack of controls.
Turnover ratios: Accounts receivable turnover

Purple has experienced a dramatic drop in its AR turnover over the three-year period being
analyzed. This is largely due to its increase in average accounts receivable outpacing its revenue
growth. This strength has been provided by Purple’s improved omni-channel distribution
efforts, manufacturing expansion, and additional wholesale partnerships. Comparatively,
Tempur Sealy slight gain was caused by increased sales offset by a very minor increase in
accounts receivable. This makes sense as it is a legacy firm with developed distribution channels
43 | P a g e
and a mature sales growth profile. Conversely, Sleep Number experienced a 20% drop in
accounts receivable which resulted in an increase in its turnover ratio. Information surrounding
this significant drop is limited. Casper’s AR turnover is most similar to Purple, both in terms of
multiple’s likeness and year-over-year decline.
Turnover ratios: Asset turnover

Purple’s expansion efforts have led to an increase in property plant and equipment, resulting in
a decrease in the asset turnover ratio. However, Purple’s asset turnover is still more rapid than
its peer group. This suggests Purple has been successful in developing lean operations relative
to its much larger competitors such as Tempur Sealy and Sleep Number. Due to Tempur Sealy’s
inorganic growth, it has a large goodwill account relative to the competitors. This has kept its
total assets large, which results in a low asset turnover ratio. Casper’s asset turnover is
decreasing rather than increasing and is significantly faster than Tempur Sealy’s turnover. Sleep
Number has seen an increase in sales and a write off to its goodwill account, resulting in a
relatively stable asset turnover that is second to Purple.
Leverage ratio: Total liabilities / Total assets

Purple has been paying down its long-term debt and as a result it has improved its leverage
over this three year period. Although its total liabilities to assets is relatively high compared to
its peers, we believe this is caused by its aggressive expansion efforts. Purple has also
decreased its payables and accrued expenses, adding to this ratio’s downward trend. Tempur
Sealy has also seen a decrease in leverage. This is largely attributed to its recent payment of
long-term debt. Conversely, Sleep Number and Casper have both seen increases in short and
long term debt. The result is increased leverage from 2017 to 2019 for these two companies.
With both of these companies relying on incredibly high marketing and sales expenditures, it
can be assumed that they rely on debt to finance the rest of their operations. Casper has
44 | P a g e
increased its liabilities at a tremendous rate over this period and we believe it will be
problematic for it in the future.
Coverage ratio: Interest coverage

As a result of Purple increasing its operating income year over year, it has increased its
capability to cover interest expenses. In 2019, Purple had the second lowest coverage ratio
compared to its peers, however this is attributed to an operating loss due to the company's
growth efforts. In 2019, Purple had an operating income which significantly improved its
coverage ratio. Conversely, Tempur Sealy and Sleep Number both offer positive operating
incomes, so their respective abilities to pay interest is not a concern. Casper however, had a
large operating loss which resulted in the lowest 2019 coverage ratio. This again highlights
Casper’s reliance on debt and unsustainable growth. COVID-19 concerns will likely widen this
gap and leaves a high probability of tripping debt covenants for Casper.
Profitability ratio: Return on assets

Purple improved its ROA with increased operational efficiencies, cost savings, and higher
margin products. This has been slightly offset by the lower margin wholesale distribution
channels it has adopted, but comparing operating income to assets, Purple is competing amidst
the industry’s leaders. Historically, growth efforts have hindered returns in previous years for
Purple, but by earning a positive operating income in 2019, it is now returning $16.2 million.
Tempur Sealy and Sleep Number have seen positive ROA throughout the three-year period. This
is a result of their well-established operations, brand recognition, and wholesale partnerships.
However, the negligible changes in ROA suggest they have struggled to significantly improve
efficiencies. Casper has struggled with consistently large operational losses which has greatly
affected its ROA. With an income statement that displays unsustainable expense growth, we
believe this will be hugely problematic for Casper.
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Valuation multiple: EV / EBITDA

With its first positive adjusted EBITDA in 2019 Purple hasn’t yet displayed historic trends or
changes but at 7.1x, it the highest of the comparable companies. This suggests that it is slightly
overvalued relative to its peers. As a general guideline, an EV/EBITDA below 10x is considered
healthy and Purple falls well below this indicator. Tempur Sealy and Sleep Number have both
had relatively high and stable valuations from 2017 to 2018 but in 2019 both saw valuation
declines with market volatility and declining share prices. As mentioned before, Sleep Number
also took on significant debt in in 2019 which contributed to its decrease in valuation.
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Common-Sized Statements Analysis
Common-sized: Income statement

Income Statement
Purple Innovation, Inc. Tempur Sealy, Inc. Sleep Number Casper Sleep, Inc.
Fiscal Year Ended 12/31/2018 12/31/2019 12/31/2018 12/31/2019 12/31/2018 12/31/2019 12/31/2018 12/31/2019
Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Total Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost Of Goods Sold 60.6% 55.9% 58.1% 56.8% 39.4% 38.1% 55.9% 52.1%
Gross Profit 39.4% 44.1% 41.9% 43.2% 60.6% 61.9% 44.1% 47.9%
Selling General & Admin Exp. 44.6% 39.4% 31.8% 31.6% 52.7% 53.3% 69.8% 70.4%
R & D Exp. 0.7% 0.9% - - 1.9% 2.1% - -
Other Operating - - - - - - - -
Expense/(Income)
Other Operating Exp. 45.3% 40.3% 31.8% 31.6% 54.6% 55.3% 69.8% 70.4%
Operating Income (5.9%) 3.8% 10.1% 11.6% 6.0% 6.6% (25.7%) (22.5%)
Interest Expense (1.3%) (1.2%) (3.4%) (2.8%) (0.4%) (0.7%) - (0.4%)

Interest and Invest. Income 0.1% 0.1% - - 0.0% 0.0% 0.1% -
Net Interest Exp. (1.2%) (1.1%) (3.4%) (2.8%) (0.4%) (0.7%) 0.1% (0.4%)
Income/(Loss) from Affiliates - - 0.7% 0.5% - - - -

Other Non-Operating Inc. (Exp.) 0.3% (4.0%) 0.1% (0.1%) - - (0.1%) (0.3%)
EBT Excl. Unusual Items (6.9%) (1.3%) 7.4% 9.3% 5.6% 5.9% (25.7%) (23.2%)
Restructuring Charges - - (0.5%) - - - - -

Gain (Loss) On Sale Of Invest. - - - 0.2% - - - -
Other Unusual Items - (1.5%) (0.8%) (1.0%) - - - -
EBT Incl. Unusual Items (6.9%) (2.8%) 6.1% 8.5% 5.6% 5.9% (25.7%) (23.2%)
Income Tax Expense - 0.1% 1.8% 2.4% 1.1% 1.1% 0.0% 0.0%
Earnings from Cont. Ops. (6.9%) (2.9%) 4.3% 6.1% 4.5% 4.8% (25.7%) (23.2%)
Earnings of Discontinued Ops. - - (0.7%) (0.0%) - - - -

Net Income to Company (6.9%) (2.9%) 3.6% 6.1% 4.5% 4.8% (25.7%) (23.2%)
Minority Int. in Earnings 5.4% 1.9% 0.1% 0.0% - - - -

Net Income (1.5%) (0.9%) 3.7% 6.1% 4.5% 4.8% (25.7%) (23.2%)
Analysis: Gross profit margin

Sleep Number has the highest average gross profit margin for the previous three fiscal years at
61.5%. Purple and Tempur Sealy have profit margins of 44.1% and 43.1% respectively. The
reason Sleep Number been able to maintain a significantly higher gross margins is due to its
increased upstream supply chain efficiency, increased prices, low product transition costs from
the previous year, and high margin on products. Simply put, Sleep Number products are easily
outsourced, inexpensive to produce, and expensive to purchase. All of these factors are
beneficial to for Sleep Number, but we believe they will be forced to adjust their business
model to better compete with a modernizing industry. While Purple currently has the second
lowest gross margin, it has shown significant improvement and if the trend continues, it has the
potential to reach a GM closer to that of Sleep Number’s. Casper does have a higher gross
margin than Purple and Tempur Sealy, but due to its staggering losses, we don’t believe it is a
47 | P a g e
very meaningful comparison. It is likely doing all it can to improve the gross margin to increase
accessibility to funds for marketing expenses as explained below.
Analysis: Operating income

Purple ended Fiscal Year 2019 with $16.2 million in operating income compared to an operating
loss of $16.9 million the previous year. Greater efficiencies in the company’s operations along
with an increase in sales and demand fulfillment has allowed the company to achieve this
improvement.75 We expect operating margin to increase as Purple’s brand and products
continue to spread and its operations are further refined. Tempur Sealy and Sleep number both
maintain positive operating margins and we don’t expect that to change. A notable difference is
that while Sleep Number was established over 30 years ago, its marketing expenses still
account for 53.2% of revenues. This is concerning for a company that sells primarily through
wholesale distribution channels. For Casper, revenues account for 70.4% of revenues and while
this should be correlated with great brand success, Purple’s reviews are significantly better and
its approach to marketing has been more effective.
Analysis: Net income

Only Tempur Sealy and Sleep number have positive net income, although even their net income
margins only represent 6.8% and 4.1% of total revenues. Purple, with a loss representing less
than one percent of its revenues, is very close to achieving profitability and with the 2019
investments in property plant and equipment we believe they are on target to show a profit at
the end of fiscal year 2020. Another point worth noting is that while Tempur Sealy and Sleep
number both have positive profitability, they have fluctuated significantly in the past. We
believe this is good for Purple as it has displayed steady growth year over year. Casper is again a
far behind the group, though its net income did improve in FY 2019.
75
Purple 10-K pg. 52
48 | P a g e
Common-sized: Balance sheet

Balance Sheet
Purple Innovation, Inc. Tempur Sealy, Inc. Sleep Number Corperation Casper Sleep, Inc.
Fiscal Year Ended Dec 31, 2018 Dec 31, 2019 Dec 31, 2018 Dec 31, 2019 Dec 31, 2018 Dec 31, 2019 Dec 31, 2018 Dec 31, 2019
ASSETS
Cash And Equivalents 17.1% 22.7% 1.7% 2.1% 0.3% 0.2% 23.1% 28.4%
Cash & ST Investments 17.1% 22.7% 1.7% 2.1% 0.3% 0.2% 23.1% 28.4%
Accounts Receivable 14.3% 19.4% 11.8% 12.1% 5.3% 2.5% 16.5% 12.1%
Other Receivables - - - - - - 3.4% 6.0%
Total Receivables 14.3% 19.4% 11.8% 12.1% 5.3% 2.5% 19.8% 18.0%
Inventory 33.1% 32.8% 8.2% 8.5% 18.1% 10.8% 28.1% 14.1%

Prepaid Exp. - - 7.6% 6.5% 1.7% 1.9% 6.6% 7.3%
Other Current Assets 2.1% 2.3% 0.3% 0.1% 6.7% 4.5% 1.3% 0.2%
Total Current Assets 66.5% 77.3% 29.7% 29.4% 32.1% 19.9% 78.9% 68.0%
Gross PP&E 35.6% 26.1% 32.9% 38.8% 99.9% 101.4% 21.1% 36.5%
Accumulated Depreciation (4.2%) (4.4%) (17.4%) (16.5%) (56.1%) (36.4%) (5.0%) (5.4%)
Net PP&E 31.4% 21.6% 15.5% 22.2% 43.7% 65.1% 16.1% 31.1%
Long-term Investments - - 0.8% 0.7% - - - -

Goodwill - - 26.6% 23.9% 13.6% 7.9% - -
Other Intangibles 2.1% 0.7% 23.9% 20.9% 2.4% 1.1% 0.7% 0.5%
Deferred Tax Assets, LT - - 0.8% 0.5% - - - -
Deferred Charges, LT - - - - 6.3% 4.2% - -
Other Long-Term Assets 0.0% 0.4% 2.6% 2.3% 1.9% 1.8% 4.3% 0.5%
Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
LIABILITIES
Accounts Payable 34.6% 34.0% 9.3% 8.2% 30.8% 16.7% 23.8% 17.0%
Accrued Exp. 13.7% 13.8% 8.8% 9.3% 5.9% 5.0% 34.0% 27.7%
Short-term Borrowings - 0.2% - - 42.5% 28.7% 12.5% 8.2%
Curr. Port. of LT Debt - - 1.7% 1.0% - - - -
Curr. Port. of Leases 0.0% 0.1% - 1.9% - 7.4% - -
Curr. Income Taxes Payable - 0.2% 0.4% 0.4% 3.9% 2.8% - -
Unearned Revenue, Current 10.5% 4.2% - - 6.9% 4.2% 7.6% 2.9%
Other Current Liabilities 8.9% 6.3% 4.5% 4.5% 14.0% 9.0% 8.6% 8.8%
Total Current Liabilities 67.7% 58.8% 24.6% 25.3% 103.9% 73.8% 86.4% 64.6%
Long-Term Debt 29.9% 24.0% 56.4% 47.2% 0.2% 37.0% - -

Long-Term Leases 0.1% 0.3% 2.5% 8.5% - - - -
Unearned Revenue, LT - - - - 9.0% 5.6% - -
Def. Tax Liability, LT - - 4.3% 3.3% 1.0% 0.5% - -
Other LT Liabilities 5.1% 20.2% 4.1% 3.9% 9.2% 3.0% 0.8% 23.6%
Total Liabilities 102.8% 103.2% 92.0% 88.2% 123.3% 119.8% 87.2% 88.2%
Common Stock 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% - -

Additional Paid In Capital 5.1% 4.1% 19.6% 18.8% - - 7.5% 8.2%
Retained Earnings (6.0%) (5.7%) 55.7% 55.6% (23.4%) (19.8%) (199.3%) (155.6%)
Treasury Stock - - (64.0%) (59.9%) - - - -
Income and Other - - (3.5%) (2.9%) - - (0.4%) (0.2%)
Total Common Equity (0.9%) (1.6%) 7.9% 11.7% (23.3%) (19.8%) (192.1%) (147.7%)
Minority Interest (1.9%) (1.6%) 0.1% 0.0% - - - -
Total Equity (2.8%) (3.2%) 8.0% 11.8% (23.3%) (19.8%) 12.8% 11.8%
Total Liabilities And Equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Analysis: Current assets

Purple and Casper have significantly larger cash accounts than Tempur Sealy and Sleep Number.
Our assumption is that as younger companies experiencing huge year-over-year growth, these
49 | P a g e
two are more unsure of their cash needs and want a buffer to cover unforeseen needs. Purple,
Casper, and Tempur Sealy also have significantly higher accounts receivable which is explained
by their more attractive financing terms for customers. Despite Sleep Number maintaining the
lowest AR, Purple is an outlier on the other side of the spectrum suggesting that it needs to
focus on increasing the rate of AR turnover, despite our findings in the prior section.
Analysis: Goodwill & Intangible assets

Due to Purple’s wholly organic growth, it does not have any goodwill on its balance sheet.
Casper is in the same position as a DTC competitor focused on its own operations. This is an
opportunity for Purple as it could consider acquiring a manufacturer or supply chain company
as it becomes profitable from operations. Tempur Sealy and Sleep Number have acquired
several companies throughout their 30 years of operations and have built substantial goodwill
accounts. Sleep Number underwent a write down to this account in 2019. Goodwill accounts
for nearly a quarter of Tempur Sealy’s total assets. Tempur Sealy also has the largest account
for intangible assets, accounting for 20.95% of total assets, a percentage that far exceeds the
follower (Sleep Number) at just 1.14%. This suggests that like Purple, Sleep Number and Casper
license patents from an outside technology development company. Purple of course has the
advantage with this due to its third party actually being the primary shareholders and founders,
perfectly aligning incentives. This also insolates the companies’ assets from future write-offs as
patents expire. Tempur Sealy will not be isolated from this and could potentially see a big loss
from the write-down. Tempur Sealy is also the only company with a deferred tax asset account,
which will benefit it in the future.
Analysis: Negative retained earnings & equity

Purple, Sleep Number, and Casper all have negative retained earnings accounts, while Tempur
Sealy’s is positive. For Purple and Casper, these accounts are negative due to the compiling
negative net income while Sleep Number underwent a large share repurchase program in FY
2017 that turned its equity negative. All three companies’ retained earnings have been trending
towards positivity as they pay down their long term liabilities. Casper has preferred stock
convertibles in an account that offsets its negative equity and accounts for 159% of total assets.
Currently, Tempur Sealy’s capital structure represents the healthiest balance, but Purple is
close behind and we believe it is a good time to utilize the availability of inexpensive debt. None
of these companies pay dividends.
50 | P a g e
Corporate Governance and Employees
Management
76
Name Role Age Year Joined Previous

Joseph Megibow CEO 50 2018 American Eagle
Craig Phillips CFO 53 2019 FTI Consulting
John Legg COO 57 2019 Claris Solutions
Terry Pearce Chairman 70 2010 (co-founder) EdiZONE
Joseph Megibow Craig Phillips John Legg Terry Pearce
Purple’s core management team reflect diverse backgrounds with all three members, other
than Terry Pearce (co-founder), previously working in various roles for companies outside the
bedding industry. Megibow, Phillips, and Legg have all been appointed to their respective roles
at Purple within the last 18 months. We view this turnover in management as an extremely
positive one that has ushered in more serious players to lead Purple as a public company. Sam
Bernards, Purple’s previous CEO for example, was the nephew of Terry and Tony Pearce.77
Although Bernards did have applicable prior experience, along with all other previous Purple
executives, the current management team’s proven tracks records in DTC and e-commerce are
of a much higher caliber.
Joseph Megibow (CEO) most recently served as the Senior Vice President and Chief Digital
Officer at American Eagle from 2012 to 2015.78 Megibow was credited with the transformation
and growth of American Eagle’s $550M+ direct-to-consumer clothing business. 79 Prior to
American Eagle, Megibow also had senior roles with Expedia.com primarily involving digital
marketing and product management.80 Purple’s board of directors “conducted an exhaustive six
76
https://www.wsj.com/market-data/quotes/PRPL/company-people/
77
https://www.forbes.com/sites/amyfeldman/2017/05/02/mattress-missionaries-inventors-tony-and-terry-
pearce-bet-big-with-fast-growing-startup-purple/#48db1c36a806
78
https://investors.purple.com/officers-and-directors
79
80
51 | P a g e
month search” to find the best CEO before ultimately landing on Megibow due to his prior
history of leading several successful omnichannel-based DTC companies. 81
Craig Phillips (CFO) started his in career in “Big 4” accounting working with the SEC and also
individual companies looking to raise capital through both private and public offerings.2 Over
the past decade, Phillips has held the role of CFO at three private companies and has most
recently worked as a managing director at FTI Consulting, one of the largest financial consulting
firms in the world. 82 In March of 2019, after Purple’s prior CFO left for “personal reasons,”
Phillips was appointed as Purple’s interim CFO. 83 Although Phillips does not have any previous
experience with DTC and heavily marketing-focused companies, during Phillips’s interim period
as Purple’s CFO he was described by Megibow as very knowledgeable and an “exceptional
leader and operator.” 84 Phillips was offered and accepted his full-time role as Purple’s CFO in
October of last year.
John Legg (COO) has over twenty years of experience managing global supply chains,
distribution, and logistics efforts at many e-commerce and direct-to-consumer companies.85
Zale Jewelers, Tory Burch, and Toys R US are several notable companies where he has
worked. 86 Legg was brought onto Purple’s management team in January of 2019 due his
previous experience working for e-commerce and DTC companies, and also for his
comprehensive knowledge of both operational wholesale and retail supply chain management.
Terry Pearce (Chairman), co-founder of Purple alongside his brother Tony Pearce, serves as the
chairman of Purple’s board. 87 Pearce graduated from the University of Utah with a degree in
engineering and also founded EdiZONE, a company of engineers that “takes your company's
end-goal and invents the products for your ultimate success and advantage in the marketplace.
EdiZONE is a powerhouse in the development and implementation of unique and successful
products.” 88 Notable licensees of EdiZONE include Nike, Hasbro, and Johnson & Johnson.89
Many of EdiZONE’s patented technologies are “advanced cushioning and gel technologies.” 90
EdiZONE’s success revolving around its cushioning technologies is responsible for the Pearce
brothers’ incorporation of Purple in 2010. With Terry Pearce serving as the chairman of the
board along with his brother Tony as a director, the two bring with them extensive knowledge
81
82
https://www.linkedin.com/in/craig-phillips-b0a3b514/
83
84
85
86
https://www.linkedin.com/in/johnalegg/
87
88
https://www.EdiZONE.com/
89
90
52 | P a g e
of the technology behind the many products that Purple offers. The two brothers also head the
Company’s R&D efforts.
Board Structure
Purple’s board operates with an independent structure according the classification of

“independent” by the NASDAQ. As a result, the Company’s CEO Joseph Megibow does not
serve as the chairman of the board to mitigate inherent conflicts of interest. Purple has eight
directors on its board, with five of the eight directors classified as independent. For
comparison, 45.6% of companies in the S&P 500 still have CEOs that are the chairman of the
board, compared to just 9.2% of European companies trading on the STOXX 600.91 Purple is
classified as a “controlled company” under the rules of the NASDAQ (over 50% of its voting
power is held by InnoHold). As a controlled company, Purple is not required to have an
independent board of directors but has chosen to do so as a measure of strong corporate
governance.92
Purple’s board is not staggered. Each year at the Company’s annual meeting of shareholders,
every board member is up for reelection with term lengths lasting just one year. 93 This structure
unfortunately weakens Purple’s defensive ability against a potential hostile takeover. Purple’s
board also only has two committees: the audit committee and compensation committee. 94 The
audit committee is primarily responsible for financial reporting oversight and risk, and is 100%
independent with a total of three members. 95 The compensation committee, composed of four
members, focuses on executive pay structure and incentives, with Terry Pearce being the only
non-independent member. 96 As a controlled company, Purple is not required to have a
nominating and corporate governance committee. 97 This, alongside the previously mentioned
recent turnover in senior leadership, contributes to Purple’s unfavorable ISS score of nine.98
The ISS score measures the quality of a company’s corporate governance. The higher a
company’s ISS score is (out of ten), the riskier a company’s corporate governance.
Although to some investors, the recent change in Purple’s management may be seen as red
flag, we strongly believe that the Company’s current leadership of professionals with proven
91
https://www.wsj.com/articles/more-u-s-companies-separating-chief-executive-and-chairman-roles-
11548288502
92
2019 Purple Proxy Statement
93
94
95
96
https://www.edizone.com/
97
98
https://finance.yahoo.com/quote/PRPL/profile?p=PRPL
53 | P a g e
track-records of successfully managing DTC-marketing companies in the past, is a major

competitive advantage for the Company.
Compensation
Name Salary Equity Incentive- Total Comp % Rev

Awards based
Joseph Megibow $450,000 $439,125 $403,000 $1,391,549 0.32%
Craig Phillips $83,077 $494,029 $90,000 $1,270,418 0.30%
John Legg $316,346 $441,734 $160,417 $996,815 0.23%
Terry Pearce $328,846 $0 $0 $374,734 0.09%
Total comp includes other misc. amounts. $603,312 was paid to Philips through FTI Consulting while Phillips status was interim CFO. 99
Purple’s executive management team’s compensation structure primarily consists of three

segments: base salary, stock/options awards, and equity-based performance incentives. The
Company is still currently “developing an executive compensation program designed to align
compensation with our business objectives and the creation of stockholder value, while
enabling us to attract, motivate and retain individuals who contribute to our long-term
success.” 100
Purple’s compensation structure, although forward-looking, admittedly could do more to align

management’s and shareholders’ interests through stronger performance incentives involving
the appreciation of PRPL shares. Given Purple’s prior history of struggling to retain senior level
management for extended periods of time, the current performance-based compensation
structure is more focused on long-term retention rather than share price appreciation. The
strike prices on option incentives recently given to Megibow, Phillips, and Legg have been only
slightly above the Company’s trading price at the time of granting.101 For example, on the
twentieth of February last year, PRPL closed at a price of $5.69 per share. 102 On that same date
Legg was granted 250,000 shares at strike price of $5.75 with a five-year expiration. 103 As long
as senior management stays with the Company for a few years for the majority of their options
to vest, and Purple’s share price increases even marginally, executive management is poised to
realize large capital gains. Although this is not unusual, Purple’s executive compensation
structure could still be shifted to place a stronger emphasis on more aggressive long-term
performance-related goals.
99
100
2019 Purple 10-K
101
102
https://finance.yahoo.com/quote/PRPL/history?
103
54 | P a g e
In terms of CEO pay to revenue, Megibow’s total compensation to revenue ratio in 2019 was
0.32%. 104 The median level of CEO compensation to revenue is also 0.32%. 105 This ranks
Megibow’s compensation exactly at the 50% level of all publicly traded companies CEOs in the
United States.106 Further, Megibow’s total compensation to the median Purple employee salary
during 2019 was 21:1. 107 For companies with revenues under $500M, the average CEO to
employee pay ratio is 20:1. 108 This once again ranks Megibow’s compensation right at the
mean. Despite Purple’s small market cap, we believe that Megibow’s compensation during
2019, especially in relation to CEO pay to revenue, was justifiable given the Company’s strong
performance during the year.
Key Initiatives & Say-Do Ratio
In Purple’s 2018 10-K, the Company listed seven main goals which include further direct-to-
consumer growth, expansion of retail operations, existing product innovation, new product
launches, international expansion, the implementation of accurate financial reporting controls,
and the development of an executive compensation plan to align compensation with the
creation of shareholder value. 109
Goal Met?
Direct-to-consumer growth
Expansion of retail operations
Existing product innovation
New product launches
International expansion
Implement strong financial controls
Development of a compensation plan to align interests
104
105
https://www.aol.com/article/finance/2014/06/27/overpaid-ceos-executive-compensation-vs-
revenue/20920130/
106
https://www.aol.com/article/finance/2014/06/27/overpaid-ceos-executive-compensation-vs-
revenue/20920130/
107
https://www.payscale.com/research/US/Employer=Purple/Salary
108
https://www.shrm.org/resourcesandtools/hr-topics/compensation/pages/
109
2018 Purple 10-K
55 | P a g e
Direct-to-consumer growth
From 2018 through the end of 2019, DTC sales grew by 9.2%. 110,111 In 2019, DTC sales were
$265.21M accounting for 61.9% of total revenue. 112 2018’s DTC sales of $242.93M represented
85% of total revenue.113 Although DTC sales overall grew, Purple’s increased retail presence
significantly decreased DTC sales as a percentage of total revenue in 2019.
Expansion of retail operations

As of 2018’s annual report, Purple had one company retail store in Alpine, Utah and
relationships with several wholesalers including Mattress Firm, Macy’s, Furniture Row, and Bed
Bath & Beyond. 114 The Company’s goal for 2019 was to launch more Purple retail stores and
also to expand the number of wholesalers that sell Purple mattresses. During 2019, the
Company successfully entered into additional retail relationships with Bloomingdales, Denver
Mattress, HOM Furniture, Steinhafels, and Raymour & Flanigan. 115 Purple also launched a new
outlet store in Salt Lake, moved its flagship retail store and HQ from Alpine to Lehi, and
launched three new showrooms in San Diego, Santa Clara, and Santa Monica. 116 Purple’s
increased retail presence can be expected to both drive new sales and also increase the brand
awareness of the Company moving forward.
Existing product innovation

With Purple’s high level of vertical integration, product refinement and testing is done relatively
easily in-house. Although Purple’s most recent major product facelift for its mattresses was
done in February of 2018, the Company is continually refining its products.117 In late 2019 for
example, Purple “reinvented” its original or most basic mattress by increasing its edge support
with dense foam side rails and also added a soft stretchy cover.118
New product launches

In 2019 Purple successfully launched many new products other than mattresses. 2019 product
launches included a weighted blanket, sleep mask, the Company’s Harmony pillow, a mattress
protector, and a platform bed. 119 The Company is attempting to expand into the general sleep
and lifestyle market through its side products and accessories.
110
2019 Purple 10-K
111
2018 Purple 10-K
112
2019 Purple 10-K
113
2018 Purple 10-K
114
2018 Purple 10-K
115
2019 Purple 10-K
116
2019 Purple 10-K
117
https://purple.com/blog/purple-mattress-vs-purple-hybrid-mattress-purple-hybrid-premier
118
https://www.usnews.com/mattress/purple
119
https://purple.com/newsroom
56 | P a g e
International expansion
Purple believes that there is “substantial opportunity for international expansion.” 120 In 2018
the Company anticipated entering into Canada in 2019 via both DTC and wholesale channels.
Unfortunately, minimal progress was made in doing so throughout the year, as Purple’s
production capacity struggled to even keep up with the high level of domestic demand.121
Purple is planning on opening a manufacturing facility on the east coast of the United States
this year.122 This should help facilitate and ease entry into Canada and also eventually Europe.
Implement strong financial reporting controls

Purple has had a history of inaccurately reporting on certain areas of the Company’s financials.
In preparation for becoming public in 2018, the Company discovered material errors in previous
financial statements for 2016 and 2017. In 2016, $4.4M of “post-closing net adjustments”
related to the reverse merger were made to the Company’s balance sheet and statement of
operations.16 Additionally, in 2017 the Company overstated inventory and prepaid inventory by
a combined total of $3.4M or 23.3%. 123 During the 2019 fiscal year, Purple “hired additional
personnel and other supervisory resources to strengthen internal control over financial
reporting, specifically in the areas of technical accounting and our month-end close
processes.” 124 In Q3 of 2019 the Company identified what it believed to be the control-related
source responsible for the previous reporting errors and claims that the weakness has now
been remedied. 125 Additionally, during 2019 there were no known financial reporting errors.126
The elimination of financial reporting errors and the improvement of internal controls should
act to boost not only investor confidence, but also the Company’s ISS score which was
previously ranked as a ten for audit. 127 Purple’s auditor is BDO USA, a financial consulting and
auditing firm with seven thousand employees and over $1.6B in revenue.128
Compensation plan
As of EOY 2018, the Company was still in the process of creating a compensation plan which
would positively align the interests of management and shareholders. As mentioned above,
compensation is currently focused heavily on executive retention. In Purple’s 2019 10-K the
compensation committee stated that it was still developing a sweeping compensation plan, but
in 2019 the board added a short-term performance plan to incentivize executive management
to meet certain metrics. 129 This new short-term performance plan gives a minimum threshold
120
2018 Purple 10-K
121
2019 Purple 10-K
122
2019 Purple 10-K
123
2018 Purple 10-K
124
2019 Purple 10-K
125
2019 Purple 10-K
126
2019 Purple 10-K
127
https://finance.yahoo.com/quote/PRPL/profile?p=PRPL
128
https://en.wikipedia.org/wiki/BDO_USA,_LLP
129
2019 Purple 10-K
57 | P a g e
and a target threshold for revenue and EBITDA numbers. 130 If the minimum thresholds for both
revenue and EBITDA are met, Megibow, Phillips, and Legg get a bonus equivalent to 50% of
their individual base salaries. If the target thresholds are met, their bonus is increased to 100%
of base salary.131 Although this is undoubtedly a step in the right direction, we still believe that
more could still be done to tie compensation to share price appreciation, specifically through
more aggressive option strike prices and a greater concentrate of pay shifted towards long-
term performance.
Earnings Performance
Since Purple became public in early 2018, the Company has reported quarterly earnings a total
of eight times. Purple has beat on EPS in four out of eight occasions and has beat on revenue in
every quarter except Q3 in 2018. The median historical EPS surprise has been 14%, and the
average revenue surprise has been 5%. Because Purple’s earnings are close to 0, its EPS surprise
is inflated because the denominator is very small. Therefore, we place greater weight on the
company’s revenue surprise. With 61% of companies in the S&P 500 now reporting a positive
earnings surprise in any given quarter, Purple’s reports in terms of EPS performance have been
in-line or just slightly below the performance of the overall market. 132 The average lifetime
share price return on the day after Purple reports earnings is -4.0%. 133 However, over 2019, the
mean next-day return on PRPL was a positive 10.7%, indicating a positive shift in the long-term
market sentiment towards the Company.134 After Purple’s impressive 2019 Q4 report in which
the Company reported a 58% increase in year-over-year Q4 revenue, shares initially traded 5%
higher after hours but declined over 30% in the following two days as an insider’s conversion of
private to public shares spooked the market. 135 Additionally in Q4, the terms of a complex deal
involving the increased probability that Purple may have to reprice private incremental loan
warrants given to creditors, resulted in a $13.4M non-cash liability expense which caused a net
loss of $4.2M compared to what would have been a net gain of $9.2M and a positive EPS of
$0.66 for Q4 2019.136 The incremental loan warrants are required to be repriced in any one of
the four following scenarios: 1) a fundamental transaction; (2) acquisition of 25% or more of
the total voting power by any one person or group of affiliated persons or entities; (3) Terry and
Tony Pearce individually or together ceasing to beneficially own at least 50% of the voting right;
or (4) the Board of Directors ceasing to be comprised of a majority of independent directors. 137
Purple’s Earnings data and performance is exhibited below.
130
2019 Purple 10-K
131
2019 Purple 10-K
132
https://www.spglobal.com/marketintelligence/en/news-insights/trending/5vKNt-qJu5tb3mlmDPEbFw2
133
https://finance.yahoo.com/quote/PRPL/history?p=PRPL
134
https://finance.yahoo.com/quote/PRPL/history?p=PRPL
135
https://www.nasdaq.com/articles/purple-innovation-inc.-prpl-q4-earnings-and-revenues-top-estimates-2020-
03-09
136
2019 Purple 10-K
137
2019 Purple 10-K
58 | P a g e
138
Q1 18 Q2 18 Q3 18 Q4 18 Q1 19 Q2 19 Q3 19 Q4 18
EPS -450% -100% -450% 14% 4050% 59% 900% -725%
Actual (0.18) (0.12) (0.09) (0.12) (0.02) (0.16) 0.18 *(0.29)
Consensus (0.04) (0.06) (0.02) (0.14) (0.81) (0.27) 0.02 0.04
Revenue 5% 5% -18% 2% 17% 9% 12% 4%
*see above commentary
Ownership Structure
Purple became public through a reverse merger with Global Partner Acquisition Corp (GPAC), a
special purpose acquisition company. 139 As part of the reverse of the company created a class B
set of shares in addition to the existing class A shares. Both class A and class B shares have
equal voting rights of one vote per share. There are currently 41.6M class A shares outstanding
listed on the NASDAQ under the ticker PRPL, and 12.3M class B shares outstanding. Class B
shares are private and entirely owned by the Pearce brothers through InnoHold, an entity
owned by the brothers, which also owns 70.9% of the class A shares. 140
Prior to November of 2019, there were 9.7M class A shares and 40.1M class B shares
outstanding.141 On three separate occasions, with the most recent occurrence on March 9,
2019, InnoHold has converted shares from class B to class A. Thus far, the total number of
converted shares is 29.5 million.142 This recent conversion of shares in March led to the above-
mentioned selloff in PRPL stock following the Company’s latest Q4 earnings report.
Additionally, warrants which entitle the owner to purchase one half a class A shares at a strike
price of $5.75 (the equivalent of a strike price of $11.50 per share) with an expiration date in
February of 2023 trade OTC under the ticker PRPLW. 143 The warrants were issued as part of the
reverse merger with GPAC, in which GPAC was granted 12.8M out of 28.3M total issued
warrants in addition to 3.9M class A shares.144 If Purple’s price exceeds $11.50 in February 2023
when the warrants expire, a sizable dilution could occur. The issuance of warrants through a
reverse merger is a fairly common procedure and is considered an added bonus for the
investors in a SPAC. In addition, if the warrants are exercised at expiration, Purple will receive
the cash equivalent of the strike price times the number of exercised warrants which could
result in a $162M cash infusion to the Company.
138
https://seekingalpha.com/symbol/PRPL/earnings/eps_surprise_summary
139
2019 Purple 10-K
140
2019 Purple 10-K
141
2018 Purple 10-K
142
Purple 13D filings
143
2019 Purple 10-K
144
2019 Purple 10-K
59 | P a g e
The Pearce brothers control of 82% of voting rights for Purple. There is a 9.3% public float on
the class A shares, with 23% of the float on average being sold short.145 The average daily
trading volume over the past sixty-five days has been 380,200 shares.146 Using PRPL’s sixty-five
day moving average of $11.00 per share, this computes into an average daily dollar volume of
$4.18M.147 A relatively small amount of capital has the potential to significantly move PRPL
shares. This is compounded by the Company’s low public float. Additionally, we spoke to a
research analyst at Hood River Capital Management (2.7% ownership in PRPL class A shares),
and the analyst stated that PRPL’s low float has been a significant factor for Hood River, as
many institutional investors have been experiencing difficulty in obtaining sizable quantities of
PRPL shares in the open market.
An exception to this involves Coliseum Capital, a major institutional shareholder of PRPL that
owns 19.8% of class A shares and 39.3% of the convertible outstanding warrants.148 Coliseum
was a majority owner in GPAC and therefore acquired most of its current ownership in Purple
through the consummation of the reverse merger between the two companies, and as a result
has not had to heavily compete in the open market for shares.149 Adam Gray, co-founder of
Coliseum, serves on Purple’s board as a director, alongside two other directors originating from
GPAC. 150 At this time we do not feel that Coliseum represents a hostile threat to Purple either
presently or into the future. Coliseum has long-term goals and invests in what they believe are
undervalued companies. 151 The $1B AUM fund describes themselves as a “patient,
collaborative investor that focuses on working supportively with management teams and
boards”.152 Given Coliseum’s tenure with GPAC as an early investor prior the merger of Purple,
it makes it even further unlikely that Coliseum has any significant hostile takeover intentions.
145
https://fintel.io/ss/us/prpl
146
https://www.marketwatch.com/investing/stock/prpl
147
TD Ameritrade Thinkorswim trading software
148
2019 Purple 10-K
149
2019 Purple 10-K
150
2018 Purple 10-K
151
https://www.linkedin.com/company/coliseum-capital-management-llc/about/
152
https://www.businesswire.com/news/home/20161007005346/en/Coliseum-Capital-Management-Sends-
Letter-Board-Directors
60 | P a g e
Insider Trading
61 | P a g e
Over the course of 2019 and through mid-March of this year, 293,026 shares were purchased
by insiders, 29.5M shares were transferred from class B to class A, and zero shares were sold by
insiders.153 There were thirteen separate buy transactions and three separate transfer
transactions.154 The Pearce brothers were responsible for transferring all 29.5M shares through
InnoHold in late 2019 and early 2020. Coliseum Capital and Joseph Megibow were the primary
parties responsible for purchasing shares.155
The Pearce brothers’ conversion of their class B shares to class A shares has spooked the
market into thinking the brothers are preparing to cash out and sell the majority of their
staggering stake in the Company. In the filings for the transfers, the reasoning provided was to
“increase the public float.” 156 However, this is misleading as without actually selling any class A
shares and just instead transferring from B to A, the public float remains unchanged. A deep
dive into Purple’s 10-K, however, explains the likely reasoning being the Pearce’s most recent
transfer of 18M shares in March. For InnoHold to transfer from class B to A shares there are
several restrictions and lock-ups in place. The most noteworthy restriction states that if class A
shares trade above $12.00 for a period of twenty or more out of thirty trading days, the option
for InnoHold to transfer from class B to A shares could perpetually be lost if PRPL stays above
$12 a share. 157 The trading day before the Pearce brothers sold 18 million shares on the tenth
of March, marked the twenty-seventh trading day in a row of PRPL trading over $12 a share.158
On March ninth, the day before the transfer of shares, PRPL closed at $11.78, allowing the
Pearce’s a window to transfer their shares. 159
Employees and Culture
Purple currently employs 875 employees of which 850 are full-time. 160 Most employees work in
the Company’s two large Utah facilities in Alpine and Grantsville with a combined footprint of
667,000 square feet, and also at Purple’s new headquarters in Lehi.161
There are currently eighty-one available openings within the Company.162 The majority of jobs
are in manufacturing, R&D, engineering and sales.163 Most manufacturing positions are
153
https://fintel.io/n/us/prpl
154
Purple 13D filings
155
Purple 13D filings
156
http://www.snl.com/Cache/IRCache/cfc0d5585-a636-1067-60fb-6e3afaeaae6b.html
157
2019 Purple 10-K
158
159
160
2019 Purple 10-K
161
2019 Purple 10-K
162
https://www.paycomonline.net/v4/ats/web.php/jobs?clientkey=0FD6FE79845086D9BD36D6EC936B7173
163
https://www.paycomonline.net/v4/ats/web.php/jobs?clientkey=0FD6FE79845086D9BD36D6EC936B7173
62 | P a g e
warehouse-related, involving the production of primarily mattresses and the hyper-elastic

polymer Purple grid.164 Some engineers also work in manufacturing to streamline the
production process, while most engineers work in R&D designing new products and refining
current ones. 165 Employees on the sales team predominately work in Purple’s company-owned
showrooms in Utah and California, in addition to Purple’s flagship retail store in Lehi. 166 Purple
further relies on labor contracting agencies and independent contractors to fill manufacturing-
related positions. 167 There are 150 temporary workers contracting with the Company
currently. 168 Purple’s employees are not involved with a labor union and there is no collective
bargaining agreement between Purple and its workers, indicating that the overall working
environment is positive. 169 Engineers make a competitive wage of $75,000 to $100,000
annually while entry level manufacturing employees earn a traditional warehouse wage in the
range of $14 to $18 per hour.170 Stock options are reserved for upper management.171
Company culture is very team oriented with a family-like environment.172 The Company
believes in taking care of its employees and “making work a place you actually look forward to
going to.” 173 Purple one-for-one matches 401(k) contributions up to 6% for all employees so
long as they have worked for the Company for at least four months. 174 Employees also get a
free mattress alongside medical, dental, and vision insurance, and three vacation weeks a
year. 175 Those involved in manufacturing work three twelve hour days a week and then get the
next four days off. 176 The majority of complaints involving company culture seem to stem from
manufacturing and production employees, in which some employees feel as if upper
management is ignorant of anything beyond their office environment. Given Purple’s rapid
growth, it is unsurprising that there are a large number of advancement opportunities within
the Company, as confirmed by many employee reviews. 177 However, consequentially there also
seems to be a general consensus that the Company has experienced moderate growing pains in
the past with finding its identity in going from a small private entrepreneurial firm to a
moderately-sized public company. 178 Megibow, during his eighteen months as CEO has played a
major role in improving employee satisfaction and retention while also introducing a more
164
https://purple.com/careers
165
166
167
2018 Purple 10-K
168
2019 Purple 10-K
169
2018 Purple 10-K
170
https://www.glassdoor.com/Reviews/Purple-Reviews-E1536694.htm
171
https://www.usnews.com/mattress/purple
172
173
https://purple.com/blog/purple-mattress-vs-purple-hybrid-mattress-purple-hybrid-premier
174
2018 Purple 10-K
175
176
177
178
https://purple.com/newsroom
63 | P a g e
structured process to the Company. 179 For instance, employee turnover previously over 100%
within manufacturing, has now decreased to the low single digits under Megibow’s robust
leadership.180
179
Joe Megibow – CEO of Purple Innovations Podcast
180
Joe Megibow – CEO of Purple Innovations Podcast
64 | P a g e
Risks
While Purple’s unique product technology and proven business strategy have allowed it to
compete successfully thus far, the company also faces risks. Purple discloses many of these risks
in the 10-K, but there are additional risks that also deserve investor awareness.
The most pressing risks we foresee are as follows:

• Ownership risk
• Rapid growth
• Reputation
• Size and Suppliers
• COVID-19
• Recession
• Debt
Ownership Risk
Several of these risks come from the founders and majority owners of Purple, the Pearce
brothers. According to Purple’s 2019 10-K, the Pearce brothers own 55.3% of Class A shares and
96.3% of Class B shares through InnoHold, a company that they own entirely. The Pearce
brothers also own TNT Holdings, which in turn owns EdiZONE, a material innovation company
that licenses intellectual property invented by the brothers and other employees to Purple.
While the Pearce brothers’ ownership is not a direct risk to Purple, the fact that their other
entity, EdiZONE, licenses intellectual property to Purple’s competitors is a risk. While it is not
clearly outlined what exact property is involved in these licensing agreements, it is possible that
licensed property could eliminate the competitive advantage that Purple has over its
competitors, particularly if the licensed intellectual property were to include access to
proprietary materials (the purple Hyper-Elastic Polymer) or manufacturing methods (Mattress
Max machinery). Additionally, the revenue streams from the licenses would go to the Pearce
brothers rather than Purple. 181 Purple has taken a number of measures to mitigate this risk,
including amendments to its contract with EdiZONE. With the new amendments, EdiZONE is
prohibited from extending existing license agreements or pursuing new license agreements
with Purple’s competitors. Further, the amended contract also initiated the process by which
EdiZONE will sign over its rights to the intellectual property Purple is licensing, making it
Purple’s property for future use. 182
181
Purple 2019 10-K
182
Second Amended and Restated Confidential Assignment and License Back Agreement
65 | P a g e
Another risk associated with the Pearce brothers is the fact that Purple leased its original
corporate headquarters and manufacturing location in Alpine, Utah from TNT Holdings.
Additionally, TNT Holdings uses a portion of that facility to store its own property. While this is
due to the fact that the Pearce brothers owned all of these companies prior to Purple’s public
offering in the stock market, this also means Purple is funding the storage of TNT Holdings’
equipment through its lease payments. Purple is in the process of negotiating the removal of
this property, but no progress had been made as of 2019. Although Purple moved its
headquarters to a facility in Lehi, Utah in the first quarter of 2020, it continues to lease the
Alpine facility from TNT Holdings. Purple now uses the facility for the production of digital
marketing materials and research and development, a department that the Pearce brothers
lead as co-directors of R & D. 183
This relationship with TNT Holdings (and the Pearce brothers) could eventually lead to a lease
dispute or result in lease terms that are harmful to Purple’s operations. Since any conflict or
litigation would likely lead to a drop in stock price and harm the Pearce brothers’ investment, it
is unlikely that they would do anything with TNT Holdings or InnoHold that would harm Purple
or its investors. The fact that a majority of Purple’s total equity is owned by the Pearce brothers
suggest that their incentives are very much aligned. Because of this alignment, the brothers
would be very unlikely to make any licensing agreement or strategic decision that would
threaten Purple’s investors. Additionally, Purple has mentioned that it is exploring options to
purchase the Alpine facility outright, removing the risk of future lease disputes in the
process. 184
Rapid Growth
Buyer Power
Purple’s rapid growth has happened as the result of combined DTC and wholesale expansion.
While this produces impressive growth numbers, it has also put Purple in a position where
Mattress Firm, its largest wholesale partner, contributes 26% of total revenue. This gives
Mattress Firm extra leverage in negotiation and exposes Purple to the possibility that Mattress
Firm could use its purchasing power to pressure Purple into less than ideal contract terms or
terminate the contract completely and cause an immediate 26% reduction in revenue.185
Mattress Firm benefits from Purple’s rapid growth and rising customer demand, so contract
termination is less likely. Further, Purple is pursuing several methods of retail diversification,
both domestically and internationally. First, Purple’s expansion with new and existing wholesale
partners will dilute Mattress Firm’s buyer power. Second, Purple’s expansion into its own
183
Purple 2019 10-K
184
Purple 2019 10-K
185
Purple 2019 10-K
66 | P a g e
Purple Outlet stores will reduce or eventually eliminate its dependence on external
wholesalers. These combined strategies make this risk increasingly less threatening.
Demand
Purple’s growth has proven to be an immense benefit thus far but supporting such rapid
expansion can be risky. Revenue growth has been remarkable over the last two years, with 45%
growth in revenue during 2018, and 50% growth in 2019. However, Purple has historically been
unable to keep up with customer demand. As a result, the Company has had to rapidly expand
its production capacity. Purple is the only company capable of developing the Mattress Max
machine that is required for the production of the Purple material, thus this has been a
manufacturing bottleneck. 186
To support its rapid growth, Purple will have to continue leasing new facilities for both
manufacturing and administrative operations. This has already been seen with Purple’s new
facility in Lehi, Utah, and is likely to continue in the future as Purple looks for new locations. The
Company has already proposed a facility in the Eastern half of the United States to better serve
that geographic region. 187 During Purple’s earnings call for Q4 and 2019 earnings, Purple also
announced that it would complete construction and testing of two more Mattress Max
machines that are anticipated to be fully functional by the end of March 2020. Despite these
new resources, Purple might be unable to keep up with the tremendous growth in demand for
its products. This could lead to extended delivery dates and loss of customers that do not wish
to wait for product delivery (likely lost to one of Purple’s DTC competitors, such as Casper). This
inability to deliver would also increase accrued revenue liabilities from customers who place
orders. While Purple’s management team says Purple will likely be capable of meeting demand
by the end of 2020, this is still a risk to watch.188
Reputation
Since Purple’s products are discretionary and customers are likely to read other customer
reviews prior to purchasing any products, Purple relies on its reputation to feed sales. Although
Purple has a good reputation and is known for selling revolutionary bedding products, its
reputation could be damaged by defective products or by individuals that are generally
unhappy with the brand.
This was the case in 2017 when Ryan Monahan, owner of Honest Mattress Reviews and Social
Media Sharks, began spreading misinformation about a possible carcinogen in the dust film that
186
Purple 2019 10-K
187
Purple 2019 10-K
188
2019 IR Conference Call
67 | P a g e
Purple applies to its Hyper-Elastic Polymer to prevent it from sticking to itself. With this claim,
Monahan wrote of people having serious respiratory complications or getting cancer from
sleeping on Purple mattresses. Purple pursued legal action with these claims and hired a team
of independent labs to test its material and ensure that none of its customers would be in any
danger.189 It was later discovered that Ryan Monahan had been receiving payments from one
of Purple’s competitors that, coincidentally, had very high reviews on Monahan’s website,
Honest Mattress Reviews. 190 Purple won the court case, and all of Ryan Monahan’s false
allegations were taken off of his website.191 The anti-stick dust was actually a food-grade plastic
powder that was not only too sparse in application to be a respiratory irritant, but also
incapable of causing damage to a customer’s lungs. 192
This success, significant as it may be, might not be the last time Purple’s reputation is
challenged by another individual or competitor with intentions like those of Ryan Monahan. As
a result, Purple could be pulled into future litigation and will have to be vigilant of its online
presence in the future. If a similar accusation turned out to be factual, Purple’s reputation could
be damaged and harm future sales.
Size & Suppliers
Purple’s supply chain could pose a risk to its future operations. This is due to the fact that
Purple has historically relied on a small number of suppliers for its key components.193 If any
suppliers were to terminate contracts with Purple, it could seriously disrupt Purple’s operations
until a suitable alternative source could be found.
A notable example of this risk comes from Purple’s supply of mineral oil, the primary
component of its Purple material. Currently Purple depends on a single supplier for the majority
of the mineral oil that it uses and has mentioned that the sheer volume needed in normal
manufacturing operations would be difficult to find with local suppliers. 194 As a result, a
disruption in this supply relationship could severely stunt Purple’s ability to manufacture and
deliver its products. Purple has been working to remedy this issue and mentioned that many of
its resources have two or more sources now, greatly reducing this risk. 195
189
Purple 2018 10-K
190
https://www.legalreader.com/ghostbed-vs-purple-mattress-lawsuit/
191
Purple 2018 10-K
192
https://purple.com/blog/asked-4-answers-non-toxic-plastic-powder
193
Purple 2018 10-K
194
2018 10-K
195
68 | P a g e
COVID-19
A risk that recently escalated is the spread of the coronavirus COVID-19. This risk could affect
Purple, and the entire bedding industry, by disrupting supply chains and company operations.
In Purple’s 2019 10-K, there is a brief discussion about Purple’s reliance on several suppliers in
China for specific raw material needs. Since COVID-19 originated in China and has caused many
factories and other operations to shut down, it could potentially disrupt Purple’s supply chain.
However, since Purple keeps the exact names and location of each of its suppliers private, the
extent to which Purple’s supply chain could be affected by the spread of COVID-19 remains
unknown.196 With the release of its 10-K for the 2019 fiscal year, Purple executives released
public statements stating that the coronavirus had not yet affected any of Purple’s supply chain
or sales. 197 Unfortunately, Purple released an 8-K on March 26 that told a very different story.
In the press release, Purple withdrew all revenue and EBITDA guidance for 2020 and announced
that half of its retail locations were closed at the time of filing. These closed retail locations
amount to roughly 19% of all revenue.198 Purple has not released any other updates since, but
existing closures present a major risk. If these stores remain closed through the end of the year,
Purple’s sales will be affected in a similar way to that of a recession, making this an increasingly
serious risk to monitor.
Another risk related to COVID-19 comes from the fact that the majority of Purple’s operations
and both manufacturing facilities are in Utah.199 This risk was brought to light again on March
27, when Utah Governor Gary Herbert issued a “Stay Safe, Stay Home” directive limiting travel
to essential travel only. Salt Lake City made this directive mandatory on the same day,
announcing that violation of the directive could result in a class B misdemeanor. Although
Purple does not have any corporate operations in Salt Lake City, it still falls into the group
covered by the statewide directive. This means Purple’s administrative operations will likely
have to move online. Manufacturing is classified as essential travel, as it cannot be done via
telecommuting, and is currently permitted as a result. 200 While Utah does not yet have a large
number of COVID-19 cases (as of writing), the spread of COVID-19 in future months could force
Purple to temporarily suspend operations at one or more of its manufacturing facilities.201
Additionally, fear of the spreading virus could reduce sales of Purple’s products through retail
locations or induce saving habits with increasing uncertainties about availability of food and
household resources during quarantine periods. These disruptions could, in turn, delay order
delivery (which could damage brand reputation) and affect financial results. This would likely
196
Purple 2019 10-K
197
198
Purple 8-K and 2019 10-K
199
Purple 2018 and 2019 10-K
200
https://www.ksl.com/article/46735620/utah-governor-issues-stay-safe-stay-home-directive-to-slow-the-
spread-of-covid-19
201
Coronavirus case information from Johns Hopkins
69 | P a g e
result in poor stock performance when earnings are released and could also lead to lost
business if other DTC brands are immediately accessible to customers.
Recession
Since Purple falls into the consumer discretionary sector, demand for its products is affected by
the economic cycle. If a recession or significant correction were to occur and result in shrinkage
of discretionary income levels, Purple could experience reduced or negative revenue growth.
Since Purple went public in 2018, revenue data for the 2008 financial crisis is not available.
However, Tempur Sealy and Sleep Number, both public during the recession, can be used to
illustrate the effects of the recession.
Both Tempur Sealy and Sleep number experienced serious damage to their revenue growth
rates during the recession. As seen above, Tempur Sealy had revenue growth rates of -16% in
2008 and -10% in 2009. Even more dramatic, though, is the nearly 60% reduction in net income
during the same period. Sleep Number was affected in a similar manner, losing a quarter of
revenue in 2008, and an additional 11% in 2009. Sleep Number also experienced a similar effect
in its net income, reporting a loss in 2008 as the recession began. Since Purple sells similar
products as these companies, it is likely that Purple would find itself in a similar situation if a
recession were to occur.202
Purple’s high revenue growth and backlog of orders in recent years could offset any temporary
reduction, but it’s unlikely that this effect would prevent revenue shrinkage entirely.
Additionally, it should be noted that both Tempur Sealy and Sleep Number saw double-digit
revenue growth immediately after the decline, with Tempur Sealy seeing 33% growth in
2010.203 This means Purple would likely recover in a similar manner and would potentially only
have to survive one or two years of stunted performance.
202
Financial information for Tempur Sealy and Sleep Number on Bloomberg
203
Financial information for Tempur Sealy and Sleep Number from Bloomberg
70 | P a g e
Debt
Although Purple’s high revenue growth and backlog of orders could offset the effects of a
recession, its leverage could magnify them. This risk is substantial because Purple currently has
more liabilities than assets. Purple’s high leverage is partially due to the fact that Purple has yet
to report a positive net income. 204 Although Purple’s management has worked to reduce the
amount of debt it holds, this continues to be a risk for a few reasons. High leverage could make
future borrowing difficult, lead to higher interest rates, or put Purple in a position where it
must agree to unfavorable contract terms to secure the cash it needs. Purple’s high debt could
also lead to an inability to service debt payments and increases the likelihood that Purple could
trigger a covenant if EBITDA requirements are not met. Although it presents a risk right now,
the severity of this risk is reduced for several reasons. First, more than half of Purple’s liabilities
are current, and Purple’s current ratio has been rising, making Purple’s current assets more
than capable of satisfying any short-term obligations. Second, Purple has no principal payments
due until 2024 and has an interest coverage ratio of 3.96x, making it more than capable of
paying its interest in full each period.205 Purple also recently announced (via an 8-K filing) that
interest payments for the first two quarters of 2020 could be converted to PIK interest if
desired, further reducing the likelihood that Purple will fail to meet its interest obligations.206
Finally, $6.3 million of liabilities are from Purple’s customer backlog. 207 Since Purple brought
two additional Mattress Max machines online in the last two weeks and is forecast to satisfy
demand through the end of 2020, this liability is likely already eliminated and the accrual of
future liabilities should not be an issue.
204
Purple 2019 10-K
205
Purple 2019 10-K
206
Purple 8-K
207
Purple 2019 10-K
71 | P a g e
Growth Strategies
Since Purple was founded by inventors, the Pearce brothers, its products have focused on
innovating in existing product areas. This goal was first realized with the invention and
implementation of the Purple Hyper-Elastic Polymer in cushions and mattress products. With
the revolutionary nature of the polymer, however, Purple has continued to find new uses for it,
with the release of new pillows, pet products, and new mattress construction methods that
innovate on its previous innovations.
Alongside these new products, Purple continues to focus on getting existing products into the
hands of customers. Through the end of 2019, Purple still had a backlog of orders for existing
products due to overwhelming demand and insufficient manufacturing capacity. This is largely
due to Purple’s marketing strategy, opting for the use of viral, comedic marketing that spread
organically, rather than through paid placement. As a result, Purple’s online marketing
campaigns have been viewed nearly two billion times in just a few years, with nearly half of that
traffic occurring in 2019 alone.208 Since Purple is the sole provider of the Mattress Max, it
wasn’t able to accommodate the sudden spike in demand. In its Q4 earnings call, however,
Purple’s management announced that the addition of two new Mattress Max machines would
resolve the mismatched supply and demand, and Purple should be capable of satisfying
demand through the end of the year.209
DTC Growth
To get products into the hands of its consumers, Purple uses a mix of direct-to-consumer (DTC)
and wholesale retail locations. Historically, the focus has been on DTC sales, with more than
85% of 2018 product sales and 62% of 2019 sales coming from this channel. 210 These sales
occur through Purple’s website and ship directly to the consumer. This provides a convenient
purchase option for consumers who wish to purchase a product without having to find a store
that has them in stock. Additionally, Purple incentivizes purchases through its website with a
100-night money back guarantee, free shipping, and free returns. Since DTC sales rely on
website traffic, however, Purple has had to rely on its marketing campaigns and word of mouth
to create product awareness and drive sales. 211
208
Purple 2019 10-K
209
210
211
Purple 2018 10-K
72 | P a g e
Wholesale Growth
Recently, Purple has shifted its focus to wholesale distribution, as demonstrated by its growth
from 15% of revenue in 2018 to 38% of revenue in 2019.212 Wholesale distribution relies
primarily on third party retailers such as Mattress Firm, Bed Bath & Beyond, and Macy’s. 213 This
allows customers to try Purple’s products before they purchase them, and also allows Purple to
grow sales while reducing marketing expense, since retail locations can use branded displays to
create product awareness, rather than online advertising. Wholesale expansion allowed Purple
to reduce marketing expense from 36.3% of revenue in 2018 to 33.1% of revenue in 2019.
Currently, Purple operates in more than 1,700 retail locations, adding more than 800 of those in
2019. In the future, Purple plans to maintain its relationships with existing wholesalers, but is
also planning to expand into its own Purple Outlet stores. Currently, Purple operates six of its
own stores in the Western half of the United States but is searching for store locations in
Eastern states as well. 214
We believe a shift towards wholesale distribution is a strong growth strategy for several
reasons including a decreased risk to revenues, increased inventory turnover, and increased
marketing opportunities. In Purple’s contracts with wholesale and retail distributors, Purple
records the revenue when the products are shipped to wholesale distribution centers. This
increases inventory movement without increasing the risk of its accounts receivable. While
gross margins are slightly lower with the discounted pricing structure, it is a crucial
environment for advertising. Retail stores and showrooms grant access to the demographics
that are less interested in online mattress shopping and digital advertising. We believe this
decreased advertising cost is the cause of 2019’s increased EBIT margins.
International Growth
Purple’s final method for expansion involves moving into international markets. Since half of all
mattress sales occur outside the United States, this provides an excellent opportunity for
growth – especially when Purple offers a product that most people have never seen before.
While Purple currently only sells mattresses in the United States, it is planning a move into the
Canadian mattress market in 2020 and then to other international markets in subsequent years.
In order to accomplish this, Purple will leverage existing wholesale relationships. Since Purple is
vertically integrated, however, it also plans to expand its manufacturing capacity and
distribution into international markets as well. 215
212
213
Purple 2019 10-K
214
215
Purple 2019 10-K
73 | P a g e
Earnings and Valuation
Overview
We have projected financial statements for Purple and have broken down the assumptions
used in driving them. We will use these projections to arrive at an implied share price for the
Company.
Income Statement
INCOME STATEMENT
Fiscal year 2017A 2018A 2019A 2020P 2021P 2022P 2023P 2024P
Fiscal year end date 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 12/31/2024
Revenue 196.86 285.79 428.36 290.00 468.00 529.90 569.28 607.75

Cost of Revenues 111.84 173.19 239.39 165.30 264.42 296.74 315.95 334.26
Gross Profit 85.02 112.60 188.97 124.70 203.58 233.16 253.33 273.49
Operating expenses:
SG&A 90.49 123.91 166.45 110.20 177.84 201.36 216.33 230.94
Research and Development 1.39 2.10 3.86 2.13 3.43 3.88 4.17 4.46
Total Operating Expenses 91.88 126.01 170.31 112.33 181.27 205.25 220.50 235.40
EBIT (6.86) (13.41) 18.66 12.37 22.31 27.91 32.83 38.09
Pretax Income, GAAP (8.84) (19.61) 4.77 12.37 22.31 27.91 32.83 38.09
Income Tax Expense - - 0.40 2.60 4.68 5.86 6.89 8.00
Net Income (8.84) (19.61) 4.37 9.78 17.62 22.05 25.94 30.09
Weighted Avg. shares 8.39 8.42 10.01 10.01 10.01 10.01 10.01 10.01
Net loss per common share $ (1.05) $ (2.33) $ 0.44 $ 0.98 $ 1.76 $ 2.20 $ 2.59 $ 3.01
Growth rates & margins

Revenue growth 45.2% 49.9% -32.3% 61.4% 13.2% 7.4% 6.8%
Gross margin 43.2% 39.4% 44.1% 43.0% 43.5% 44.0% 44.5% 45.0%
R&D as a % of sales 0.7% 0.7% 0.9% 0.7% 0.7% 0.7% 0.7% 0.7%
SG&A as a % of sales 46.7% 44.1% 39.8% 38.0% 38.0% 38.0% 38.0% 38.0%
Tax Rate 0.0% 0.0% 0.1% 21.0% 21.0% 21.0% 21.0% 21.0%
74 | P a g e
Balance Sheet
BALANCE SHEET
Assets
Cash and Cash Equivalents 3.59 12.23 33.50 62.51 74.49 84.82 97.15 73.47
Accounts Receivable 4.18 10.24 28.70 8.98 14.49 16.41 17.63 18.82
Inventories 14.64 23.73 48.50 25.93 41.47 46.54 49.55 52.43
PPE 13.46 22.51 31.98 39.86 52.50 66.71 81.89 97.98
Intangible Assets 1.27 1.49 1.01 0.81 0.64 0.50 0.44 0.38
Other Assets 0.51 1.50 3.40 3.40 3.40 3.40 3.40 3.40
Total Assets 37.66 71.71 147.72 141.49 186.99 218.39 250.06 246.48
Liabilities
Accounts Payable 21.13 24.83 50.24 26.21 41.92 47.05 50.09 53.00
Accrued Expenses 18.60 21.21 27.09 19.81 31.98 36.21 38.90 41.53
Debt 8.00 21.41 39.20 39.20 39.20 39.20 39.20 -
Revolver - - - - - - - -
Other Liabilities 3.85 4.92 18.11 18.11 18.11 18.11 18.11 18.11
Total Liabilities 51.58 72.37 152.46 103.33 131.21 140.57 146.30 112.63
Shareholder's Equity
Retained Earnings (13.92) (4.32) (8.35) 1.43 19.05 41.10 67.03 97.12
Additional Paid in Capital - 3.66 5.99 13.72 13.72 13.72 13.72 13.72
Total Stockholder's Equity (13.92) (0.66) (4.73) 15.14 32.77 54.82 80.75 110.84
Total Liabilities and Equity 37.66 71.71 147.72 118.48 163.98 195.38 227.05 223.47
Balance Check - - - - - - - -
Cash Flow
CASH FLOW STATEMENT

Net income 9.78 17.62 22.05 25.94 30.09
+ Depreciation 2.22 3.67 4.25 4.66 5.08
+ Amortization 0.20 0.17 0.14 0.06 0.06
+ Stock based compensation - - - - -
Changes in Working Capital:
(Increase) / Decrease in A/R 19.72 (5.51) (1.92) (1.22) (1.19)
(Increase) / Decrease in Inventory 22.57 (15.55) (5.07) (3.01) (2.87)
Accounts payable (8.11) 15.72 5.13 3.05 2.90
Accrued expenses (7.27) 12.16 4.23 2.69 2.63
Other assets - - - - -
Other liabilities - - - - -
Cash from operating activites 39.11 28.29 28.80 32.16 36.70
Capital expenditures (10.10) (16.31) (18.46) (19.83) (21.18)
Purchases of intangible assets - - - - -
Cash from investing activities (10.10) (16.31) (18.46) (19.83) (21.18)
Debt - - - - (39.20)
Common dividends - - - - -
New share issuances - - - - -
Revolver
Cash from financing activities - - - - (39.20)
Net change in cash during period 29.01 11.98 10.34 12.33 (23.68)
75 | P a g e
Revenue Build
In our forecast, we compute total net sales through projecting growth in the direct-to-
consumer (DTC) and wholesale distribution verticals.
REVENUE BUILD
Direct-To-Consumer Sales $ 242.9 $ 265.6 $ 250.0 $ 270.0 $ 288.9 $ 306.2 $ 321.5

% growth 9% -6% 8% 7% 6% 5%
% of revenue 85% 62% 86% 58% 55% 54% 53%
Wholesale $ 42.9 $ 162.8 $ 40.0 $ 193.3 $ 214.3 $ 236.4 $ 259.5

% growth 280% -75% 383% 11% 10% 10%
% of revenue 15% 38% 14% 41% 40% 42% 43%
Wholesale doors 900 1,700 2,000 2,200 2,410 2,631 2,862

(+) New store additions - 800 200 200 210 221 232
% growth in new stores 89% -300% 0% 5% 5% 5%
(*) Revenue per door ($million) 0.10 0.02 0.09 0.10 0.10 0.10
Revenue $ 285.79 $ 428.36 $ 290.00 $ 468.00 $ 529.90 $ 569.28 $ 607.75
% growth 45% 50% -32% 61% 13% 7% 7%
COVID-19
COVID-19 has changed the way that we decided to forecast revenue going forward. We slowed
growth in DTC for 2020-2021 and dramatically decreased our Wholesale forecast for 2020-
2022. Due to the current uncertainty with the length of this pandemic, it is hard to get a proper
idea of the impact from the pandemic, however we believe that if the virus were to clear within
the end of this year, Purple will continue to grow by executing in the DTC and wholesale
verticals.
Wholesale
Purple’s management team believes that the wholesale vertical is the most critical to achieving
long-term growth goals. Consequently, the Company is focused on moving the product line into
as many individual stores as possible throughout the projection period. This focus began in
2018 as the Company grew their number of wholesale stores by 89%. Executive management
believes that this year the Company will venture into 900 more stores, an uptick of 11% over
this last year.216 However, due to the COVID-19 impact, we are now forecasting that Purple will
enter into only 200 new stores, a sharp decline. Due to the large uncertainty going forward, we
are projecting another 200 stores for 2021, and then an increase in the years following. To
project growth in the wholesale vertical, we took the increase in new stores and multiplied the
revenue per door to this change to arrive at our wholesale portion of projected revenue.
Historically, Purple was achieving nearly $100,000 of revenue per retail door, however we are
216
Purple 2019 Q4 Earnings Call
76 | P a g e
projecting a decrease down to $20,000 for FY 2020. We expect a rebound in 2021 up to

$90,000, and then remaining at $100,000 for the rest of the projection period.
Direct-to-consumer
Direct-to-consumer sales consist of e-commerce purchases through Purple.com, where
consumers can purchase a mattress or bedding product and have it delivered to their door.
While this vertical is growing, management believes that there is more room for growth in the
wholesale space, primarily due to the competitive advantages that are realized when a
consumer can experience the Purple Grid in person. Due to the COVID-19 impact, we are
forecasting a slight decrease in DTC sales for 2020, however as Purple continues to adapt in
years going forward, we believe this vertical will continue to grow just under the historical
average.
Gross Margin
To project a COGS figure we projected a gross margin figure through 2024, based on the three-
year historical average from 2017-2019 of 42.2%. Moving forward, we project that Purple will
realize manufacturing efficiencies through their new facilities that will increase gross margin by
50 basis points each year through the projection period.
2020P 2021P 2022P 2023P 2024P

43.00% 43.50% 44.00% 44.50% 45.00%
Selling, General & Administrative (% of Revenue)

SG&A is forecast to be 38.0% of revenue through the year 2024. While the three-year average is
43.5%, Purple has managed to decrease this figure by seven percentage points to 40.0% in
2019. A large portion of this figure has been marketing spend, and as the brand continues to
grow, we believe that this figure will hover around our projected percentage.
2020P 2021P 2022P 2023P 2024P

38.00% 38.00% 38.00% 38.00% 38.00%
Research & Development (% of Revenue)

Research and development is forecast to be 0.73% of revenue throughout 2024. This figure is
based on the three-year historical average from 2017-2019 of 0.73%. Purple has expanded its
product line over the last few years and has managed to keep its R&D spend under 1.0%,
something we believe that will continue.
2020P 2021P 2022P 2023P 2024P

0.73% 0.73% 0.73% 0.73% 0.73%
77 | P a g e
Amortization ($m)
Purple explicitly provides amortization values from 2020 through 2024 in its 2019 10-K. Our
assumptions for amortization assume that these figures will stay the same. 217
2020P 2021P 2022P 2023P 2024P

0.08 0.07 0.06 0.06 0.57
Depreciation (% of Capital Expenditures)

Our depreciation assumption going forward through 2024 was based on the three-year
historical average from 2017-2019 of 21.97%. We assume that as Purple continues to invest in
its manufacturing abilities, depreciation will increase, and this figure will follow by increasing
0.5% annually through 2024.
2020P 2021P 2022P 2023P 2024P

22.00% 22.50% 23.00% 23.50% 24.00%
Other Income / (Expense)

On Purple’s income statement, this account includes income and expenses that are unrelated
to core business activities. Other than a non-recurring write-down in 2019, this account’s three-
year historical average from 2017-2019 is $2.65 million, or less than 0.5% of 2019 revenue. Due
to this, we are forecasting this account as 0 going forward.
Balance Sheet Assumptions
Accounts Receivable (Days Sales Outstanding)

Purple’s average DSO from 2017 through 2019 was 11 days. We are projecting no major
changes to the receivable collection and therefore are forecasting this figure through 2024.
2020P 2021P 2022P 2023P 2024P

11 days 11 days 11 days 11 days 11 days
Inventories (Days Inventory Outstanding)

The three-year historical average for days inventory outstanding (DIO) has been 57 days from
2017 to 2019. We are projecting that going forward, this figure will stay the same as Purple
grows its supply chain through DTC and Wholesale.
217
Purple 10-K 2019 pg.F-19
78 | P a g e
2020P 2021P 2022P 2023P 2024P

57 days 57 days 57 days 57 days 57 days
Accounts Payable (% of COGS)

We projected accounts payable as a percent of cost of goods sold. From 2017 to 2019 the
average figure was 15.86% and we are forecasting this figure through 2024 as we don’t believe
there will be any material changes regarding the method in which that Purple handles its
payables.
2020P 2021P 2022P 2023P 2024P

15.86% 15.86% 15.86% 15.86% 15.86%
Accrued Expenses (% of SG&A)

From 2017 through 2019, accrued expenses averaged to 17.98% of selling, general and
administrative expense. We are forecasting that this figure will remain constant through 2020
to 2024.
2020P 2021P 2022P 2023P 2024P

17.98% 17.98% 17.98% 17.98% 17.98%
Intangible Assets (Including Goodwill)

This change in this account is calculated as:
+ intangible asset purchases

- amortization
With both future intangible asset purchases and amortization charges scheduled in the 2019
10-K, we are forecasting intangible assets with these changes.
2020P 2021P 2022P 2023P 2024P

0.81 0.64 0.50 0.44 0.38
Common Stock & Additional Paid-in Capital

As of 2019, this account has a balance of $13.72 million. We do not forecast a change in this
figure from 2020 to 2024.
79 | P a g e
“Other” Balance Sheet Accounts

Both “other” accounts, assets and liabilities, are being forecasted as constant with 2019 figures
due to a lack of correlation with revenue growth going forward.
Valuation
Overview
Based on our analysis, we currently believe that Purple’s stock is undervalued. As of April 6,
2020, Purple is trading at $5.24 per share, which creates a 91.4% upside to our target price of
$10.03 per share. In this table is a summary of Purple’s implied valuation based on four
different valuation methods. We looked at discounted cash flow analysis, precedent
transactions, and comparable companies to get a holistic view of Purple’s true valuation.
Originally our DCF displayed the highest valuation range, however after we accounted for
COVID-19, our forecast became much more conservative. For this reason, our precedent
transaction analysis displayed the highest valuation range. Purple has an innovative product mix
in an industry that has lacked new technology over the last twenty years. In addition, executive
management has demonstrated a clear vision and growth strategy for the company that relies
heavily on expansion within wholesale retailers. Through our analysis, we believe that there is a
lot of headroom in this vertical, however, it may be delayed due to the lasting effects of COVID-
19.
80 | P a g e
DCF: Weighted average cost of capital (WACC)

Purple’s weighted average cost of capital is 14.53%. The Company’s beta is 1.30, which was
found using a comparable set of companies due to Purple’s limited trading history. Next, we
unlevered and re-levered Purple’s beta to the target capital structure, which was found using
the average of future debt and equity levels in the projection period. Using this target capital
structure, the Company’s beta is 1.30.
Beta Calculation
Levered Beta 1.30

Debt (FY 2019) 39
Equity (FY 2019) 337
Debt-to-Equity 0.12x
Tax Rate 0%
Unlevered Beta 1.16

Target Debt 39
Target Equity 337
Target Debt-to-Equity Ratio 0.12x
Target Beta 1.30
To find Purple’s cost of equity, we used the capital asset pricing model (CAPM) and found a
figure of 14.82%. The market risk premium was calculated using a 10-year CAGR of the S&P 500,
our ideal proxy for the market risk in recent history. For cost of debt, we used our average
interest rate on outstanding debt to arrive at 12.01%. Using these figures, Purple’s WACC is
14.53%.
WACC Calculation
Target Capital Structure

Target Debt 10.43%
Target Equity 89.57%
Cost of Debt 12%
Capital Asset Pricing Model

10-yr Treasury Yield 0.60%
Expected Market Return 11.5%
Target Beta 1.30
Cost of Equity 14.82%
WACC 14.53%
81 | P a g e
DCF: Explanation
We believe the DCF represents an accurate representation of Purple’s value drivers and ability
to create positive free cash flow into the future.
Free cash flow

Fiscal 2017A 2018A 2019A 2020P 2021P 2022P 2023P 2024P
Fiscal 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 12/31/2024
EBITDA (6.10) (10.75) 33.11 14.68 26.05 32.22 37.55 43.74

EBIT (6.86) (13.41) 18.66 12.37 22.31 27.91 32.83 38.09
Tax Rate 0.0% 0.0% 0.1% 21.0% 21.0% 21.0% 21.0% 21.0%
NOPAT (6.86) (13.41) 18.64 9.78 17.62 22.05 25.94 30.09
Depreciation & amortization 2.42 3.84 4.38 4.72 5.14

Stock-based compensation - - - - -
Accounts receivable 19.72 (5.51) (1.92) (1.22) (1.19)
Inventory 22.57 (15.55) (5.07) (3.01) (2.87)
Accounts payable (8.11) 15.72 5.13 3.05 2.90
Accrued expenses (7.27) 12.16 4.23 2.69 2.63
Other assets - - - - -
Other liabilities - - - - -
Unlevered CFO 39.11 28.29 28.80 32.16 36.70
Less: Capex 10.10 16.31 18.46 19.83 21.18
Less: Purchases of intangible assets - - - - -
Unlevered FCF 29.01 11.98 10.34 12.33 15.52
% growth -59% -14% 19% 26%
Discount factor 78.1% 178.1% 278.1% 378.1% 478.1%

Present value of Unlevered FCF 26.09 9.41 7.09 7.38 8.12
These five years of free cash flow were then discounted to a present value using a mid-year
conversion which arrived us to a net present value of $43.09 million. We then used both the
multiple method and the Gordon Growth method to find a terminal value. Using the multiple
method, we assumed an EV/EBITDA multiple of 9.3x, arriving at an implied enterprise value of
$270.42 million. After accounting for net debt, we arrived at an implied equity value of $264.72
million which implied a share price of $11.22 per share. Using the Gordon Growth method, we
assumed a long-term growth rate of 1.0%, arriving at an implied enterprise value of $119.76
million which produces an implied equity value of $114.06 million, and a share price of $4.84
per share.
Exit multiple approach Gordon Growth approach
Terminal year EBITDA 43.74 Unlevered FCF in last forecast period 15.52
Terminal value EBITDA multiple 9.3x FCF 15.96
Terminal value 406.10 Long term growth rate 1%
Present value of terminal value 212.33 Terminal value 117.95
Present value of stage 1 cash flows 58.09 Present value of terminal value 61.67
Enterprise value $ 270.42 Present value of stage 1 cash flows 58.09
Enterprise value $ 119.76
82 | P a g e
Comparable Companies Overview

In analyzing comparable companies, we separated our findings into two baskets:
• Pure-play bedding
o Companies that solely focus on mattresses and bedding products, very identical
to Purple’s business model.
• Home furnishing
o Companies that sell bedding products, but also accommodate consumers looking
for a wider range of home furnishing products.
Operating Statistics Multiples

Sales Gross EBITDA EV / Forward
Company Market Cap Total EV Growth Margin Margin EV / Revenue EBITDA
Pure-play bedding (60%)
Tempur Sealy International, Inc. (NYSE:TPX) 1,954.1 3,649.4 15% 43% 14% 1.1x 10.6x
Sleep Number (NasdaqGS:SNBR) 492.3 492.3 11% 62% 10% 0.6x 9.9x
Casper Sleep Inc. (NYSE:CSPR) 159.9 159.9 23% 49% NM 1.1x NM
Home furnishing (40%)
Guangzhou Holike Creative Home Co.,Ltd. (SHSE:603898) 719.6 759.5 2% 39% 19% 1.1x NM
La-Z-Boy Incorporated (NYSE:LZB) 1,367.5 1,511.9 10% 8% 8% 0.5x 8.6x
Herman Miller (NAS: MLHR) 1,344.3 2,309.0 8% 37% 9% 0.6x 6.7x
Haverty Furniture Companies (NYSE: HVT) 223.7 490.5 -2% 54% 6% 0.4x 9.2x
Ethan Allen Interiors (NYSE:ETH) 280.0 610.9 -3% 55% 7% 0.5x 8.6x
Roche Bobois S.A. (ENXTPA:RBO) 191.3 307.5 4% 64% 12% 0.9x 6.4x
The Lovesac Company (NAS:LOVE) 140.2 112.3 46% 52% NM 0.2x NM
Target
Purple Innovation (NAS: PRPL) 243.5 243.3 50% 44% NM 0.6x 8.1x
Average 0.8x 9.3x

Q1 0.6x 7.0x
Q3 0.9x 11.6x
In creating a valuation range, we decided to weight our baskets unevenly, in favor of pure-play
bedding. While there are a limited number of public, pure-play bedding companies, these are
the companies that best represent Purple’s core business operations, thus allowing us to arrive
at a fairer valuation. Home furnishing companies made up 25% of our comparable company
consideration as the product lines can be similar and these companies all have a large
wholesale presence, similar to what Purple is trying to achieve in the upcoming fiscal years.
Precedent Transactions Analysis

We conducted a precedent transaction analysis to allow for us to include past transactions that
have taken place in the bedding and home furnishing space.
83 | P a g e
Target Business Transaction EV / EV /

Date Target Acquirer Description Value ($mm) Revenue EBITDA
Tempur-Pedic Manufacturer and marketer of

3/18/2013 Sealy 1,300.00 0.65x 7.09x
International bedding products.
Retailer of various name brand

2/5/2016 Sleepy's Mattress Firm mattresses.
1,445.00 NM NM
The company engages in the

3/28/2013 The Brick Leon's Furniture retail of household furniture.
460.60 0.53x 6.50x
QuMei Home Manufacturer and supplier of

8/29/2018 Ekornes 614.95 1.79x 12.46x
Furnishings Group furniture in the Nordic region.
Heritage Home KPS Capital The company operates multiple

11/25/2013 280.00 0.13x NM
Group Partners furniture brands.
Kate Spade & Designer and manufacturer of

7/10/2017 Coach (NTSE: COH) 1,600.00 2.09x 12.87x
Company apparel and accessories.
National retailer engaged in the

Sears Hometown
1/23/2019 ESL Investments selling of home appliances, lawn NM 0.21x 0.21x
& Outlet Stores and garden equipment.
The home furnishing industry has many companies that have sold the same product lines for
multiple decades. Many niches within this industry are low-growth and engage in little
innovation, and this is reflected in the buyout multiples in the table above. The closest
transaction to Purple’s core business operations is the Tempur-Pedic acquisition of Sealy that
took place in 2013 for an EV/EBITDA multiple of 7.09x and EV/Revenue of 0.65x. While we
observed both a revenue and EBITDA multiple, we applied the revenue multiple in our
valuation.
Valuation Summary
EV/ Revenue EV/EBITDA
Average 0.85x 7.83x
Median 0.59x 7.09x
Quartile 1 0.34x 3.36x
Quartile 3 1.15x 12.67x
Purple 0.57x NM
84 | P a g e
Conclusion
Purple Innovations is a valuable growth investment offering a unique opportunity in the
mattress and bedding industry. The Company has positioned itself as a highly differentiated,
comfort technology product manufacturer and distributor, generating over 60% of its sales
from direct-to-consumer distribution. Purple’s proprietary research and technology will allow it
to continue making and selling highly demanded products for years to come.
Along with updated versions of existing products, the Purple Grid can be applied to virtually any
cushioning product, offering extensive opportunities to develop new offerings. Purple has
successfully partnered with Gravity Blankets to launch several products. Continued partnerships
with more companies will allow Purple to extend its reach in the industry. Purple will continue
expanding throughout the U.S. in DTC, retail, and wholesale channels, allowing it to reach
mattress customers wherever they are. The Company added 800 retail locations in 2019 and
plans to continue its growth track by adding 900 locations in 2020. Additionally, Purple plans to
aggressively pursue international sales, starting with Canada. While some of these plans may be
delayed by the COVID-19 pandemic, we believe that Purple will experience rapid growth once
social distancing is relaxed.
At $5.24 per share, Purple is dramatically undervalued. Our target price for Purple is $10.03 per
share, offering a potential upside of 91.4%. The recent market drop has greatly increased this
upside and has created a valuable opportunity for investors. This, paired with Purple’s
competitive advantage and market positioning, provides a unique opportunity to outperform
the market. Purple will continue to grow quickly in the bedding industry by manufacturing
unique, effective, and quality mattresses that customers love. With no products or companies
like it on the market, Purple is a definite buy at its current price.
85 | P a g e

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Student Investment Fund

Equity Research Report

Table of Contents .................................................................................................................. 1

Corporate Governance and Employees ................................................................................ 51

Purple’s operations are vertically integrated, allowing it to benefit from proprietary

Our investment thesis is as follows:

• The technological differentiation in Purple products makes its cushions more

• Purple’s technology is patented, giving it a protected competitive advantage.

Competitive Advantage and Strategic Initiatives

Inimitable – How challenging is it for other firms to imitate?

Organizational – Is the firm ready to capture value?

Patents and Intellectual Property

Revenue Growth and Breakdown

Additionally, Purple has opportunities to continue expanding geographically. It can do this

• Ranked in the top 5 for Best Mattresses 2020, and

Sleep – Sheets and blankets

as recurring revenues to stabilize sales of less-frequently purchased products, like mattresses. 11

Sleep – Bed frames

Sit – Seat cushions

Customer Satisfaction and Brand Recognition

Research and Development

heavily on outsourced manufacturing, while traditional manufacturers such as Sleep Number

While vertically integrated operations have benefited Purple, it is seen as a necessary

The manufacturing process for mattresses and cushions are as follows:

Marketing and advertising

Industry and Market Analysis

Industry Structure and Overview

41 IBIS Bed & Mattress Stores – Report OD5462

Key aspects of DTC companies

Transparency and limited offerings

Alternative approaches to marketing

The bedding industry has had limited

Macroeconomic Drivers and Industry Outlook

As mentioned earlier, the bedding industry is highly competitive. Manufacturers compete on

Porter’s Five Forces

Threat of Threat of Bargaining Bargaining Competitive

Industry Comparable Statistics

Liquidity ratio: Current

Liquidity ratio: Quick

Turnover ratios: Accounts receivable turnover

Turnover ratios: Asset turnover

Leverage ratio: Total liabilities / Total assets

Coverage ratio: Interest coverage

Profitability ratio: Return on assets

Valuation multiple: EV / EBITDA

Common-Sized Statements Analysis

Common-sized: Income statement

Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Interest Expense (1.3%) (1.2%) (3.4%) (2.8%) (0.4%) (0.7%) - (0.4%)

Income/(Loss) from Affiliates - - 0.7% 0.5% - - - -

Restructuring Charges - - (0.5%) - - - - -

Earnings of Discontinued Ops. - - (0.7%) (0.0%) - - - -

Minority Int. in Earnings 5.4% 1.9% 0.1% 0.0% - - - -

Analysis: Gross profit margin

Analysis: Operating income

Analysis: Net income

Common-sized: Balance sheet

Inventory 33.1% 32.8% 8.2% 8.5% 18.1% 10.8% 28.1% 14.1%

Long-term Investments - - 0.8% 0.7% - - - -

Long-Term Debt 29.9% 24.0% 56.4% 47.2% 0.2% 37.0% - -

Common Stock 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% - -

Minority Interest (1.9%) (1.6%) 0.1% 0.0% - - - -