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spk01: Good morning and welcome to Casper Sleep's third quarter 2020 conference call. Today's call is being recorded. At this time, I'd like to turn the conference over to Roberto Aja for investor relations for Casper. Mr. Aja, you may begin.
spk08: Thank you, operator, and good morning, everyone. Thank you for joining the Casper Sleep 2020 third quarter conference call. We'll get started in just a minute with management's comments, but before doing so, let me take a minute to read the State Harbor language. This call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including statements regarding management's plans, strategies, goals, and objectives. our anticipated financial performance, and the expected impact of novel coronavirus on our business. These statements are neither promises nor guarantees, involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Factors discussed in our annual report conformed 10-K for the year-end of December 31st, 2019, as updated by the risk factor section of our quarterly report on Form 10-Q for the quarter-end of September 30th, 2020, and our other findings with the Securities and Exchange Commission, should cause actual results to differ materially from those indicated by the forward-looking statements made on this call. Any such forward-looking statements represent management's estimates as of the date of this call. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause reviews to change. In addition, we may also reference certain non-GAAP metrics, which are reconciled to the nearest GAAP metric in the company's earnings release, which can be found on our investor relations website at ir.casper.com. On the call today is Philip Krim, co-founder and chief executive officer of Casper, Emily Arrell, President and Chief Commercial Officer of Casper, and Mike Monahan, our Chief Financial Officer. Following the prepared remarks, we'll open the call for a question and answer session. With that, I would now like to turn the call over to Mr. Philip Krim, Casper's Chief Executive Officer. Philip, please go ahead.
spk09: Thank you, Norberto, and good morning, everyone. Welcome to our third quarter conference call. We are living through an incredible time in the history of our business. As a result of the COVID-19 pandemic, we have seen increased focus on the at-home experience. Consumers are searching for products that improve their wellness and increase their comfort. They are willing to invest in quality, design, and convenience, and they want the products now. Trusted and admired brands that deliver top-quality products and customer service will win over the long term. Casper is one of those brands. In the third quarter, Casper saw record interest for our products, evidenced by our website traffic reaching its highest level since we started the company. Since Q3 of last year, we have added seven new retail partnerships with iconic brands such as Macy's and Nordstrom's, entering conversations with additional retail partners that will both further our brand visibility as well as our growth. With a strong brand and a multi-channel presence across e-commerce, retail stores, and retail partnerships, we are confident Casper is positioned well to take share in the growing fleet market. Revenue for the third quarter was $123.5 million. Disappointing results given the strong demand signals we experienced, in particular across our e-commerce and retail partner sales channels. However, significant challenges in our supply chain, including industry-wide shortages in textiles and chemicals critical to phone production, led to outsized levels of out-of-stock items both in our DTC and retail partnership channels. Thus, we were unable to monetize the full demand opportunity and fulfill all purchase orders, leading to a marked increase in order cancellations. For example, on our website, many of our core mattresses offerings were out of stock for weeks at a time, We are laser focused on and diligently working to address the bottlenecks in our supply chain, including labor shortages, capacity constraints and scarcity across many key materials and components. We have made significant progress over the past few weeks addressing these challenges. As an example, we have already onboarded new Tier 1 and Tier 2 suppliers and vendors who are allowing us to better meet strong consumer demand across our multi-channel distribution platform, while adhering to our high levels of quality control to preserve the value of brand and reputational equity. At the same time, we are implementing redundancies across key supply chain points and better inventory planning, which bring improved forecasting and inventory management. In addition, we are actively building safety stock that will help protect against further disruption. Put succinctly, while we are disappointed in our third quarter results, we believe the worst of our supply chain disruptions are behind us and that we are well positioned going forward to both grow the top line and further preserve the growth to the bottom line and achieve adjusted EBITDA profitability. On a more positive note, gross margins in the quarter came in very strong to 55.5%, an increase of 480 basis points year over year, highlighting the strength of our asset-light model. Year over year, our Q3 gross profit dollars increased by 6%, demonstrating the leverage in our model. We've negotiated more favorable rates with our shipping partners and are optimizing our product mix to both better meet demand and manage overall inventory levels. By leveraging a diverse supplier base, we are able to maintain competitive pricing and favorable margins over the long term in a capital efficient manner. We've also made significant strides towards our goal of profitability. Adjusted EBITDA loss came in at $7.5 million, representing a 57% improvement year over year and a 34% improvement sequentially. In the fourth quarter, we expect to grow revenue and continue our march towards profitability, and as a result, expect a sequential improvement in adjusted EBITDA loss. We are pleased in our ability to continue this positive trend in the face of the significant headwinds we face for most of 2020. We are also seeing success in our efforts to increase our reach in North America through our multi-channel distribution model. We currently have a footprint that is much less than many of our competitors, leaving us with significant opportunity to expand and take market share. Our task resource and retail partnerships are critical to our strategy. Many of our customers want to try a mattress and experience our products before they make a purchase. These channels are highly complementary to our e-commerce strategy and enable us to interact with and influence the customer across the decision-making process, leading to more trial opportunities and higher conversion rates. We've also strengthened our management team in recent months. bringing many talented and experienced individuals to the company, including a new CFO and CMO, along with a number of other senior executives to help lead facets of the business, including e-commerce, media, customer acquisition, retail partnerships, and supply chain teams. Each of these new team members has a deep experience in their respective areas, and I am confident they will make meaningful contributions to Casper. Going forward, we expect to benefit from a number of favorable including strong demand for mattresses, healthy demand for at-home purchases, robust home buying and suburban migration, increased awareness and appreciation for wellness, increased consumer demand for a multi-channel shopping experience, and an industry-leading brand that resonates with consumers across a growing demographic and consumer profile. We feel strongly that our value proposition is not just a major differentiator, but also a significant driver of our growth plans as we continue to converge the shopping experience. In summary, while we are aware that there's still much work to be done, our ongoing trends highlight the value of our strategic multi-channel positioning and expansion across our retail stores and retail partnerships. The addressable market we are in is estimated at over $20 billion. We believe there is an enormous opportunity in front of us for the Casper brand to take a greater share of this large and growing market. We believe Casper is in a great position to provide strong long-term shareholder value. I'll now turn the call over to Emily, our President and Chief Commercial Officer, to provide some additional color on our channel performance and commercial strategy. Emily?
spk03: Thanks, Philip, and good morning, everyone. While the third quarter certainly had its challenges, I believe we are well positioned to capture market share and meaningfully grow our brand in both the near and long term. We're addressing our supply chain constraints, putting our consumer at the center of our business, launching new products, and investing in growth and initiatives that we believe offer high return on investment. Overall revenue, excluding the impact of our European operations shutdown earlier this year, was up 1.8% year-over-year. Our North America direct-to-consumer channel, which represents sales from our own stores and website, declined 6% compared to the third quarter of 2019. This was primarily due to depressed retail foot traffic and limited store offerings at our Casper stores. and numerous supply chain disruptions on our e-commerce site due to the COVID-19 pandemic. I am pleased to report that by the end of the third quarter, 64 out of our 65 stores were back up and running and that we're beginning to see improved retail store performance. Over the next four to five quarters, we expect to open approximately eight to 10 new Casper retail locations. Our stores are an important part of our effort to create more awareness at the top of the purchase funnel that influences buying behavior across our sales channel. We see tremendous value in having a strategic curated retail footprint that supports key business drivers from brand awareness to product offering introductions, high level of customer service and support to cross channel sales. E-commerce sales on casper.com were up modestly year over year despite increased levels of out of stock items throughout most of the quarter. With the addition of new senior leadership, We have identified and addressed various issues across the e-commerce platform and continue to strengthen our e-commerce capabilities, launching several initiatives in 2020, including strategic changes to our marketing programs, further investments in technology and data analytics capabilities, along with our ongoing work to address our supply chain issues. Revenue from our North America Retail Partnership channel enjoyed healthy growth as revenue grew 33% year over year and by 15% on a quarterly sequential basis. We are still in the very early stages of breaking into this channel, and it represents a significant portion of the addressable market, as it is where the majority of mattress trials and purchases are made today. Trial is an important part of the consumer's buying process. Many people just want to lay on a bed before purchasing. We've seen this since we opened our first office and had customers literally knocking on the door asking to try the mattress. We successfully complemented our website with a combination of Casper-owned sleep shops and retail partnerships. In 2021, we will continue to add trial opportunities. The expansion of our retail partnerships allows us to grow our reach at a relatively low cost, while positioning us where our customers want to shop. You should expect to see us continue onboarding new leading retail partners and driving more Casper offerings in more doors and across more geographic markets. Our multi-channel distribution strategy puts the consumer at the center, meeting them wherever and whenever they want to shop. As a result, consumers can follow many different purchase journeys, which may include multiple touch points and may take multiple weeks of education and deliberation before arriving at a final decision. Our expanding channel presence appeals to many different consumer segments. We know some consumers like to shop from their sofa on their computers. Some like to shop in stores at their local mall, and some walk by our pillar display at one of our retail partners. Our multi-channel distribution strategy ensures that wherever a consumer chooses to shop, they will have a consistent Casper experience. Finally, I am pleased with the progress we've made in expanding our brand presence. The trends we are seeing in our business and across our industry, as well as our efforts to make the business more efficient, reinforce our confidence that we are on the right path to achieve our operating and financial goals. Our marketing strategy and ability to effectively execute is critical to our success. We make marketing decisions every single day, measuring the dollars we spend and efficiency across channels. Every dollar we deploy is measured against the targeted return on ad spend, both internally and with our agency partners. We will continue to leverage marketing to reach more and more consumers. As an example, a few weeks ago, you may have seen us on the Today Show and on Good Morning America, showcasing some of our products for the holiday season. Casper started in 2014 disrupting the mattress market, and we've been able to capture outsized consumer attention with innovative marketing, such as puzzles on the subway and NatMobiles traveling across the country. Our brand ignites people's imagination, makes them smile, and really think about what sleep can do to improve their life. But we still have a lot of runway to expand awareness and capture new customers. The successful execution of our marketing strategy will bring increasing leverage to the operating model and is an important part of our path to profitability. I'll now turn the call over to Mike. Mike?
spk05: Thanks, Emily. I want to take this opportunity to thank everyone at Casper for their warm welcome. It has been a pleasure working with this talented team the past two and a half months, and I'm excited for what the future holds for our company. Taking a look at our financial results, consolidated revenue was 123.5 million, a decline of 4.2 million, or 3%, compared to 127.7 million in the third quarter of 2019. Revenue was impacted by the previously mentioned supply chain challenges, as well as virtually no contribution from the recently discontinued European operations, which contributed 6.4 million in revenue in the third quarter of 2019. North America revenue increased nearly 2% year over year. The supply chain disruption was a challenge for us in the quarter and impacted our results. While mattresses are considered purchased, we believe once consumers make the decision to buy, they don't want to wait. As a result, our out-of-stock items in the quarter resulted in lost sales but meaningfully pressured revenues. The largest contributor to the lost revenue was our inability to adequately supply and stock our retail partnership channel, as we were, unfortunately, unable to fulfill a number of purchase orders. We believe these orders were lost for good. Out-of-stock and delayed shipping times resulted in lost orders on our website as well. Despite the challenges, North America retail partnership revenue increased 8.3 million year-over-year, or nearly 33%, to 33.6 million and 15% sequentially driven by organic growth on the back of the expansion of our product offering as well as our growing number of partners. Overall, North America direct-to-consumer revenue declined 6.3% to 89.8 million, primarily due to the impacts of COVID-19. Our stores were impacted by limited offerings and depressed foot traffic due to the pandemic. and the previously mentioned supply chain pressures that resulted in out-of-stock items negatively impacted web sales. Gross profit was 68.5 million, an increase of 3.8 million, or 5.9%, compared to 64.7 million. Gross profit grew 920 basis points faster than revenue on a year-over-year basis. Gross margin was very strong, improving 480 basis points to 55.5% compared to 50.7% in the prior year and was up 370 basis points sequentially. The increase in gross margin was primarily driven by improved product mix and favorable shipping terms. Our average selling price for mattresses improved year over year as we successfully implemented a price increase earlier in 2020. Additionally, we've emphasized higher margin product offerings on our website, each favorably contributing to our gross margin. During the quarter, we recorded a $1 million partial reversal of a charge taken in the first quarter associated with a change in shipping vendors, which favorably impacted our margins. This one-time item was adjusted out of EBITDA. Even with the challenges related to COVID-19, we continue to see our asset-light model as a key driver of margin expansion and capital flexibility, allowing us to deploy our capital in higher ROI areas and affording us added nimbleness to pivot our production, distribution, and supply chain. Sales and marketing expenses decreased year over year by $2 million, or 4.5% to $42.6 million. As a percentage of revenue, sales and marketing expenses decreased by 40 basis points to 34.5% of revenue versus 34.9% last year as we built a more robust customer database to enable increased long-term value through more and better customer touchpoints in our expanded product portfolio. G&A expenses, including store operating costs but excluding depreciation, were $36.4 million, or an 8.8% decline, compared to $39.9 million in the prior year period. G&A expenses as a percentage of revenue decreased from 31.2% to 29.4%. Net loss for the third quarter was $15.9 million, a significant improvement from a net loss of $23 million in the third quarter of 2019. Earnings per share was a net loss of 40 cents, Depreciation and amortization was 3.3 million. This led to an adjusted EBITDA loss of 7.5 million, a 55% improvement compared to the adjusted EBITDA loss of 16.8 million in Q3 of 2019. We are pleased with these year-over-year results and even more pleased with how adjusted EBITDA has been trending, improving by over 3.9 million sequentially, which serves to reinforce our path to positive adjusted EBITDA by mid-2021. I want to emphasize that our team is committed to top-line growth while achieving our profitability goals. One of my key focus areas as CFO has been and will continue to be working with our organization to do more with less. To that end, I expect we will continue to be more efficient across the business from the gross margin line down to the bottom line. Moving to the balance sheet and our liquidity position, as of September 30th, we had cash and cash equivalents of $96.1 million compared to $67.6 million as of December 31, 2019, primarily as a result of the $88 million from the issuance of equity, which was partially offset by $47 million of cash used in operating activities, and $12.6 million invested in property and equipment, primarily to build retail stores. We recently added a $30 million asset-based facility with Wells Fargo. This facility has an additional 15 million accordion feature provided certain parameters are met that will enable us to scale in the future. In the fourth quarter of 2020, we expect to deliver 132 to 142 million of revenue driven by year over year growth in our e-commerce channel and the expansion of our retail partnerships. At the midpoint of our range, this represents double-digit growth for our North America business year-over-year, excluding our European business that is winding down. In the fourth quarter, we expect both year-over-year and sequential improvements of our overall adjusted EBITDA. Gross margins are expected to be lower in the fourth quarter of 2020 compared with the third quarter due to increased promotions and channel mix. The fourth quarter, which includes Black Friday, Cyber Monday, is typically more promotional than other quarters. Additionally, we anticipate the retail partnership channel, which carries lower gross margins than DTC, will contribute a larger percentage of revenue in Q4 2020 than it did in the third quarter. It's important to note that our retail partnership channel requires less marketing spend, which results in the channel positively adding to adjusted EBITDA. Longer term, While there is slight margin of pressure given the channel mix shift, we believe we will continue to be a business with above 50% gross margins, and the growth from this channel will be a key driver of profitability and cash flow going forward. For modeling purposes, it's important to note that Q1 tends to experience seasonally lower demand, and as such, we expect Q1 2021 will have an increased adjusted EBITDA loss versus the fourth quarter of 2020. We expect this loss will be offset in the second half of 2021 as we become adjusted EBITDA positive. CapEx is expected to be below 10 million in 2021 with plans to open fewer than 10 stores. We enter 2021 with enormous opportunity in front of us. We operate in a very large addressable market. We have a powerful brand with significant opportunity to grow. Our organization is focused on long-term growth and achieving sustainable profitability. Our expanded distribution, current product offering and pipeline, brand awareness, marketing expertise, and balance sheet position as well. We are confident in achieving our goal of sustainable adjusted EBITDA profitability starting in mid-2021 by driving healthy top-line growth down to the bottom line and in turn creating significant shareholder value. Going forward, we will continue to apply a disciplined data-driven approach towards capital deployment and customer analytics to drive both top and bottom line growth. Casper is an amazing brand with trusted products that position us to capture lifelong customers. We are rich in customer data and are investing in analytical capabilities that will enable us to more effectively leverage that data to enhance our customer economics, and we believe capture significant market share in the years to come. We are diligently working to improve those areas where we can do better. We are pleased with the improvement and positive trends we're seeing across our business, and we're excited about the opportunities ahead. I'll now turn the call back to Phil.
spk09: Thanks to everyone who joined the call this morning. Before we go to Q&A, I want to thank our talented and dedicated employees for the exceptional work they have done throughout these challenging times to advance Casper's industry position by meeting the needs of our ever-evolving consumers through continuous innovation, product expansion, our continued focus on wellness, and providing the highest level of quality and customer service. We truly have a remarkable team. Operator, I think we can open it up for questions now.
spk01: Okay. At this time, if anybody would like to ask a question, please press star 1 on your telephone keypad. Again, that is star 1 on your telephone keypad. Your first question comes from Peter Keith from Piper Sandler. Your line is open.
spk08: Hi. Good morning, everyone. I wanted to just reconcile the North America growth of 1.8%. And if we look at the Q3 data for the industry that's out, whether it's ISPA or even some of our industry survey work, it does suggest a very strong growth core for the entire mattress industry of about 10% to 15%. So my specific question is, given the North American growth of 1.8%, were there disproportionate supply chain issues that impacted you, or are there aspects of your business model that you felt put you at more of a disadvantage relative to everyone else?
spk09: Good morning, Peter. Thank you. So just to reiterate, we saw very strong demand signals for our business. E-commerce saw record traffic, and our retail partners reported very strong demand for our products. Unfortunately, we did run into several supply chain issues that did not allow us to ship products on time or to what we expected. There were issues around foam chemical production. There were issues around innerspring manufacturing. And there were issues around textiles and covers that created supply chain disruptions that we did not foresee. So we are certainly disappointed that we weren't able to ship more products. But I would separate it out from, you know, to your question about demand. You know, we saw record traffic to the website, and we echo your sentiment about what's going on in the industry. And since we've turned the corner with our supply chain issues and are now back on stock, and if you go to Casper.com, you'll see, you know, our products are in stock and shipping back to normalized windows.
spk08: uh we've seen a re-acceleration of the business so the the supply chain issues are certainly separate from the demand side within our business okay thanks philip yeah i guess the supply chain issues are impacting everyone um i mean that's evidence with the earnings calls we've had uh so far this quarter and and in some of our industry discussions it didn't seem like the supply chain issues had a disproportionate negative impact on you guys Maybe just to round it out, the inventory was up 26% year-on-year at quarter-end, so that doesn't necessarily look like a company that has a lot of stocks. Can you help us reconcile that quarter-end number? Maybe it's a timing issue, but that stood out to us.
spk09: Sure. So keep in mind that we deploy an asset-light business model that leverages third-party manufacturing for our production. we did not see some of the supply chain disruptions coming. And I think we perhaps were maybe hit a little bit harder than some of our competitors because of that. But we have since taken steps to change that. We have talked about how we've implemented strategies with our manufacturing partners to give us more visibility into key components. We've added redundancies across critical supply chain points. We've brought in new expertise around supply chain management, inventory forecasting, and demand planning. And so all of those are things that we've been really focused on in the last 90 days, and we've seen our supply chain respond very positively. So we are also back focused on building safety stock. positions within our inventory position, mostly talking about mattresses here, but building up safety stock positions there so that we can be ahead of any potential supply chain disruptions. And I think the industry is going to continue to report on Supply chain issues, but I think we can mitigate those going forward by the steps that we've talked about. Redundancy of suppliers. We've onboarded new Tier 1 and Tier 2 suppliers. We've increased the capacity that we could source. And this is also a focus with kind of 2021 planning, just given the demand that we see for the business and the brand. And so we are very focused on increasing capacity, increasing visibility through the supply chain, and making sure that we have redundancy so that we can absorb any supply chain issues that might arise. Okay.
spk08: That sounds good. I do agree. Supply chain issues are going to be around for a while. So thanks for the answer.
spk09: I agree too, unfortunately. Thanks, Peter.
spk01: And your next question will come from Alexandra Wallius from Goldman Sachs. Your line is open.
spk04: Good morning, everyone. Thanks so much for taking my question. On the supply chain issues, it seems like with the product that you have that you're choosing to prioritize the retail partnerships channel. Can you talk through why that is and how you're expecting to allocate insufficient inventory across channels going forward? And then, you know, related question, you've announced a few new partnerships, and I suppose I'm wondering why you're choosing to onboard new partners, you know, given some of these shortages.
spk09: Yeah, good morning, Alex. Thank you. So you're right. You know, we call our retail partnership channel retail partners because they are partnerships, and we think long-term about those relationships. We saw high demand in the retail partnerships in Q3, and we see that continuing into Q4. Unfortunately, we couldn't ship even some of the purchase orders that were placed for our products with retail partners, but we made a commitment that we would try to get them inventory to the extent possible, and we did the best we could. And so we are trying to be very strategic with how we're flowing goods between all of our channels. And I would say that we believe we, you know, the issues with our supply chain are currently behind us and that we are able to better keep up with demand this year. And one of the key areas of focus is just increasing the number of trial doors. So partners like Macy's and Nordstrom's will increase our footprint, will give more people the ability to lay on our products, try our products, and see what makes them truly special, which is just how unbelievably comfortable they are. And so we think that's long-term something that is strategically very important. And, you know, as I mentioned, the supply chain fixes that we've been talking about, many of which are in place now, give us confidence that we have the scale. And like I said, if you go back to our e-commerce website, our DTC channel, we are in stock in pretty much every SKU. We're shipping products much more quickly, and we are largely able to fulfill demand from our retail partners, even as we stand up new partners that we've announced over the last two, three months.
spk04: Thank you. And then maybe one more question, if I may. You mentioned, certainly if I heard this wrong, but I think you said you were trying to roll out 10 stores next year. That's lower than the run rate that we had previously and lower than what we were expecting. Can you talk about the decision to slow the store rollout? Is it just because of the uncertainty around the virus and the return of traffic, or does it represent more of a strategic shift in terms of how you're thinking about channel mix and the importance of maybe stores versus retail partnerships?
spk09: Yeah, I think it just speaks to us being conservative about our store rollout, and we're going to continue to let data inform how we accelerate that or not. So right now we see more than enough demand from our e-commerce channel and from our retail partnership channel, and so we're going to slow the store rollout performance. But we're certainly going to revisit that as we get more data and as we see what happens to the broader retail picture, you know, certainly once a vaccine is rolled out and we – Expect kind of retail foot traffic and sales performance to return to normal levels. But right now it's really just a conservative view on how we see 2021 playing out. And, you know, back to your point about some of these partnerships, just to reemphasize, you know, partners like Macy's and Nordstrom's and Ashley Home Store and Sam's Club, I mean, these are major, major accounts and we expect them to contribute significantly. a meaningful amount of business next year as we continue to drive not just our footprint, but also continue to drive penetration into the retail partnership channel, which is by far the biggest addressable market of the channels that we compete in.
spk04: Great. Thanks so much.
spk01: The next question comes from Randy Connick from Jefferies. Your line is open.
spk08: Hey, thanks. Good morning, everybody. First question would be, Philip, how are you, given the supply constraints or bumps, how do you think about changing your view of safety stock? How did you kind of manage levels of safety stock before? Can you quantify that and how you're kind of changing that approach now? Just get some perspective there would be helpful.
spk09: Yeah, good morning, Randy. Actually, I'll turn it over to Mike, who can talk a little bit more about how we think about the inventory management and kind of how we're changing our thinking there. Mike, do you want to comment on that one a little bit?
spk05: Sure. Thanks, Randy. So in the quarter, safety stock was too low from where we needed it to be. And so we're obviously working with our suppliers in order to make sure we can go forward and build up the needed safety stock to make sure that we can satisfy the demand, but also do it in a way that is capital efficient. So as an example, you know, we're working with a number of our manufacturing partners where they're going to hold some of the inventory and raw materials. And then we're also going to build up some of our finished goods to make sure we can properly meet the demand.
spk08: Got it. And then just a question. So do you think that, you know, given the inventory number that was kind of mentioned earlier, it is up year over year, that indicates that you've now caught up on the inventory you need to have the appropriate levels of safety stock going forward?
spk05: I think we have some work to do there. Our inventory on our balance sheet, you know, from our most popular products, we tend to drop ship them. And so when you look at the balance sheet, it doesn't necessarily represent, you know, demand, the supply we have for those demanded products. And so I think it's a little misleading sometimes. I think going forward, we did make progress throughout the quarter in building up safety stock for certain products, but we still have some more work to do throughout the year.
spk08: Got it. Thanks. And last question would be the gross margin came in kind of better than we were thinking. And I understand your commentary around the sequential dynamic of gross margin in the fourth quarter. I guess the question would be, should we still expect gross margin, even though it should be down sequentially from the third quarter into the fourth quarter, because of the items you mentioned, should we still expect to be up on a year-over-year basis in the fourth quarter? And then related to that, can you just give us some perspective on just a general pricing environment out there because it seems, again, in the quarter, you know, your gross margins are coming in fairly healthy. So just any comments around the environment and how your pricing is being perceived by the consumer and so forth would be really helpful. Thanks, guys.
spk09: Mike, do you want to just talk about margins on a year-over-year basis and what to expect on Q4? Sure.
spk05: So we talked about it in the commentary. Mattress ASP was up in the third quarter of 2020 across all our North America kind of channels. We had a price increase earlier in the year, and we've also been improving our product mix, shifting it towards some more premium products that are helping out there. The other piece I'd say about the third quarter I did mention in the opening remarks, we had a settlement charge, kind of a one-time item that helped gross margin by about 80 basis points. We're also seeing kind of on an ongoing basis efficiencies in our supply chain, specifically around shipping. We have a new contract that we signed at the beginning of Q2 of this year. It's a long-term contract, and we expect you'll start to see favorability going forward from that. When you look at Q4, I would anticipate that quarter over quarter for the margins to decline, primarily because we talked about Q4 tends to be a little bit more promotional, and we expect the percentage of the retail partnerships to be larger than it was in Q3. That said, I would expect margins in the fourth quarter to be better than they were on a consolidated basis in the fourth quarter of 2019. We view our business overall as a 50% or more gross margin business, and that's what we're targeting.
spk09: Thank you. Thanks, guys. Thanks, Randy.
spk01: And your next question will come from Atul Neshwari from UBS. Your line is open.
spk08: Good morning. Thanks a lot for taking my question. So Phil, I think you mentioned that Casper was perhaps more vulnerable to supply chain issues given your reliance on third parties. So does that need to rethink your strategy of relying solely on third party manufacturers going forward?
spk09: Good morning, Atul. So just to clarify, I think We got caught by some of the industry dynamics, I think, a little later than perhaps if we had owned our own manufacturing facilities. But the changes that we've made that we spoke about, working differently with our manufacturers, getting increased visibility into their supply chains, building up safety stocks will allow us to mitigate that going forward. And so, no, I don't think it requires us to change our business model. And, again, I think going back to Randy's question as well, the business model is working. If you look at our margins – If you look at both sequential and year-over-year expansion of margins, both profit dollars and profitability, the business model is working. The asset-light model for manufacturing footprint is working well. These industry issues are unprecedented, at least in the existence of Casper. And so we've now changed how we operate with our manufacturers, including just onboarding more manufacturers, onboarding more redundancy points throughout the supply chain so that this doesn't happen again. So again, disappointed with what happened in Q3, but it's doesn't reflect the demand that we're seeing in the business. And since we've implemented a lot of these changes, we've seen the business re-accelerate. And we think going forward, this will be a new way that we operate our business model, but that it's the right business model for us, and it will lead us to the long-term profitability targets that we've talked about since the IPO.
spk08: Great. Thank you. And then my follow-up question is on your fourth quarter guidance. Where are you tracking now relative to the double-digit North America growth expectation for the full quarter? So basically, would you be able to achieve this if you maintain your current fourth quarter quarter to date trajectory, or are you baking in an acceleration over the balance of the period? Thank you.
spk09: So I think what we'd say now about the fourth quarter is, again, we saw a lot of our products come back in stock kind of mid-October, Q4 starting off strong. You know, the big event in Q4 is obviously Black Friday, Cyber Monday, which is still to come. We think we are well positioned for that holiday period. And so, you know, we'll see how that goes. But right now, I would say Q4 is off to a strong start, and we feel good about how the business is performing thus far. Great. Good luck with the fourth quarter. Thanks, Atul. Atul?
spk01: The next question will come from Bob Dribble from Google. I'm sorry. Your line is open.
spk06: Hey, guys. Good morning. A couple questions for me. I guess the first one is, as you run through a lot of the challenges that you're seeing, has the path to profitability timeline at all changed in your minds? Hey, Bob.
spk09: Good morning. I would say it feels like we are still ahead of plan, meaning we're we are going to invest less cash to get into profitability. We still feel good about mid-2021, and the business model is working. Obviously, there was less revenue in Q3 than we had expected, but the margin improvements were there, demand is there, and we think that's all coming together to drive profitability, and we'll still be ahead of expectations where we were kind of back in February.
spk06: Got it. Okay. And then I guess just a follow-up question. So when you think about the environment, I don't know if this is for Emily, but in terms of the marketing or the advertising trends or investments, like the decisions behind how you're going to allocate some tighter dollars, I don't know if you could just maybe address what you're seeing there and how you're thinking about that in the coming months and quarters. Thanks.
spk09: Yeah. Emily, do you want to talk about that one?
spk03: Sure. Sure. Hi, thanks for your question. So we make marketing decisions every single day, and we've learned a lot from the environment from Q2, Q3, and then heading into Q4. And now, particularly that we're back in stock, we have, as Philip had mentioned in his remarks, a new CMO, a new head of media, a new head of e-commerce, new agencies on board. We feel really good heading into Q4 about our ability to, every single day, look at our marketing dollars and deploy them efficiently, efficiently to really drive consumer demand.
spk09: Great. Thank you very much. Thanks, Bob.
spk01: And your next question will come from Matt Caranda from Roth Capital. Your line is open.
spk07: Hey, guys. Thanks. Sounds like we're not necessarily losing sales, I guess, in 4Q given lead times are back to normal, Phil, as you said. But I guess if we look at it on a year-over-year basis, the mid-20-year guy would suggest somewhere in the mid-to-high single digits growth-wise, which seems to be maybe a little bit below where the industry would be tracking for the quarter. So maybe you could help us square those comments.
spk09: Yeah, again, I think we are still early in the quarter, just given the events that are still to come. I think we are still throttling how quickly we stand up retail partners and how we roll out our business. Right now we do feel like we're well positioned to handle the demand going on in the business, and we'll see how the rest of the quarter plays out. But, you know, we've been working aggressively to ramp up this capacity that we have on the inventory side so that we can handle the stronger demand. But I would say, you know, that's still largely in the second half of the quarter, just given the holiday timing. And so we'll see how the rest of the quarter plays out.
spk07: Got it. And then a little bit of a longer-term question, but I guess the store growth that you guys gave in terms of commentary sounds like 10 locations next year. What does that imply for kind of longer-term plans for your store expansion? I'm just curious, does that also imply that next year we should expect kind of maybe even stronger third-party retail growth for 2021? Sure.
spk09: Emily, do you want to talk about that one a little bit?
spk03: Sure, yeah. So in the past, you've really heard us talk about our business being a third, a third, a third in each of our channels. And I think you could see in the future up to 50% of our business in retail partners and 50% of our business in direct-to-consumer. You know, we talked about 8 to 10 new store locations, and as Bill had mentioned earlier, this is really a decision we're making based on the environment we're in right now. We look at stores city by city by city and look at not only our store locations but retail partnerships and really providing the best shopping experience for the consumer in each DMA. And that's the way we'll continue to look at retail as we go forward.
spk01: And your next question will come from Curtis Nagel from Bank of America. Your line is open.
spk00: Great. Thanks very much for taking that question. So, just not to belabor a point, but just wanted to, I guess, revisit some questions on supply chain. You know, so it sounds like you guys have resolved some of your issues. It looks like, like you said, fill up the websites. sort of back in stock on most of your beds. But yeah, I'm just kind of wondering how you're able to get there so quickly, which is certainly a really good thing given how, I guess, far reaching this issue is, right? It's an input issue, right? So I guess why would I add a new manufacturers who theoretically might be constrained by inventory shortage as well help? If you could kind of talk through that, that'd be really helpful. Yeah.
spk09: Yeah, good morning, Curtis. Thank you. No, it's a good question. And again, I think this speaks to the benefit of the asset-light third-party manufacturing business model that we have. So, you know, If we were producing our own foam and we're only buying chemicals from one, maybe two sources, then, yeah, we're going to be limited to that. But for us, we're able to go to a number of manufacturers to source chemicals, to source inner springs, to source covers. We now have redundancy across those inputs and other inputs that go into our mattresses. And we are able to build up that redundancy very quickly by moving on a number of fronts. All thanks to the asset light business model. And so we now are shipping and producing finished mattress goods from, I think, something like eight different manufacturing points. And that's companies, so additional footprints within those. And we were able to move on that very quickly, just given that there's a strong demand for manufacturers to manufacture for us. We're able to push on those fronts concurrently. We do the design and development of the products that we make in-house, but we're able to go and partner with the manufacturer and stand them up relatively quickly, given expertise in that category. So it is a differentiated aspect of our business model that has allowed us to move quickly. And I think going forward will allow us to mitigate risk in a way that if we were owned and operating our own manufacturing footprint that we couldn't do. So, again, we do think this is the right business model, despite what was frustrating in Q3. And when we look longer term and just to what Peter had asked and mentioned about continued supply chain issues. We do believe we're building up redundancy through a number of different manufacturing points so that we don't have this hiccup again, hopefully.
spk00: I guess maybe just to talk to that, I mean, any risk you think in terms of moving pretty quickly and distributing to new partners, you know, particularly as some of your products have become a little bit more complex, you know, like your hybrid beds?
spk09: So we still do full quality stand-ups. We still test manufacturers. We work with them to get them ramped up based on our quality standards. So we do not sacrifice kind of the quality standards that we hold our vendors to, even in trying to fix the supply chain. We know that that could impact brand and product performance, and that's something we're never willing to sacrifice. And the manufacturers that we are working with are all high-quality manufacturers that, you know, are well-known to the industry. You know, before we didn't believe we needed the level of redundancy that we now know that we need in order to get ahead of these hiccups. But these are established players that have made mattresses for a long time. And now we're, you know, flowing goods and purchase orders to them and their shipping products and all of the quality standards that you know, are adhered to as a requirement to do business with us.
spk00: Okay. Fair enough. Thank you. I appreciate it.
spk09: Thanks, Curtis.
spk01: The next question comes from Nick Jones from Citigroup. Your line is open.
spk08: Great. Thanks for taking the questions. I guess two quickly. In 4Q, I've heard some other e-commerce players kind of lean away from Black Friday, Cyber Monday, and kind of playing to a more elongated holiday season. It sounds like you're a little more optimistic that the Black Friday or Monday weekend will still be kind of a big event. I guess, can you talk there if you're expecting an elongated season or if you expect it to be kind of fairly typical versus prior years given kind of the COVID dynamic? And then the second question is, while you fix some of the inventory constraints and supply constraints, can you talk about shipping times? Are you going to be able to ship? You know, the inventory, you do have two consumers in a fast enough time, because that's another area we've heard there's been some worries about constraints going into the holiday season due to COVID. Thanks.
spk09: Yeah, good morning, Nick. No, that's a great question. And you hit on something that we, when we look back in Q3, we think was an executional kind of misstep for us, because we agree that consumer trends are changing this year. certainly driven by COVID and other factors as well. We do believe that there are elongated shopping periods around the tentpole moments within this industry. And we don't believe that we played that as well as we could have over Labor Day. And so we changed our playbook and we launched our Black Friday sale earlier this year. We do believe that there's kind of a flattening out of consumer shopping across these holiday periods. And you saw us change our playbook to accommodate that. So I agree. It's not going to be as concentrated of a holiday selling period over historically what had been a five-day period. And we're seeing increased demand already in our business, which, again, goes back to the comments I made about kind of the reacceleration and Q4 being off to a good start. So, again, if you go to Caster.com, you'll see that we are running our Black Friday sale. Others in the industry are. And I think consumers are responding well to that. And then, sorry, on your ship time question, you know, our products are largely in stock. We are shipping and delivery times are kind of back into normalized ranges, and we think that's great. I think we will be able to ship out products within normalized ranges for us, which is usually, you know, one to three business days. We do anticipate that the carriers out there are going to be having issues, and we're going to try to get ahead of that, but, you know, some of that is outside of our control. But I think consumers are going to be seeing that kind of across the board. So we will be able to get the product out of our warehouses quickly. And then I think we'll be subject to kind of what's going on with the broader carrier networks. Thank you. Thanks.
spk01: And your next question will come from Lauren Shank from Morgan Stanley. Your line is open. Great. Thank you.
spk02: I guess any color on new versus existing retail partnership growth during the quarter? and how you're thinking about what the right number of partners or even doors there is over the long term. And then my second question is just, you know, given what we're seeing from a COVID perspective, does your fourth quarter guidance assume that all 64 of the stores remain fully open for the duration of the quarter? Thanks so much.
spk09: Thank you. Yeah, I'll let Emily kind of weigh in on that. But I'll start by saying most of the growth in retail partnerships in Q3 came from existing partners. And that's where we prioritize the inventory that we did have available to us and where we were flowing. Longer term, I think you will see balanced growth across new partners and existing partners. But Emily, any other color you want to provide on kind of the retail partnership demand mix and then as well as our stores?
spk03: Yeah, I think that's right what Philip said. I would say also, you know, we continue to partner with brands who really understand Casper as a brand. And our partners have different assortments based on what's right for their brand and their consumer as it relates to Casper. And so we'll continue to keep an eye on that mix. But to Philip's point, the majority of the growth was we saw a lot of growth coming from existing partners, which we're excited about. As we think about stores, our stores are all open now. As you can imagine, pending what could happen with COVID and further lockdown, we'll take that as it comes in regards to our stores. But right now, we're operating all of our stores.
spk05: I would just add one thing to that, if I could. You know, in the guidance, what we assumed is that the stores would be open, but there would be lower foot traffic baked into the number. And then on top of that, you know, as we think about 2021 and our prepared remarks, we also took into effect the impact that COVID had had, and that shaped our strategy in thinking about what our planned near-term store rollout would be for the following year.
spk01: Great. That's helpful. Thank you. Your next question will come from Seth Boshin from Wedbush Securities. Your line is open.
spk08: Thanks for that, Anne. Good morning. My question is around marketing. You showed very limited leverage in marketing expenses this quarter despite the lower ad rate environment and the shift to the wholesale channel, which you had said carries a lot lower marketing burden. Can you help us understand what's going on there? Please.
spk09: sure seth um so we we continue to spend on marketing which uh again we saw strong demand pictures the supply chain issues uh hit us uh in a bit of an unexpected fashion uh just given how quickly they started to happen and are delayed shipping times and so uh the dynamics that we're talking about were not because we changed uh strategy within the quarter. We saw strong demand signals. We thought we could keep up with demand, but the manufacturers kept getting more and more behind as we were trying to fulfill orders. And so in real time, we were trying to balance where we were making the investments. Had we been able to fulfill the demand that we saw through our retail partnerships and that we saw through our DTC business, I think you would have seen that continued de-laboring of the sales and marketing expenses. We have seen ad rates kind of creep back up just as overall e-commerce has stayed strong. But we think that that continued trend will go forward. And, again, in Q4, we know that we're going to see some channel mix shift, and so you're going to see a different trend. kind of percent of net revenue driven on sales and marketing. And just Q3 didn't play out the way we had expected it given the supply chain disruptions. But going back to kind of how we operate the business and what we're seeing in Q4, you know, we do expect that as retail partnerships grow, that drives leverage in our sales and marketing channel and that we'll be able to effectively spend on our sales and marketing to profitably drive growth within our DTC business. And that's how we'll operate the business going forward.
spk08: Got it. So as we think about the fourth quarter and then in 2021, would you expect leverage in sales and marketing?
spk09: I would expect that our retail partnerships continues to grow faster than our DTC channel, and I think that will drive leverage in our sales and marketing channel going forward.
spk08: Thank you. And then my second question is just around the performance of your direct-to-consumer Casper stores. I understand there's lower foot traffic, but across the industry we've seen a pretty big improvement in sales in bricks-and-mortar stores. Based on the data that you've disclosed, it seems like your sales per Casper company-owned stores were down sharply year over year. A, can you confirm that? And B, does that make you rethink not only the 2021 plan for your stores, but your longer-term plan about the value of having company-owned stores?
spk09: Yeah, so remember, we don't break out retail and e-commerce because we believe there's a lot of interplay between those channels, and we think that interplay continues. So we don't break out in a same-source sales performance. We see that consumers are leveraging our retail stores for education, to lay in touch and see the products, but we also know that they're coming back to the e-commerce channels to complete their purchases and to buy products. And so we see that interplay and that dynamic nature between retail and e-commerce continue to play out and, if anything, be much more convergent in the consumer behavior than we had expected at this point. And as we mentioned earlier, we're going to continue to let data drive how we think about our store rollout, and that data will be informed by consumer behavior. So as consumer behavior changes, I'm guessing post-vaccines being rolled out, we're going to look at the investment case and look at how we're thinking about the return on invested capital to continue our store expansion. But my belief is that consumers are going to continue to want trial opportunities. My belief is that the best trial opportunity for Casper products is in a Casper-owned and operated retail store, and that those will be key to driving long-term market share gains and long-term direct-to-consumer growth, which we believe is in front of us. Thank you. Thanks, Seth.
spk01: This will bring us to the end of our Q&A session today. I turn the call back over to Mr. Philip Grimm for closing remarks.
spk09: Thank you, everyone, for joining the call today. We appreciate the opportunity to talk about our business and just wanted to thank again the talented and dedicated employees at Casper who continue to stay focused on fulfilling our mission to help the world sleep better. Thank you, everyone.
spk01: Thank you, everyone. This will conclude today's conference call. You may now disconnect.
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