Shares in memory foam mattress specialist Eve Sleep (LON:EVE) today fell as much as 35% in early trading as the company revealed the cessation of merger talks with rival firm Simba. Furthermore, it revealed that revenues would drop in this year. The share price looks to have little going for it after the latest Eve Sleep profit warning:
The market cap is really remarkable. Eve was a recent flotation on the stock market, and in January 2018. Initially, it saw a valuation of 130p a share. The destruction of value for shareholders here has been tremendous, although the investment case was a tough one. Notably Neil Woodford was a large investor, holding almost 20% of the firm at one stage.
Many will be aware of Eve, or perhaps one of its competitors. They have undergone quite extensive marketing campaigns, paying for prominent TV advertising or billboard advertising in prime London stations. The core product is a memory-foam mattress, sold at premium prices. In recent years, they have branched out into other products such as pillows or bed-covers. These are not new products by any means, and have been available in Ikea for decades. However, the likes of Eve come at a large price tag, often double or more.
We get a plethora of news today. A merger has failed, the shares are available for trading, and there is a trading update. On the merger first, we get the following reason.
The board of eve has decided that now is not the right time to pursue the potential merger and that it is more appropriate to focus on the eve rebuild plan, as previously communicated to investors in the Company’s 2018 results announcement on 12 March 2019.
Given the merger talks only initiated on 12 August, it seems far fetched to decide that the timing is wrong. More likely a disagreement on how the merger would value the two companies.
The board will continue to seek further acquisitive growth opportunities, in addition to its focus on driving organic growth, in order to support its focus on a path to profitability.
This sounds rather worrying. There is no real evidence so far that Eve could get its own house in order, let alone an acquisition. If it isn’t the time for a merger, the same could be said for an acquisition.
However overall trading has been more challenging than previously anticipated owing to the uncertain economic outlook and continuing low levels of consumer confidence. This economic backdrop combined with heavy discounting and promotional activity from our competitors has led the board to conclude that 2019 revenues are now likely to be in the range of £25m-£27m.
That seems to be a very large miss. Stockopedia put the estimate at £35.3m, so the fall in share price is commensurate with this.
It is not really worth running through the figures too much here. Eve is a company that are early stage and shares characteristics with many in that it has only known losses. The short-term goal is attempt to scale up its sales so that these more than compensate for losses. These losses are heavy. In 2017 and 2018, the loss per year was around £20m.
How it has been able to do this and still keep afloat is quite simple. They have raised cash via the markets, selling a dream to investors that one day they may be much bigger. 2016 and 2017 saw equity raises of over £53m. Remarkably, another £11.7m was raised only this year, and the cash balance stood at £17.8m in February 2019.
Notably, the broker research (available on Research Tree) have withdrawn any guidance for next year’s figures and we might have to wait some time for it to be produced. The reason for this is that with a constant change of strategy, it is quite hard to guess where the company might be going next. Quite amusingly, old broker notes had estimated sales of £114m for FY2019. It is clear we have got hugely off track.
Looking at the figures, the gross margin is good: unsurprising when a mattress costs so much. Where the company falls down is its expenses. These are huge, particularly advertising costs. The problem is, once these are removed then revenues fall as well. Almost every part of the operation apart from production (which appears to be outsourced) seems expensive, as taking back a mattress under their 100-day guarantee must be pretty costly.
It seems from the RNS today that the company is doing what it can. However, there still will be significant cash burn in this year and the existing cash balance will come under threat soon. With the share price so low now an equity raise appears off the table, and some kind of rescue deal by a competitor is more likely.
Is the Eve Sleep profit warning a buying opportunity?
This has been a disaster of an investment for anyone in it. Originally billed as a disruptor, there has been little disruptive about Eve. Successful disruptor companies add genuine value to people’s lives and their products speak for themselves. From this point of view, there is evidently nothing remarkable about Eve’s products apart from the price tag. After several tens of millions of pounds in marketing spend over the years, the brand awareness percentage of 15% perhaps says it all.
Additionally the products don’t lend themselves well to business. When times get tough, very expensive mattresses might be one of the first purchases cut, as people could purchase one at a fraction of the price elsewhere. It is also a product that has limited upsale potential. The life of a mattress is supposedly over 10 years and also needs no maintenance in that time.
In my view the business case was flawed from the start, although Eve didn’t particularly mind this because it’s other people’s money they are gambling with. The range of competitors all attacking the same small niche (all oddly named: Simba, Casper, Emma, Sid) means that this part of the market seems saturated and some consolidation is rife.
I don’t believe this company is investable at all. It may survive in the form of a merger, but I’d expect small investors to be wiped out. I would not be surprised if there was another Eve Sleep profit warning in future.
Amusingly, Stockopedia ranks this as a 0, and I am inclined to agree. 1/5.