Eve Sleep (LON:EVE) is a mattress designer and seller that (historically at least) has focused on the direct-to-consumer channel. The company listed in June 2017 at around 100p a share, and today trades at 7.55p a share. Whilst the company has grown revenue at a CAGR of 137% since 2015, it has disappointed on the profit side, which has led to the poor share price performance.
The company has more recently focused on ‘loss reduction’ through targeting fewer markets, marketing ‘efficiency’ (eg stopping marketing) and reducing overheads. It has also signed deals with some retailers including Argos, Dunelm and Homebase (eg moving away from the direct-2-consumer model).
A trading update announced on 18th July announced the loss has been reduced for H1 to £5.9m. However, this has come at the cost of growth – UK turnover declined 0.9%. They expect to grow again in H2 as they relaunch marketing, however we have taken a detailed look into their recent performance and believe it leads to some worrying conclusions.
Research
The research we have done is based on the reviews on the Eve Sleep website. We have gathered all this data including product, review score and date, and used it to identify some trends in Eve Sleep’s biggest market & channel.
Chart 1 shows the overall number of reviews plotted weekly since early 2015. As you can see there was a big period of growth in late 2018 & early 2019 but then there has been a big slowdown in growth over the past few months.
Chart 2a shows the same as Chart 1 but split out by product – as you can see there as been a sharp slowdown in the Original Mattress. Chart 2b shows the same but with the Original Mattress removed – the Memory Foam Pillow (next top seller after Original Mattress) and Hybrid Mattress have both done poorly.
Chart 3 looks at the average review of the products from Eve Sleep. They pride themselves on quality of product and that is key to their differentiation. Review quality fell steadily from 2016 to mid-2018 before recovering slightly. This has been driven by two things: a decline in the rating of the Original Mattress from 4.9 in 2015 & 2016 to 4.6 now, and the addition of other products not rated as highly e.g. Memory Foam Pillow (4.5) and Premium Mattress (4.5). The decline in the reviews for the Original Mattress may either be due to declining quality as they seek to increase margins or worse customer service as volume increases, amongst a number of other reasons.
Chart 4 combined the number of reviews and the cost of the product sold to try indicate the revenue trend. Whilst not perfect, this should reflect the higher growth Eve is experiencing in lower value products. As you can see, there was a big increase in Q1 2019 followed by a decline in Q2 2019, to a point where it was below the 2018 run-rate. This is a worrying trend for holders – will management be able to reverse this in H2 2019 without throwing more money at marketing and therefore damaging the bottom line?
With the chart below, there will naturally be a time lag between the product being bought and the review being posted – which we would estimate to be around 3 months (though little hard evidence to back this up). So the actual spike in revenue probably happened in late 2018, which matches more closely with the trading update.
Conclusion
It is concerning that a company that has focused so heavily on building a direct to consumer brand sees revenue decline when it turns off marketing. This implies that aggressive marketing spend on new customer acquisition is the only way to sustain growth, and Eve have shown that they struggle to manage their bottom line whilst doing that.
Taking a step back – a direct to consumer business that is not a recurring revenue model must make money on every sale and can’t blame operating losses on customer acquisition. In the mattress market, there is very little recurring revenue or ‘life time value’ once a customer is won for the first time – as households buy a mattress maybe once every 5 years! So, we would have expected Eve to have started to make money by now.
We have always been sceptical of this business model and this increases our concerns over whether this can ever be a viable business. With the pivot to deals with retailers we think this looks like management have come to a similar conclusion. As a consequence, however, we would argue that any price premium the market is giving this company is unjustified – though that’s one for Mr Market to decide.
Finally, the comparisons are not 100% – but AO World is a similar model with a similar product… We are planning to look at that share later this quarter.