Q3 2020 Casper Sleep Inc Earnings Call

[music] good morning, and welcome to Casper sleep third quarter to catch the 20 conference call. Today's call is being recorded at this time I'd like to turn the conference over to gross Norberto, our job for Investor Relations.

For cash for the <unk> you may begin.

Thank you operator, and good morning, everyone. Thank you for joining the Casper sleep 2020 sort of quarter conference call. We'll get started interest the minute with management's comments.

Before doing so let me take a minute to read the safe 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 the do not relate the matters of historical fact should be considered forward looking statements, including statements regarding management's plans strategies goals and objectives.

The anticipated financial performance and the expect and impact of novel approach the virus and our business the.

Statements are neither promises or guarantees and Walt 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 and our annual report on form 10-K for the year end of December 31st 2019, that's updated.

Risk factor section of our quarterly report and form 10-Q for the quarter and the September Thirtyth 2020, and our other filings with the Securities and Exchange Commission sort of cause actual results to differ materially from those indicated by the forward looking statements made on this call.

Any such forward looking statements represent managements estimates as of the date of this call. While we may elect to update such forward looking statements at some point and the future. We disclaim any obligation to do so even if subsequent events cost her views to change.

In addition, we May also reference certain non-GAAP metrics, which are reconciled to the nearest GAAP metric and the company's earnings release, which can be found on our Investor Relations website at IR day Casper Dot com.

On the call today is Philip from co founder and Chief Executive Officer of Casper.

The only around the 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 Kranz Casper Chief Executive Officer. Philip. Please go ahead.

[noise] thinking there Brito and good morning, everyone welcome to our third quarter Conference call.

We're living through an incredible time and the history of our business.

The result of the Cove and 19 pandemic, we've seen increased focus on the at home experience consumers are searching for products and improve their wellness and increase their comfort you are willing to invest and quality design and convenience that they want and they want the products now trusted and admired brands the deliver top quality products and customer service will win over the long term.

Casper is one of those brands and.

The third quarter Casper saw record interest for our products as 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 and are in conversations with additional retail partners that will both further our brand visibility as well as our growth.

With the strong brand and the multi channel presence across the E commerce retail stores and retail partnerships. We are confident Casper is positioned well to take share in the growing sleep markets.

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 channel.

However, significant challenges and our supply chain, including industry wide shortages, and textiles and chemicals critical to the phone production lead times outsized levels of out of stock items, both in our DTC and retail partnership channel.

The us we were unable to monetize the full demand opportunity and fulfill all purchase orders leading to a market increase in order cancellations.

For example on our web site many of our core mattresses offerings were out of stock for weeks at the time.

We are laser focused on and diligently working to address the bottlenecks and 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 ex <unk> as an example, we have already onboard and new tier one and tier two suppliers and been.

Others, 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 reputation of equity.

At the same time, we are implementing redundancies across key supply chain points, and better inventory planning, which bring and proved forecasting and inventory management.

In addition, we are actively building safety stock that will help protect against further disruptions.

Put distinctly 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 preserved the gross the bottom line and achieve adjusted EBITDA profitability.

On a more positive note gross margins and the quarter came and very strong, it's 55.5% and 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're.

Weve negotiated more favorable rates with our shipping partners and are optimizing our product mix to both better meet demand and manage overall inventory levels.

And leveraging a diverse supplier base, we are able to maintain competitive pricing and favorable margins over the long term and a capital efficient manner.

We've also made significant strides towards our goal of profitability adjusted EBITDA loss came in at seven point of the $7.5 million, representing a 57% improvement year over year, and a 34% improvement sequentially.

And the fourth quarter, we expect to grow revenue and continue our march towards profitability and as a result expect the sequential improvement in adjusted EBITDA loss.

We are pleased and our ability to continue this positive trend and the face of the significant headwinds we faced from most of 2020.

We're also seeing success and our efforts to increase our reach in North America through our multi channel distribution model. We currently have of <unk> footprint that is much less than many of our competitors, leaving us with significant opportunity to expand and take market share our casper stores and retail partnerships are critical to our strategy. Many of our customers want to try and mattress and experience are.

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 another of a number of other senior executives help lead facets of the business, including E Commerce media cut.

Customer acquisition retail partnerships and supply chain teams.

Each of these new team members has a deep experience in their respective areas and I'm confident they will make meaningful contributions the casper.

Going forward, we expect to benefit from a number of favorable dynamics and tailwinds, including strong demand from mattresses healthy demand for at home purchases robust home buying and suburban migration and.

Increase awareness and appreciation for wellness increased consumer demand for a multiple multi channel shopping experience and the industry, leading brand the resonates with consumers across the growing demographic and consumer profile.

We feel strongly that our value proposition is not just the 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 of 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 you.

The addressable market. We are in is estimated at over $20 billion. We believe there's an enormous opportunity in front of us for the Casper brands to take a greater share of this large and growing market we.

We believe Casper and 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 and the way.

Thanks, Philip and good morning, everyone.

Well the third quarter of certainly had its challenges I believe we are well positioned to capture market share and meaningfully grow our brand and both the near and long term.

We're addressing our supply chain constraints.

Putting our consumer at the center of our business launched.

The 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 represent sales from our own stores and website declined 6% compared to the third quarter of 2019 the.

This was primarily due to depressed retail foot traffic and limited store offerings that our Casper stores and numerous supply chain disruptions and our ecommerce site due to the COVID-19 pandemic.

I'm pleased to report the body and the 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 of the top of the purchase from all the influence of buying behavior across our sales channel.

We see tremendous value and having the strategic curated retail footprint.

That's the ports of key business drivers from brand awareness to product offering introduction.

Hi level of customer service and support to cross channel sales.

E Commerce sales and Casper dotcom 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've identified and addressed various issues across the E commerce platform and continue to strengthen our ecommerce capabilities lunch.

Launching several initiatives and 2020, including strategic changes to our marketing programs further investments in technology and data analytics capabilities and.

Along with our ongoing work to address our supply chain and shoes.

Revenue from our North America retail partnership channel enjoyed healthy gross adds revenue grew 33% year over year and by 15% and a quarterly sequential basis.

We are still in the very early stages of breaking into the channel and of represents a significant portion of the ADESA addressable market as it is where the majority of mattress trials and purchases are made today.

Trials and important part of the consumers buying process the.

And he people just want to lay and a bad before purchasing we've seen the since we opened our first office and the customers literally knocking on the door asking to try the mattress.

We successfully complemented our website with the combination of Casper and sleep shops and retail partnerships.

And 2021, we will continue to add trial opportunities the.

The expansion of our retail partnerships allows us to grow our reach out of relatively low cost.

The positioning us where our customers want to shop.

You should expect the continue to see US continue onboarding, new leading retail partners and driving more casper offerings, and more doors and across and nor geographic market.

Our multichannel distribution strategy puts the consumer of the center meeting them wherever and whenever they want to shop as a result consumers can fall in many different purchase journey, which may include and much of multiple touch points and they take multiple weeks of education and deliberation before arriving at a final decision.

Our expanding channel presence appeals the many different consumer segments.

We know some consumers like the shock from there so far and their computers, the unlike the shop and the doors of their local mall and somewhat by our pillar display at one of our retail partners and.

Multi channel distribution strategy and shares that wherever the consumer cheese the shop, they will have the consistent cash <unk> expense.

Finally, I'm pleased with the progress we've made and expanding our brand presence the trends, we're seeing and our business and across the industry as well as our efforts and make the business and more efficient reinforce our confidence that we are and the right path to achieve our operating and financial goals.

Our marketing strategy and the ability to effectively execute its critical to our success.

We make marketing decision every single day measuring the dollars, we spend and efficiency across channel.

Every dollar we deploy as measured against the targeted return on that side, both internally and with our agency partners.

We will continue to leverage the marketing to reach more and more consumer.

As an example of a few weeks ago, you may have seen us and the today show and and good morning America showcasing some of our products for the holiday season.

Casper started in 2014, disrupting the master market mattress market and we've been able to capture outsize consumer attention with innovative marketing such as cousins and the subway and non mobileyes traveling across the country.

I branding night People's imagination makes and smile, and really think about what sleep can do to improve their lives. So.

So 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 important part of our path to profitability.

I'll now turn the call over to Mike Mike.

Thanks definitely.

I want to take this opportunity to thank everyone and Casper for their warm welcome and it's 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 feet our financial results consolidated revenue was 123.5 million a decline of 4.2 million or 3% compared to 127.7 million and 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 and the third quarter of 2019.

North America revenue increased nearly 2% year over year.

And supply chain disruption with the challenge for us and the quarter and impacted our results.

The mattresses are considered purchase 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 that meaning for the crusher and revenue.

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 fill and number of purchase orders.

We believe these orders were lost for good.

Out of stock and delayed shipping times the 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, and direct to consumer revenue declined 6.3% to 89.8 million, primarily due to the impacts of couple of at 19.

Our stores were impacted by limited offerings and depressed foot traffic due to the pandemic and.

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.

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% and 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 from mattresses improved year over year as we successfully implemented a price increase earlier in 2020.

Additionally, weve emphasize higher margin product offerings on our web site each favorably contributing to our gross margin.

During the quarter, we recorded a 1 million dollar partial reversal of a charge taken in the first quarter associated with the change in shipping vendors, which favorably impacted our margins. This onetime item was the adjusted out of the 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.

Allowing us to deploy our capital and 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 of 4.5% to 42.6 million.

As the 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 increase long term value through more and better customer touch points and our expanded product.

Folio.

[noise] GNS expenses, including store operating costs, excluding depreciation were $36.4 million or and 8.8% decline compared to 39.9 million and the prior year period.

Gn 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 and the third quarter of 2019.

Earnings per share with the net loss of 40 cents depreciation and amortization was 3.3 million.

This led to an adjusted EBITDA loss of 7.5 million and 55% improvement compared to the adjusted EBITDA loss of 16.8 million and Q3 of 2019.

We're 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 and 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 30, we had cash and cash equivalents of 96.1 million compared to 67.6 million as of December 30, Onest 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 and property and equipment, primarily to build the retail stores.

We recently added a 30 million dollar asset based facility with Wells Fargo. This facility has an additional 15 million accordion feature provided certain parameters are met the will enable us to scale in the future.

And the fourth quarter of 2020, we expect to deliver $132 million to $142 million of revenue driven by year over year gross and our ecommerce 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 full year over year and sequential improvements of our overall adjusted EBITDA.

Gross margins are expected to be lower and 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 margin and DTC will contribute a larger percentage of revenue in Q4 2020 than it did and 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 were slight margin pressure and given the channel net shift we believe we will continue to be of 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 the Q1 tends to experience seasonally lower demand and as such we expect Q1 2021, we'll have an increased adjusted EBITDA loss versus the fourth quarter of 2020.

We expect this loss will be offset and the second half of 2021 as we become the adjusted EBITDA positive.

Capex is expected to be below $10 million and 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, but 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 us well.

We are confident and 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 gross.

Casper and it is an amazing brand with cost of products the position us to capture lifelong customers.

We are rich and customer data and are investing and analytical capabilities. The will enable us to more effectively leverage that data to enhance our customer economics, and we believe capture significant market share and 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 and so.

Thanks to everyone, who joined the call. This morning before we go into Q and a I want to thank our talented and dedicated employees for the exceptional work. They have done throughout these challenging times to advance Casper 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. So oh, okay. At this time, if anybody would like to ask the question. Please press star one on your telephone keypad and again that is star one on your telephone keypad. Your first question comes from Peter Keith from Piper Sandler.

Line is open.

Hi, good morning, everyone.

I wanted to just.

Just reconcile the North America growth of 1.8% and.

We look at the the Q3 data for the industry that's out whether it's just the or even some of our industry survey work. It does suggest the very strong gross quarter of for the entire mattress industry of about 10% to 15%. So my specific question is given that the North America growth of 1.8% where their display.

Portion of supply chain issues that impacted you or the aspects of your business model that you felt puts you at more of a disadvantage relative to everyone else.

Good morning, Peter Thank you.

So just to reiterate we saw very strong demand signals for our business E. Commerce saw record traffic and the 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 the were issues around the phone chemical production there were issues around the innerspring manufacturing and there were issues around textiles and covers the created supply chain disruptions that we did not foresee. So we're certainly disappointed that we weren't able to ship more products, but I would separate it out.

And to your question about demand we saw record traffic the the website.

And we echo your sentiment about what's going on and the industry and since Weve turned the corner with our supply chain issues and are now back on stock and if you go to Casper Dot com, you'll see the more products are in stock and shipping back to normalized windows and we've seen a reacceleration of the business. So the the supply chain issues or sort of separate from the demand side within.

Our business.

Okay. Thanks, Philip Yeah, I guess, the the supply chain issues are impacting the everyone.

As evidenced with the the earnings calls we've had the.

So far this quarter and and then some of our industry discussion. So it doesn'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 and year at quarter end, so that doesn't necessarily look like a company that has out of stocks can you help us reconcile that debt quarter and number of maybe it's a timing issue, but but that stood out to us.

Sure so keep in mind.

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 weve, perhaps where 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 the 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 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 net mattresses here, good and building up Seifi talked 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.

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 one and tier two suppliers, we increased the capacity that we could source and this is also a focus with the kind of 2021 planning just given the demand that we see from the business and the brand and so we're very focused on increasing capacity and.

Increasing visibility through the supply chain and making sure that we have.

Done and see so that we can be absorbing the supply chain issues that might arise.

Okay that sounds good I do agree the supply chain she's going to be around for a while so thanks for the answer.

Well I agree to and Portugal.

Thanks Peter.

And your next question will come from Alexandra, while the U.S. from Goldman Sachs. Your line is open.

Good morning, everyone. Thanks, so much for taking my question on the supply chain issues. It seems like with the product and have that youre choosing to prioritize.

The retail partnerships channel and continue.

You talked true.

Why that is and how you're expecting to allocate integration and retreat across channels going forward.

And then a related question you've announced a few new partnerships and I suppose I'm wondering why you're choosing to onboard new partners and given some of these shortages.

Yeah. Good morning, Alex Thank you Bob.

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 and we see that continuing into Q4, and unfortunately, we couldn't ship or even some of the purchase orders that were please.

Four of 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 and so we are trying to be very strategic with how we're flowing goods between all of our channel.

And I would say that we believe we are the issues with our supply chain are currently behind us and the we are able to better keep up with the man 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 and see what makes and truly special which is just how unbelievably comfortable they are and so we think thats long term something that is strategically very important and you know as I mentioned, the the supply chain fixes that we've been talking about of many of which are in place now give us confidence that we have the skill and like I said, if you go back to art.

Commerce website, our DTC channel, we are in stock and pretty much every SKU, we're shipping product and much more quickly and we were 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.

Thank you and then maybe one more question I know you mentioned and correct me if the had this wrong, but I think you said you were kind of rollout 10 stores next year, that's lower than the the run rate that we had previously and the lower than what we were expecting can you talk about the decision to slow the school rollout is it just because of the uncertainty.

Around the virus from of the type of traffic what does it represent more of the strategic shifts and tens of how you're thinking about and channel makes and the importance of maybe the stores lessons retail partnerships.

Yeah, I think it just speaks to the us being conservative about our store rollout and we're going to continue to lead data inform.

How we accelerate that that or not.

So right now we see more than enough demand from our ecommerce channel and from a 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 and.

Certainly once the vaccine is rolled out and and we expect a 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.

How we see 2021, playing out and then back to your point about some of these partnerships just the to reemphasize partners like Macy's and Nordstrom's and actually home store and Sam's club. The mean, neither major major accounts and we expect them to contribute.

A meaningful amount of business next year as we continue to drive not just our footprint, but also continued to drive penetration into the retail partnership channel, which is by far the biggest addressable market of the channel. So we compete and.

Great. Thanks, so much.

Your next question comes from Randy Konik from Jefferies. Your line is open.

Hey, Thanks, and good morning, everybody.

Quick first question would be fill of how are you given the supply constraints or or and bumps.

How do you think about changing your view of safety stock, where how did you kind of manage levels of safety stock before can you quantify that and how you're kind of change and that approach and.

Now just gets and perspective, there would be helpful.

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.

Sure. Thanks Randy.

So in the quarter, our safety stock was was too low from where we needed it to be and so were obviously, we're 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 in the and away that is.

Capital efficient so as an example, you know we're working with the number of our manufacturing partners, where they're going to hold some of the inventory and raw raw materials and then we're also going to build up some of our finished goods to make sure we can properly and meet the demand.

Got it and then just the quite so do you think that given the inventory number that was kind of mentioned earlier. It is up year over year that that indicates that youve now caught up on the inventory you need to have the appropriate levels of C safety stock going forward.

I think we have some work to do there our inventory on our balance sheet 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.

Yeah demands of the supply we have four of those demand and products and so I think it's a little misleading sometimes I think you know going forward, we did make progress throughout the quarter and building up safety stock and certain and certain for certain products, but.

But we still have some more work to do throughout the year.

Got it thanks and last question would be the 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 do we still we should still exceed we still expect gross margin, even though it should be down sequentially from the third quarter into the fourth quarter of because of the items. You mentioned should we still expect to be up on a year over year basis, and the fourth quarter and then related to that can you just give us the perspective on just the general price.

The environment out there because it seems again in the quarter you know your gross margins are coming and fairly healthy. So just any comments around the environment and how your pricing is being perceived by the consumer and and so forth be really helpful. Thanks, guys.

Sure Mike do you want to just talk about the margins on a year over year basis, and what to expect from Q4.

Sure. So we talked about it and the commentary mattress day, and he was up of and 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 that are helping.

Out there.

The other piece I'd say about the third quarter I didn't mention in the opening remarks, we had a settlement.

Settlement charge of kind of a onetime items that helped gross margin by about 80 basis points.

We're also seeing kind of on an ongoing basis, the efficiencies and our supply chain specifically around shipping we have a new contract that we signed at the beginning of Q2 of this year. That's a long term contract and we expect you will start to and we'll see favorability going forward from from that when you look at Q4 I would anticipate.

Right.

The quarter over quarter for the margin to decline, primarily because we talked about Q.

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 and in the fourth quarter to be better than they were on a consolidated basis and the fourth quarter of 2019, we view our business overall at the 50% or more of gross margin.

Business and that's what we're kind of with us and we're targeting.

Thank you thanks guys.

Thanks Randy.

And your next question will come from a true meshed worry from you vs. Your line is open.

Good morning, Thanks, a lot for taking my question.

So Phil I think you mentioned the cash group was perhaps more vulnerable to supply chain issues given your of reliance on third parties. So does that make you rethink your strategy of free length, certainly on the fall on the third party bunch of factors going forward.

Good morning, and tool 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 the owned our own manufacturing facilities.

The the changes that we've made that we spoke about working differently with our manufacturers getting increased visibility into their supply chains building.

Building of safety stocks will allow us to mitigate that going forward and so no I don't think of requires us to change our business model and again I think you know going back to the 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 gross profit dollars and profitability the business.

The model is working the asset light model for manufacturing footprint is working.

These industry issues are unprecedented unprecedented at least and the existence of Casper and so weve now chain and we operate with our manufacturers, including just the Onboarding more manufacturers onboarding more redundancy points throughout the supply chain. So the this doesn't happen again, so again, the disappointed with what happened and in Q3, but it doesn't.

It reflects the demand that we're seeing and 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. The we operate our business model, but the 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.

Great. Thank you and and then my follow up question is on the fourth quarter guidance, where are you tracking now relative to the double digit North America growth expectation for the full quarter speech and would you be able to achieve this if you maintain your garden fourth quarter quite different day trajectory or are you baking and an acceleration of where the value.

Thank you.

So I think what we'd say now about the fourth quarter is again, we saw a lot of our products come back and stock kind of mid October Q4, starting off strong.

The big events 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 will see how that goes but right now we 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 full quarter.

Thanks the tool.

Your next question will come from the Bob Drbul from Graben Guggenheim Sorry. Your line is open.

Hi, guys and good morning, just a couple of questions from me and just the first one is as you.

You run through a lot of the challenges that you're soon has the path to profitability timeline and all changed in your minds.

Hey, Bob Good morning.

I would say it feels like we are still ahead of plan meaning.

We're going to invest less cash to get into profitability, we still feel good about mid 2021, and and the business model is working obviously there was less revenue in Q3 than we had expected but the margin improvements were there. The demand is there and we think that's all coming together to drive profitability and will still be ahead of the.

Expectations, where we were kind of back in February.

Got it Okay, and then I guess just a follow up question. The link so when you think about the and environment. None of this for Emilie, but in terms of and the 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.

And the coming months and quarters. Thanks.

Yeah, and Mike you want to talk about that one.

Sure I think 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 the way back and stock we have as Phil had mentioned in his remarks, and news and now and new head of media and new head of E Commerce, new agencies and.

Board, we feel really good heading into Q4 about our ability to every single day look at our marketing dollars and the play them efficiently efficiency efficiently to really drive consumer demand.

Great. Thank you very much.

Thanks, Bob.

And your next question will come from Matt Koranda from Roth Capital. Your line is open.

Hey, guys. Thanks.

Sounds like we're not necessarily losing sales I guess and for Q given the lead times are back to normal.

Phil as you said, but I guess, if we look at it on a year over year basis of the midpoint of your guidance suggest somewhere in the mid to high single digits growth wise.

Which seems to be and maybe a little bit below where the industry would be tracking for the quarter. So maybe you could help of square those comments.

[noise] Yeah I.

Again, I think we are still early in the quarter just given the events that are still to come I think we're still throttling how quickly we stand up retail partners and and how we roll out our business.

Right now, we do feel like we're well positioned to handle the demand going on and the business and and we'll see how the rest of the quarter plays out.

But you know weve been working aggressively to ramp up of the capacity that we have on the inventories side. So that we can handle the stronger demand, but I would say that's still largely in the second half of the quarter just given the the holiday timing and so we'll see how the rest of the quarter plays out.

Got it and then a little bit of a longer term question, but the I guess the store growth that you guys gave the terms of commentary sounds like 10 locations next year, what does that imply for kind of longer term plans for your store expansion and just curious does that also imply that the next year, we should expect.

And maybe even stronger third party.

The retail gross for 2021.

Sure Emily do you want to talk about that were a little bit [noise].

Sure, Yes, so and the past the really hard to talk about our business being a third of sort of third and each of our channels and I think you could see and the feature up to 50% of our business and retail partners and 50% of our business direct to consumer.

And you know we talked about eight to 10, new store locations and as Doug mentioned earlier. This is really a decision were making base and the environment, where and right now we look at it as stores city by city by city and look at not only our store locations of retail partnerships and really providing the best shopping experience for the consumer.

The merger and each of the M. and that's the way, we'll continue to look at retail and the go forward.

Yes.

And your next question will come from Curtis Nagle from Bank of America. Your line is open.

Great. Thanks, very much for taking the.

Question So I'm.

Just not to belabor reported but just wanted to revisit.

And the questions on the.

The supply chain.

So it sounds like you guys of resolve some of your issues looks like like you said so of the websites.

Sure it back of stock and most of your beds.

Yeah, I'm, just kind of wondering how you get there so quickly, which which is certainly a really good thing given.

How I guess for reaching this issue is right and its and then put issue right. So.

I, just why would the new manufacturers from theoretically might be constrained by inventory shortage as well help.

If you just kind of could talk through that the be really helpful.

Yes. Good morning heard of thank you know it's a good question and again I think this speaks of the benefit of the asset light third party of manufacturing business model that we have to you know.

If we were buying if we were producing from foam and we'll only buy and chemicals from one maybe two sources and 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 innersprings. The sorts covers we now have redundancy across those inputs and and other inputs that go into our mattresses and we're.

Well the build up that redundancy very quickly by moving on a number of fronts. All thinks of 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 the companies the additional footprints within those.

And we were able to move on that very quickly.

Given that there's a strong demand for concern for manufacturers to manufacture for us we're able to push on the front the concurrently.

Do you have the you know we do the design and development of the products that we make in house, the we're able to go and and partner with the manufacturer and stand them up relatively quickly and given expertise in that category and 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 and Q3 and 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 of that we don't have the pick up again hopefully.

I guess, maybe just a follow up to that I mean, any risk you think in terms of jobs and the moving from pretty quickly and distributing cure to new partners.

Particularly as some of your products should become a little bit more complex and the like like your hybrid that's.

So we we still do full quality standard 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 do even and tried to fix the supply chain we.

We know that that could impact brand and product performance and that's something we're never willing to sacrifice and.

And the the manufacturers that we are working with are all high quality manufacturers that are well known to the industry.

Before we didn't believe we needed the level of redundancy that we now know that we need in order to get ahead of the pick ups.

But these are established players that have made many made mattresses for a long time and.

And now we're flowing goods and and purchase orders of them and they're shipping products and and all of the quality standards.

You know our adhere to the requirements to do business with us.

Okay Fair enough. Thank you appreciate it.

Thanks Curtis.

Your next question comes from net Jones from Citigroup. Your line is open.

Great. Thanks for taking the questions of I guess too quickly and and for Q of or some other ecommerce players kind of lean away from Black Friday, cyber Monday, and and kind of playing to a more a log and at holiday season and it sounds like.

You're a little more optimistic that the black Friday, cyber Monday week, and we'll still be kind of a big event I guess can you kind of block there if you're expecting and elongated season or if you expect it to be kind of fairly typical versus prior years given.

I'm kind of the cover the dynamic.

And then the second question as well you fix some of the inventory constraints and supply constraints can you talk about shipping times. The are you going to be able to ship.

No. The inventory you do have to consumers and the fast enough time. So that's another area of you've heard there's been some worries about constraints going into the holiday season due to cover the thanks.

Yes, good morning, there no the that's a great question and.

You hit on something that we when we look back and Q3, we think was and Executional kind of missed step for us and because we agree the consumer trends are changing this year, certainly driven by cobot and other factors as well we do believe that there are elongated shopping periods around the tent pole moments with the.

And this industry and we don't believe that we played that as well as we could of over labor day, and so we changed our playbook and we launched our Black Friday sale earlier. This year, we do believe the there's kind of a flattening out of consumer shopping across the holiday periods and you saw us change our playbook to accommodate that so I agree it's not going to be.

As concentrated of the holiday selling period over you know historically, what had been a five day period.

And we're seeing increased demand already and our business, which again goes back of the comments I made about kind of the re acceleration in Q4 being off to a good start. So again, if you go to Catharine I call and you'll see the we are running our black Friday sales, others, and the industry are and and and I think consumers are responding well to that.

And then sorry on your ship time question.

The products are largely and Soc, we are shipping and and delivery times from kind of back into the normalized ranges and and we.

We think thats, great I think we will be able to ship out products within the normalized range is for US which is usually you know one to three business days.

We do anticipate that the the carriers out there are going to be having issues and and we're going to try to get ahead of that but.

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 the broader carrier networks.

Great. Thank you.

Thanks, Nick.

And your next question will come from the line Shank.

From Morgan Stanley Your line is open.

Great. Thank you.

I guess any any color on new versus existing retail partnership gross during the quarter and.

And how you're thinking about what the right number of of partners or even doors. There is over the long term and the my second question is just you know given what we're seeing from a from a Kobe perspective does your fourth quarter guidance assume that that all 64 of the stores and remain fully open for the duration of the quarter. Thanks, So much.

Thank you yeah, I'll, let him line kind of weigh in on that but I'll start by saying you know most of the the growth in retail partnerships and Q3 came from existing partners and.

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 the new partners and existing partners, but it really any other color you want to provide on kind of the retail partnership the man mix and then as well as our stores.

Yeah, I think Thats rail and Phillips said I would say also you know we continue to partner with brand to really understand Casper and the brand and our partners have different assortments based on what's right for their brand and their consumer as it relates to the Casper and so we'll continue to keep an eye and that makes the difference between the majority of the garlic and was.

We saw a lot of gross coming from the existing partners, which we're excited about and we think about stores and our stores are all open now and as.

As you can imagine pending what could happen with co bid and for the Lockdown and we'll take that as as it comes in regards to our stores, the right now where and where operating all of our stores.

I would just add one thing to that if I could and the guidance. What we assumed is that the stores of the open but there would be lower of foot traffic is baked into the number and then on top of that you know as we think about 2000.

The 21 and our prepared remarks.

We also took into effect the impact of the Cove and it had and that shaped our strategy and thinking about what our planned near term store rollout will be for the following the here.

Great. That's helpful. Thank you.

And your next question will come from Seth Basham from Wedbush Securities. Your line is open.

Thanks, a lot and good morning, my questions around marketing and you showed very limited leverage and 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 bird and can you help us understand what's going on there.

[noise] sure Seth.

So we.

We continue to spend on marketing, which.

Again, we saw strong demand pictures of the supply chain issues hit.

Hit us in a bit of an unexpected fashion just given how quickly they started to happen and are delayed shipping times and so.

The dynamics that we're talking about we're not because we changed.

The strategy within the quarter, we saw strong demand signals, we thought we could keep up with the man, but the 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're making the investment and how do we have been able to fulfill the demand that we saw through our retail partnerships and that we saw through our DTC business and I think you would have seen that continued delevering of the of the sales and marketing expenses and we.

We have seen the 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 kind.

And a percent of net revenue driven until the marketing and just Q3 didn't play out the way we had expected given the supply chain disruptions, but going back to kind of how we operate the business and what we're seeing and Q4, we do expect that as retail partnerships gross that drives the leverage and our sales and marketing channel and the we'll be able to effectively.

Spend the on our sales and marketing to profitably drive growth within our DTC business and and that's how we'll operate the business going forward.

Got it so as we think about the fourth quarter and then in 2021 would you expect leverage and sales and marketing.

[noise] I would expect that our retail partnerships continues to grow faster than our DTC channel and I think that will drive leverage and our sales and marketing channel going forward.

Thank you and then my second question is just around the performance of the year direct to consumer Casper stores and I understand there is lower foot traffic, but across the industry, we've seen a pretty big improvement in sales and bricks and mortar stores base.

Based on the data that you disclose it seems like your sales per day Casper company owned stores were down sharply year over year and.

Aching and confirmed that and B is that make you rethink not only and the 2021 plan for your stories, but your longer term plan and not the value of having company owned stores.

Yes, so remember we don't break out kind of retail and E. Commerce, because we believe there is a lot of the interplay between those channels and we think that interplay continues and so we don't break out from the same store sales performance of.

We see that consumers are leveraging our retail stores for education to lay and touch and see the products, but we also know that they're coming back to the ecommerce channel to complete their purchases and to.

By products and so we see that interplay and that dynamic nature of between retail and E. Commerce continue to play out and if anything be much more.

The convergent in the consumer behavior than we had expected at this point and as we mentioned earlier.

Earlier, you know, we're going to continue to lead the data drive how we think about our store rollout and and that deal will be informed by consumer behavior. So as the 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 and the return on invested capital.

Well to continue our store expansion, but my belief is that consumers are going to continue to one trial opportunities. My belief is that the best trial opportunity for Casper products and then the Casper owned and operated retail store and the dose will be key to driving long term market share gains and long term direct to consumer growth and <unk>.

Which we believe is in front of the.

Thank you.

Thanks.

The she'll bring us to the end of our Q and a session today I turn the call back over to Mr., Philip Kranz for closing remarks.

[noise]. 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. The Casper who continue to stay focused on fulfilling our mission to help the world sleep better. Thank you everyone.

Thank you everyone. This will conclude today's conference call you may now disconnect.

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