Purple (PRPL)

Bedding and comfort retailer Purple (NASDAQ:PRPL) met Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 13.2% year on year to $104.2 million. The company’s full-year revenue guidance of $475 million at the midpoint came in 0.7% above analysts’ estimates. Its non-GAAP loss of $0.11 per share was 23.3% above analysts’ consensus estimates.

Company Overview

Founded by two brothers, Purple (NASDAQ:PRPL) creates sleep and home comfort products such as mattresses, pillows, and bedding accessories.

A healthy housing market is good for furniture demand as more consumers are buying, renting, moving, and renovating. On the other hand, periods of economic weakness or high interest rates discourage home sales and can squelch demand. In addition, home furnishing companies must contend with shifting consumer preferences such as the growing propensity to buy goods online, including big things like mattresses and sofas that were once thought to be immune from e-commerce competition.

Competitors in the mattress and sleep products sector include Tempur Sealy (NYSE:TPX), Sleep Number (NASDAQ:SNBR), Haverty Furniture (NYSE:HVT) and private company Casper.

A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Purple struggled to consistently increase demand as its $472 million of sales for the trailing 12 months was close to its revenue five years ago. This wasn’t a great result and is a sign of poor business quality.

We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new product or trend. Purple’s recent performance shows its demand remained suppressed as its revenue has declined by 6.3% annually over the last two years.

This quarter, Purple reported a rather uninspiring 13.2% year-on-year revenue decline to $104.2 million of revenue, in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 1.5% over the next 12 months. Although this projection suggests its newer products and services will catalyze better top-line performance, it is still below the sector average.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Purple’s operating margin has risen over the last 12 months, but it still averaged negative 19.7% over the last two years. This is due to its large expense base and inefficient cost structure.

Purple’s operating margin was negative 13.9% this quarter. The company's consistent lack of profits raise a flag.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for Purple, its EPS declined by 18.8% annually over the last five years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.

In Q1, Purple reported EPS at negative $0.11, up from negative $0.19 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street is optimistic. Analysts forecast Purple’s full-year EPS of negative $0.39 will reach break even.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Over the last two years, Purple’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 10.3%, meaning it lit $10.34 of cash on fire for every $100 in revenue.

Purple burned through $25.31 million of cash in Q1, equivalent to a negative 24.3% margin. The company’s cash burn was similar to its $19.85 million of lost cash in the same quarter last year.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Purple’s five-year average ROIC was negative 34.8%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer discretionary sector.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Purple’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Purple burned through $30.55 million of cash over the last year, and its $176.9 million of debt exceeds the $21.63 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Purple’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Purple until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

We were impressed by how significantly Purple blew past analysts’ EBITDA expectations this quarter. We were also glad its full-year revenue and adjusted EBITDA guidance both outperformed Wall Street’s estimates. Overall, we think this was a solid quarter with some key areas of upside, especially considering how choppy the macro is and how under pressure consumer discretionary purchases are. The stock traded up 20.3% to $0.91 immediately following the results.

Updated: July 10, 2025 at 11:44 PM EDT

Are you wondering whether to buy Purple or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

We see the value of companies helping consumers, but in the case of Purple, we’re out. To begin with, its revenue growth was weak over the last five years. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its declining EPS over the last five years makes it a less attractive asset to the public markets. On top of that, its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

Purple’s EV-to-EBITDA ratio based on the next 12 months is 24.7x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $2.53 on the company (compared to the current share price of $0.76).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.