Stifel GMP has maintained a ‘Buy’ rating and C$30 price target for Sleep Country Canada Holdings Inc after it announced its intention to acquire 100% of the Canadian assets of New York-based Casper Sleep Inc, an omni-channel retailer of mattresses and sleep accessories.
The US$20.6 million deal, announced Monday, comes at a price that appears attractive and could represent a multiple of roughly 0.35 times sales when adjusting for marketing contribution, inventory on hand and warrants received, Stifel analysts said in a client note on Tuesday.
“Although Casper is a small acquisition, adding less than 4% to ZZZ's sales, we see potential for significant growth through store network expansion and margins improvements following the integration of Casper into ZZZ's logistics and sourcing capabilities,” the analysts wrote.
“We are reflecting the acquisition of Casper into our forecasts resulting in a $0.02 EPS (earnings per share) dilution in 2023 and a $0.02 EPS accretion in 2024.”
The analysts noted that since 2016, Casper Sleep has grown its revenues at an “impressive” 29% compound annual growth rate (CAGR) to an estimated US$600 million in 2021.
The company invested over $1 billion into building its brand since its inception, which resulted in a strong following with three times more followers on Instagram than Sleep Country. Yet, its lack of profitability resulted in volatile share performance from $12 per share at IPO in February 2020 to $3.55 on November 12, 2021, before being acquired by private equity firm Durational Capital Management for $6.90 per share in cash on January 25, 2022.
In Canada, the analysts said Casper generated roughly $40 million in sales in 2022 with an omnichannel presence, including online but also through six retail locations.
“The transaction will give Sleep Country control over the Casper brand in Canada, which includes, control over product development, product sourcing, pricing, marketing and distribution,” the analysts said.
“Hence, synergies could come from consolidating Casper's product development, sourcing, distribution and marketing into Sleep Country's operations. As opposed to Sleep Country's other transactions, such as Silk and Snow and Endy, we expect a full integration of Casper Canada given the limited employee base that comes with this transaction.”
With a market share of less than 2% in Canada, the analysts said Casper seems under-penetrated in relation to its strong brand awareness.
“We see a potential for Sleep Country to expand Casper's Canadian store base and product offering, especially with accessories and grow the Casper Brand meaningfully in the coming years. Casper could be an appealing growth vector,” they concluded.
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