Why Purple Innovation Stock Plunged 28% at the Open Today

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What happened

Shares of mattress maker Purple Innovation (NASDAQ:PRPL), which describes itself as a vertically integrated comfort company because it also makes pillows, bed frames, and sheets, fell out of bed on Wednesday, dropping as much as 28% in early trading. The big news was the company’s third-quarter earnings update, which hit Wall Street after the close on Tuesday.

So what

As the stock’s performance might suggest, it was not a good quarter. For example, sales fell 8.7% year over year in the third quarter of 2021 versus the same period in 2020. Although wholesale revenue was higher by 9.6%, the company’s direct-to-consumer sales dropped 15.9%, more than offsetting that positive. This is notable given that the company highlights the fact that it is a digitally native brand, meaning that direct sales are its historical core business. Gross profit margin declined 11.4 percentage points, and operating costs increased 5.4 percentage points. Purple’s adjusted lost was $0.07 per share, down from a profit of $0.27 per share in 2020.

Image source: Getty Images.

To be fair, there’s a good reason for the poor performance: supply bottlenecks. Essentially, according to the company, it couldn’t come up with enough product to sell. Given the larger supply chain issues being seen today, that makes sense. So it’s probably appropriate to give Purple the benefit of the doubt here when it comes to its business performance.

That said, due to the headwinds, management also lowered its full-year 2021 guidance. Investors don’t like it when companies post poor results and lower guidance. On top of that, the company missed analyst expectations by more than $0.20 per share. No wonder Mr. Market was downbeat.

Now what

Purple Innovation’s business, and stock, got a boost from the pandemic-driven shift toward online shopping in 2020. In early 2021, the stock was 360% higher than where it started out in 2020. However, the reality is that Purple is just a mattress and bedding company, so investors might have gotten a bit overly excited here. Which helps to explain the downtrend the shares have been in since hitting that early 2021 high-water mark.

The current results, while perhaps justified by the broader circumstances, just confirm that Purple probably isn’t going to revolutionize the bedding industry, even if it gets back on the growth track in 2022. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.