Mattress unicorn Casper accused of misleading investors with IPO

[COLUMBIA] Casper Sleep duped investors into pouring US$100 million into its initial public offering (IPO), knowing its financial prospects were far dimmer than it promised, according to a lawsuit seeking class action status.

It's the latest in a series of blows to the online mattress retailer, which went public at US$12 a share in February. The stock closed at US$13.50 on its first day out, for a market capitalisation of less than half the US$1.10 billion Casper was valued at in a private funding round last year. The bed-in-a-box startup ended Friday with a share price of US$8.50 and a market value of US$337.2 million.

In registering for the IPO, Casper failed to disclose that its profit margins were narrowing and that it was selling "a glut of old and outdated mattress inventory" at clearance prices, according to the lawsuit, which was filed last week in federal court in New York and demands unspecified damages.

Then, in April, Casper said it was working to "improve its cash position and business model", the suit continues, "notwithstanding the fact that the company had raised more than US$100 million in gross offering proceeds from the IPO" less than three months earlier.

"The claims in this lawsuit are without merit, and we will defend against them," a Casper spokesperson said.

Casper's IPO followed the stock market debuts of much bigger "unicorns" - private startups valued at more than US$1 billion - such as Uber Technologies and Peloton Interactive, whose shares have taken investors on their own roller-coaster rides but which are still valued at billions of dollars.

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To read the lawsuit, that's not in the cards for Casper.

In the complaint, Robert Lematta, the individual investor seeking to represent others who bought the stock, notes that the New York retailer has retrenched its global operations and announced a 21 per cent reduction in its workforce. He cites its "ballooning losses and deteriorating cash position" as responsible for these "drastic measures" and calls the departure of chief financial officer Gregory Macfarlane "an extraordinary move so soon after the IPO".

Casper's troubles could colour investors' view of other brands that cut out the middleman and entice consumers with the savings. The category's heavy reliance on social media advertising lowered barriers to entry, spurring the arrival of competitors and making it costlier to get new customers. A raft of online brands started opening stores and adding ancillary products.

Founded in 2014, Casper popularised the practice of buying a mattress online that arrived bundled in a box. It won acclaim through marketing campaigns featuring YouTube stars and other celebrities, expanding rapidly. Casper attracted a series of famous investors, including the rapper Nas and the actor Ashton Kutcher. Kylie Jenner posted about the brand on Instagram in 2015.

As the IPO approached, the company "claimed to have significantly improved its profit margins, placing it on a path to profitability", according to the suit. Still, it slashed its offering price, to a range of US$12 to US$13 a share from US$17 to US$19, just before it listed.

During its expansion, Casper incurred net losses of US$73.4 million in 2017 and US$92.1 million in 2018, according to the suit, and in its first quarter as a public company posted a net loss of US$34.5 million on net revenue of US$113 million. It spent US$423 million on marketing from 2016 to September, Casper said in a January securities filing.

In the run-up to the stock offering, the retailer reassured investors that its fortunes would be driven by revenue growth and profit margin improvements, according to the suit. Shortly after the IPO, Mr Lematta said in the suit, it announced a downward trend in its gross margin and "substantially impaired operations as a result of an increasingly dire cash flow situation".

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