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Eve Sleep – Positive sounding trading update but at what cost?

By Cynical Bear | Wednesday 12 July 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Following my initial piece on the Woodford-backed Eve Sleep (EVE) two weeks ago, I thought I would comment on today’s trading update which outlined great growth but it’s what it doesn’t say that worries me a tad.

The headlines look great. First half revenues up 126% to £11.5 million with strong growth expected to continue. The offline retail partnerships are growing increasing the number of outlets from three to over 50 by the end of this month. In addition, it is now operating in all 14 of its key European markets.

It talks about a step-up in marketing spend though which sounds expensive. I appreciate that it needs to spend to build the brand awareness but, as I mentioned in my earlier piece, I was hoping to see more information on the effectiveness of the marketing spend and was keen to see if the cost per acquisition of customer had started to reduce. Unfortunately, there is nothing on this so it is impossible to predict whether it is growing in a sustainable way or not.

I don’t wish to knock the excellent growth here but anyone can grow a company by paying for it. If I launched a business selling five pound notes for £4.50 each, I am sure that I would be able to grow my revenues pretty impressively too; however, that doesn’t make it a sustainable business, albeit, if I had just raised £35 million, I would be able to stay in business for a while yet!

Nevertheless, there does appear to be a market and interest here as I note that an identical looking business in the US, Casper, just raised the astonishing amount of $170 million; it will be interesting to see how it tries to compete with Eve. In addition, there is the Nigel Wray-backed business, Simba Sleep, about which he presented at the UK Investor Show that could also come to market and compete strongly.

It looks to me that it could be an interesting eighteen months or so for the online mattress-in-a-box specialists.

Having read Graham Neary’s piece this morning on Woodford’s disaster in the making, namely RM2 International (RM2), I still wonder whether this could go down a similar path though. To be clear, I don’t believe Eve Sleep is as obviously making a product that insufficient people want to buy but it does get one thinking that one shouldn’t think it is necessarily a winner just because Woodford is throwing money at it.

In the meantime, I guess I will have to wait for the Eve Sleep interims to see the real detail, due on 13 September, and will comment again then. 

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