Could Aim newcomer eve Sleep (EVE) do with mattresses what Aim superstar Fevertree (FVR) has done with tonic? The business model of this bedroom upstart certainly suggests some parallels. Like Fevertree, eve is focused on the premium end of its market and concentrates on brand and design while outsourcing manufacture and fulfilment. The market for mattresses, bedding and bedroom furniture is also ripe for innovation, with sales of this kind of high-price-tag item only just starting to move online – eve is not the only 'disruptor' targeting the market, but is aiming to exploit this opportunity by focusing on direct-to-consumer, pan-European e-commerce sales. It also has a growing presence in department stores (149 at the last count), which allows potential customers to try before they buy, as well as providing additional brand exposure.
Cost conscious
Online market disrupter
Growing brand awareness
International expansion
Lossmaking
Competitive market
The shares' lack of progress against May's 101p float price, which raised £32.8m after costs, belies impressive business progress. Perhaps most importantly, the company's marketing efforts are proving very successful at building the brand, which will be key to eve's long-term success. Brand awareness in the UK, which is expected to account for just over half of sales this year, rose from just 0.5 per cent in June 2016 to 1.4 per cent six months later, then 4.1 per cent in June this year and 6.6 per cent in the first week of November. With growing brand power, the company is rapidly widening its product range beyond mattresses to related items, such as pillows, duvets, bedroom furniture and even pyjamas.
Successful brand building does not come cheap, and marketing expenditure accounted for 64 per cent of first-half sales. But the group's experienced management team – led by a former executive of giant European internet incubator Rocket Internet – is focused on keeping costs in check. Indeed, marketing spend in November plummeted to 35 per cent of revenue.
This drop in the proportion of revenue used for marketing not only reflects cost controls, but also the fact that sales are exploding. At the end of last month the group said year-on-year sales in the UK had more than doubled, while European sales were up 180 per cent; a recent deal with German department store group Karstadt should help growth on the continent further. Meanwhile, the outsourcing of capital-intensive aspects of the business (manufacture and fulfilment) puts the company in a great position to handle this rapid expansion, although also means ceding some control over key aspects of operations.
At this stage eve is lossmaking, but profitability should not be too far off. Encouragingly, gross margins look very healthy at 56 per cent, and management expects the UK business to turn profitable in the fourth quarter of 2018 followed by the group as a whole in 2019. Peel Hunt believes double-digit operating profit margins will be possible in the long term.
| EVE SLEEP (EVE) | ||||
| ORD PRICE: | 102p | MARKET VALUE: | £141m | |
| TOUCH: | 101-103p | 12M HIGH / LOW: | 107p | 81p |
| FORWARD DIVIDEND YIELD: | NIL | FORWARD PE RATIO: | NA | |
| NET ASSET VALUE: | 25p | NET CASH: | £37.2m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
| 2015 | 2.6 | -1.5 | na | na |
| 2016 | 12.0 | -10.7 | -7.8 | nil |
| 2017* | 27.2 | -13.1 | -9.4 | nil |
| 2018* | 66.8 | -11.5 | -8.3 | nil |
| % change | +146 | - | - | - |
| Normal market size: | 3,000 | |||
| Matched bargain trading | ||||
| Beta: | na | |||
| *Peel Hunt forecasts, adjusted PTP and EPS figures | ||||
