What happened

Shares of mattress company Purple Innovation (NASDAQ:PRPL) went down on Friday after the company reported record quarterly revenue and operating income for the second quarter of 2020. As of 12:30 p.m. EDT, the stock was down 8% for the session.

If this looks like a contradiction, remember that Purple stock had already more than doubled in 2020, and was up around 400% from lows hit during the market crash. Furthermore, Wall Street analysts had expected more from the company in Q2, resulting in unmet investor expectations.

PRPL Chart

PRPL data by YCharts

So what

Purple sells its mattresses and other sleep products through retail channels and directly to consumers. Since retail channels were shuttered to prevent the spread of the coronavirus, Purple's wholesale revenue fell 49% year over year in Q2. However, its direct-to-consumer revenue picked up the slack, growing 128% from last year. This resulted in record quarterly revenue of $165 million -- up 60% from the second quarter of 2019.

Revenue missed expectations, but not by much. CEO Joe Megibow explained the shortfall, saying in the earnings statement, "Following a brief scale back in our operations early in the pandemic, we quickly ramped production and fulfillment capabilities and pivoted back to our digital roots, shifting our efforts into a mostly direct-to-consumer business to capture the growing online demand."

Purple's net loss was $5.8 million, which was improved from last year. However, Wall Street had expected a profit. This is likely the biggest reason the stock fell today.

A rising line breaks near the top, resulting in the arrow pointing down.

Image source: Getty Images.

Now what

Purple intends to use some of its $95 million in cash to open more of its brick-and-mortar retail showrooms. Given the strength of its direct-to-consumer business, and the growth of e-commerce during the COVID-19 pandemic, it's a questionable strategy. Investors should monitor this going forward. Retail locations will add to operational expenses, and if they don't drive sales growth then they're not worth it.

Otherwise, Purple's expenses are trending in the right direction. In the first half of 2020, the company's cost of goods as a percentage of revenue have decreased, leading to higher gross profits. Furthermore, marketing and sales, and general and administrative expenses are also going down -- a signal this company is on the path to profitability.

Of Purple's expenses, only research and development has held steady at 1% of revenue. Product innovation is important for this growth stock. Therefore, it's fine this cost hasn't decreased since last year.

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.