Checking In on Casper Sleep, Yeti, and Domino's Pizza

Casper Sleep's (CSPR) first-quarter report shows things are improving, but Wall Street's not impressed yet. Yeti (YETI -0.25%) shares rise as first-quarter profits and revenue are higher than expected, and global sales continue to grow. In this episode of MarketFoolery, Motley Fool analyst Asit Sharma analyzes those stories and discusses Bill Ackman's taking a 6% stake in Domino's Pizza (DPZ 1.45%).

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This video was recorded on May 13, 2021.

Chris Hill: It's Thursday, May 13th. Welcome to MarketFoolery. I'm Chris Hill. With me today, Asit Sharma. Good to see you.

Asit Sharma: Good to see you, Chris, I am really excited to join you today because when you gave me the lineup of stocks you were interested in, I got stories behind almost all these. [laughs]

Hill: That's good. That's why you're here. We've got some earnings to get to. Bill Ackman is back in the news and we're going to talk about that. But let's start with Casper Sleep. Casper Sleep raised guidance for the full fiscal year after their first-quarter loss was smaller than expected. Revenue in the first quarter was higher than expected. This was looking like it was going to be a really good day for shareholders. It has not turned out to be a really good day for shareholders. Pre-market, the stock was up close to 10%. It reversed course, it's basically flat right now. Start wherever you want, but I'm curious what you see when you look at Casper Sleep.

Sharma: Generally, I see positive things, Chris. I haven't listened in on the call, so I don't know what management might've said to kill the enthusiasm they created with this nice earning report. This is a tough industry. I am a big fan of a company called Sleep Number, which is a competitor of Casper Sleep. Casper Sleep is starting to impress me a little bit though, well, let's work through these numbers and then we'll talk about the stories behind them. As you mentioned, revenue increased, it was up 20% to $178 million year over year. They're direct to consumer revenue. This includes their retail stores and their online sales that increased 11%. But North America retail partnership revenue, this increased 54%. What is this? This is Casper Sleep selling through partners like Nordstrom, Ashley Store, Sam's Club, it is gradually getting into really great venues to sell their price point of mattress, which isn't super expensive, I thought that number was great. 

The other thing which is impressive in this report is that their gross profit increased. Not so much the margin increase, which was impressive, but just the fact that they're throwing some gross profit on the books. That gross margin percentage was up 5.4 percentage points. This was to a total of 52%. Why does this matter? [laughs] Because gross profit pays the bills. When you're running a mattress business, I know this is going to sound very simplistic here, but friends, sometimes we have to reduce these concepts to the simplest equation. You got to sell a mattress at a price that's going to cover your fixed expenses. Gradually, they're doing that. I was skeptical on this stock for a long time, Chris, because of the low gross margin, but it's creeping up as they sell more into these online channels. The third story here is that they're increasing their brand awareness, they're starting to sell pillows and other accessories, those are growing at a pretty nice clip. All in all, if you're a shareholder you have to be pleased here. This is not the kind of report that makes me want to diversify my investments in the mattress industry and add Casper to my Sleep Number shares, but I want to give them some props for this, and I'm guessing that though they raised guidance, maybe the conference call discussed some problems still that could creep up in their supply chain, or that beyond this latest raise, maybe there's a lack of visibility there. But at least for the period they just completed these numbers look good to me. What did you think of this report?

Hill: You mentioned Sleep Number and if you look at the competitive landscape when it comes to mattresses and Casper Sleep has some work to do, not just in terms of their own business, but in terms of the stock because it went public at $12 a share, it's still below that IPO price. If you're taking the basket approach and you're saying, "All right, I'm going to buy equal shares of Casper Sleep and Purple Innovation and Sleep Number, well, Casper Sleep is the laggard [laughs] by a wide margin.

Sharma: It's the hole in your basket right now.

Hill: Yeah, of those three. But I do agree that the moves they're making are the moves you would want to see. This may be a situation where if you buy a few shares today, a year from now or two years down the line, you're happy that you did that because it may be a situation where in hindsight, this was the time to buy. The expansion of the brand to go from Castro Mattress to Casper Sleep, as you said, this may be overly simplistic, but that's important. That's a small change but I think that's important. It provides them more opportunities. Look, mattresses are one of those things. This is not the razor-and-blade model. This is not the [laughs] I'm going to repeat purchase this every month or even every year. But it is the thing where if you are happy with the products they are making, you are so much more likely to go back to them somewhere down the line. As we're seeing with the housing market and people looking to get into bigger houses, you're throwing one of these things in a guest room, I don't know, they're doing the right things, but this is not, as Ron Gross would say, "A business that is at the moment firing on all cylinders."

Sharma: True. Let's not go back to my bad knowledge of cylinders from last week, but let's talk about that for just a second. This is one that seems like its ignition has turned. It's in gear, is it in high gear yet? No. I have a Mazda 3, I can't get rid of it because it's a stick shift, Chris. I know I should replace this car, but I just love the stick shift and they're going away. But if this were me, I'd be like in third gear, not yet in fourth gear. They're in third gear and that's not a bad place to be. I like what you mentioned about the industry having some nice tailwinds behind it for now. They do have this component of trying to move beyond the mattress sales into these accessories. Maybe you buy the mattress, you like it, you like the brand, you buy the pillows, you buy blankets, etc. We'll see, but nothing today screaming, "Go out and buy the stock." However if you're a shareholder, this was a good report.

Hill: First-quarter profits and revenue for Yeti Holdings came in higher than expected. Yeti makes outdoor gear, coolers, insulated drinkware, they raised guidance for the full fiscal year and shares of Yeti up a little bit today.

Sharma: Yeah, this is another brand story. This is part of the story, Chris. But a personal story here, I had pored over this S-1 for Yeti. They're R-3 prospectus when they went public with Vince Shen, one of our really great analysts who is now taking time in Taiwan and hanging out there. I made this cute little, I thought it was a cute little pun at the time. Is it time to buy this stock, Yeti? [laughs] I never bought the stock. I was a little skeptical of their brand power because the company presented itself to the public as a brand that was going to catch on with young millennials, they were working with influencers on Instagram. I remember we were recording Industry Focus, and Austin Morgan who was producing that day was telling us about their brand power and how all his friends were buying the coolers and the drinkware, and I still didn't get the story. I focused on a little bit too much on the numbers. But as they have proven, here's another company that has capitalized during COVID. Lifestyle purchases really ramped up over the last year and as the economy reopens, I think more people are going to be going out into the outdoors and so those are further tailwinds for them. 

Just to look at some of these pretty nice numbers they had: Net sales were up 42% year over year; that direct-to-consumer channel that they've been building for years was very strong. This is, for them, more of the online sales, e-commerce sales up 56%, but their wholesale channel, those revenues were up 27% year over year. I want to point out to investors just before the pandemic hit, management was really talking up their expansion into some bigger outlets like Lowe's. They have a new partnership with Lowe's that never really got off the ground because Lowe's had shut [laughs] all of its stores last year. This could be an understated part of their story going forward. They're expanding beyond some of the smaller venues that we're in, I think, Chris, again, they will build brand power similar in a way to Casper Sleep. 

The last thing I wanted to mention before hearing your take on this is they are really investing around the globe to bring this brand, which is popular down south and now popular in more parts of the U.S. into Canada, into Australia, into the U.K., various countries in Europe and the Asia, using the same strategy, going to a country and hit the social media. I think they may have success. Global sales make up only about 6% of the total top line but you know, that's tripled last year versus the prior year, so they are on their way there. This is one that got away from me, Chris, I still haven't bought shares. At some point, I think we're just going to have to bite the bullet and take a position here.

Hill: Yeah. I think it went public somewhere around $16 a share back in 2018. It's now north of $80 a share. This is a business that is so much bigger and it's doing so many more things than I thought they were because I heard Yeti, the drink company. Yes, got it, they make the coolers. They have so many different products. It looks like they're taking the same approach because the thing about those Yeti coolers, those insulated drink holders, it's like those things are so durable and it looks like they take the exact same approach to their apparel, to their camping gear. You mentioned this stuff with Lowe's. I think it's another strength of this business, as they appear to be doing a very good job of balancing the direct-to-consumer, which is so important for any retailer with the partnerships, Bass Pro Shops, and that thing. By my count, I think they have five physical stores of their own. I'll be curious to see how many more they get because I wouldn't expect them to have too many more. I don't see the strategy being, we want hundreds of stores across the United States. I think they are almost more like destination stores at this point. But yeah, this is a $7 billion company. It really seems like if they can even modestly grow outside the United States then this stock still has a lot of room to run.

Sharma: Yes. That market cap, as you mentioned, while you slept is surprisingly big, I agree on all of those points, Yeti is a company, I think, with a lot of potential strong brands. I love what you mentioned about just having a few stores. It reminds me of Canada Goose, a company that we might have spoken about today because they also reported earnings, but they have a few experiential stores where people go in and have that Canada Goose experienced the same with Yeti. I think their stores are more about experimenting with the products. Then they just drive these partnerships and a very strong online business. The one that got away, what do we have up next? 

Hill: One quick plug for Motley Fool Money this week, my guest is going to be Brad Stone, senior editor at Bloomberg, the best selling author of the really great book from, I think seven years ago, The Everything Store about Amazon. He's back with another book about Amazon called Amazon Unbound: Jeff Bezos and the Invention of a Global Empire. It's not surprisingly a fantastic book and sorry I'm interviewing Brad later today. That will be on Motley Fool Monday this week, so check that out this weekend. 

Bill Ackman is back in the news because he and his comrades at Pershing Square have apparently sold their stake in Starbucks. I guess they announced that a month or two ago. What has Bill Ackman done with that money? He has taken a 6% stake in Domino's Pizza. This is unfair to Bill Ackman but when I hear his name, I automatically think of Herbalife and just the knock down drag out flight he had with Carl Icahn over Herbalife but as you pointed out, when you and I were going back and forth this morning, you look at the investments that Bill Ackman has made in restaurants, pretty good track record.

Sharma: Absolutely, Chris, and I think you put your finger on what is so interesting about this story. Bill Ackman, a great investor, one of the great, I will say in the same breath, no offense, also one of the worst people who manage billions. He's made some spectacularly bad investments, Valeant Pharmaceuticals is an example. That ill-fated short bet on Herbalife, which philosophically, I agree with that short because I have never been able to quite understand those financials, Chris, and how they are able to present under GAAP, the way their company operates and multi-level angle for Herbalife always bothers me. He also has invested in the Borders Group [laughs] and lost money there, remember borders? But then he's made a lot of really good investments sticking to some more basic concepts so purchase shares, significant stake in Chipotle. Those shares doubled, I think in about four years. As Chipotle recovered, as you mentioned, he bought Starbucks. 

I remember writing an article for Fool.com, we're amazed that the numbers within 19 months, those, I think, hundreds of millions that he had pored in gained 73%-odd in the first 19 months of his investment. I think I wrote this article, maybe early last year, late in 2019. When he sticks to some very basic concept, just go back to simplicity as we were talking about beginning of the show, he's done pretty well and I see simplicity here and I think this is actually a good call. Maybe one more to the positive side of the ledger. You have to like Domino's. No. 1, it's got a spectacular return since it went public, thousands and thousands of percentage points of return. It's still a relatively small company for being the world's largest pizza chain. Chris, speaking of market caps, we're talking about Yeti being a sudden billion-dollar company, Domino's Pizza is just a $16 billion company, so larger than Yeti, but still has room to grow and it is also expanding around the world. I believe that stake that Bill Ackman took, it's significant but it, again, could pay off because this is one of the companies that you think about in the restaurant space that has only grown stronger through COVID. Always had a tech stack that was a little bit more advanced in the rest of the industry and I hear much about the pizza industry, but the whole quick-service and restaurant industry in that sense, they were always forward in developing apps and still invest a lot in technology. I like this one. It doesn't change my idea about Bill Ackman that he is sometimes his own worst enemy but I can get behind this. What are your thoughts?

Hill: Well, two thoughts. For anyone who hasn't seen that documentary Betting on Zero, I believe it's on Netflix. It came out a few years ago. It's a documentary about Herbalife. One of the amazing things that Ted Braun, the director, manages to do in that documentary is he makes Bill Ackman this almost sympathetic hero type character and depending on what you read about Bill Ackman and the way he conducts business, he might not be necessarily the nicest person in the world [laughs] but it's a brilliantly done documentary. In terms of this, I think if you're a Domino shareholder, you have to view this as a positive because of a number of reasons, chief among them. Ritch Allison is doing such a good job of running this company. There are plenty of times when Bill Ackman, or any activist investor, takes a stake in a business and they are showing up with their list of demands of things they want to change. Bill Ackman appears to be making this investment because he thinks for all of the success of this business and this stock, it still has a lot of room to run. I don't get the sense that he is heading to Michigan to knock on a Ritch Allison's door to say, "Look, here my idea is to make the business better."

Sharma: Yeah, and it's so very interesting, too, just on the level of where Pershing Square Capital, which is that the hedge fund that Bill Ackman could have placed some of the money that realized when it's sold out of it Starbucks position, there has been no dearth of great IPOs, interesting spec companies now, of course, here we are today, May 13th. These growth stocks have been down for several weeks but over the last few months, it could've gone into some new names. I think this shows an ability to stick to one's own knitting here and I totally agree with you, Chris, I don't think that he is there to agitate. He is there just to take the shares, maybe give some advice, some friendly advice, but stay out of Ritch Allison's way and let this company keep performing as it has for so long. We can learn a little lesson here that you don't always have to get distracted by what shiny knew. Now, personally, I do like some of the shiny new stuff. I think there's great innovation going on in the economy, fun places to invest but do I like the idea of a forward-looking consumer stock that still has room to grow? I have a lot of them in my portfolio so I can't argue with this one too much.

Hill: Asit Sharma, great talking to you. Thanks for being here.

Sharma: Thanks so much for having me, Chris.

Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill, thanks for listening. We'll see on Monday.