Casper Sleep (CSPR) is keeping investors up at night after a disappointing second-quarter earnings report sent shares tumbling. The stock is still falling two months after its financials were released and has now lost two-thirds of the value it held this past summer.

The market seems convinced the bedding company is the stuff of nightmares -- a damaged brand that will do to your portfolio what a broken bed spring will do to a good night's sleep -- yet with growing sales and expanding market share, maybe Casper still has what it takes to put those doubts to bed.

Two people lying on a mattress.

Image source: Getty Images.

Not taking it lying down

There's a good case to be made that Casper Sleep shouldn't be so severely punished for its recent performance. Admittedly, losses at the bedding specialist dramatically widened to $33.8 million from $24.9 million last year, and management expects it won't get any better in the third quarter, as losses will come in at as much as $0.55 per share (Wall Street was expecting a loss of just $0.21 per share). But it's not necessarily the company's fault.

Casper is suffering from the inflationary pressures impacting the economy, as well as the supply chain constraints caused by the massive congestion at global shipping ports. Rising costs for raw materials, freight, and labor are hampering its ability to meet the record demand it is experiencing for its bedding.

Yet the dilemma Casper faces is it's limited in its response to an inflationary market. CEO Philip Krim says the bedding leader is targeting price increases in certain product lines to offset the higher costs, but it needs to remain competitive so he can't raise them too high.

Sleep on it

Although the bedding company's response is constrained, consumers still like its comprehensive focus on sleep and wellness. Casper generated record revenue in the second quarter of almost $152 million, up 38% year over year, and it's guiding to a 26% increase in the third. For the full year, Casper anticipates revenue will rise 20% over 2020 to as much as $610 million. 

Wall Street is forecasting Casper will increase sales by over 30% by 2023 while losses steadily narrow over time. 

That could be further bolstered by Casper paying even more attention to its third-party retail partners rather than its direct-to-consumer business, which still generates the bulk of its revenue.

The retail channel provides a clearer path for accelerating revenue growth, which Krim says is key to the company's "ability to efficiently scale Casper's North America business and to further diversify our revenue mix toward premium-priced products." Such revenue jumped 79% in the second quarter.

Person wearing pajamas and holding their head in bed.

Image source: Getty Images.

Tossing and turning

So with all of this potential, why is the market uncomfortable with Casper Sleep? On a macroeconomic level, the situation isn't going to improve anytime soon. The raw materials Casper needs for its mattresses -- cotton, plastics, wood, and the chemicals used to make foam -- are all in short supply and prices for them are still elevated even if they're off from their record highs.

It's impacting all next-gen bedding companies. Purple Innovation (PRPL -7.81%) also failed to meet earnings expectations and cut its full-year forecast because of production problems. Sleep Number (SNBR 1.93%) missed Wall Street's forecasts due to supply chain issues.

So despite Casper saying it believes it will be able to become profitable on an adjusted EBITDA basis during 2022, that actually might not be possible. 

At the company level, Casper didn't inspire much confidence when it fired dozens of employees, including its chief marketing officer, chief technology officer, and chief operating officer.

That's a C-suite housecleaning that could hint at deeper troubles within the company, though it also might simply be in line with its new focus on selling bedding at third-party retailers. Yet because Casper failed to even publicly announce the staff reorganization, it lends itself to doubt.

Keep dreaming

Casper Sleep priced its IPO at $12 a share almost two years ago, but today it trades for just over $4 a stub, a loss of value that would cause any investor to lose sleep. It also needs to prove its new business model really can work profitably.

A patient investor might find comfort in the deep discount the stock is offering, but they also might be better off looking at traditional mattress maker Tempur Sealy (TPX -0.48%), which continues to post strong growth and is already profitable.

Casper Sleep has potential, particularly at these prices, but it may be some time before that potential is realized.