Having previously raised £22m in private funding from (current) backers including Channel 4, Octopus Investments and Woodford Investment Management, premium memory foam mattress seller Eve Sleep (EVE:AIM) floated on the AIM market on 18 May, raking in £35m at 101p to accelerate its growth in a £26bn European sleep market.

The IPO valued the business at £140m post new money or roughly 11.7 times historic sales, which at first glance looked very expensive for a mattress company. But the share price has subsequently softened to 84.5p (£116.9m), which after some initial in-house scepticism towards the story, Shares considers a buying opportunity for bolder investors.

Sleep disruptor

Co-founded by CEO Jas Bagniewski, Eve Sleep is a high-growth, online-focused direct to consumer European sleep brand. The proposition to consumers is simple; the North London-headquartered concern designs and sells ‘the world’s most comfortable mattress’, a premium memory foam mattress backed by a 10-year guarantee, a 100-day trial and free next-day delivery.

As Shares reports in this week’s Big News (see page 6) , big ticket spending is coming under pressure as consumers pull in their horns and prioritise non-discretionary purchases. However, the Eve mattress is priced significantly below store-based equivalents and at £549 for a double mattress, is under-cutting competitor memory foam-based mattresses such as Tempur.

Interest free credit is also available and Eve Sleep has injected the marketplace with innovation, which means it is growing the market for premium mattresses as well as taking market share. Given the growth rates this AIM newcomer is generating, it is evident that consumers are buying into the lifestyle benefits of better sleep and the higher quality mattress the company offers.

Shares also notes the Eve brand has been named as one of the UK’s Top 100 Cool Brands. This is important because desirable brands can garner loyal followings and generate fantastic returns for investors, as seen with the likes of Fevertree Drinks (FEVR:AIM), Joules (JOUL:AIM) or Ted Baker (TED).

Pillow talk

Peel Hunt initiated coverage (29 June) with a buy rating and 135p target price, one that implies 60% upside from current levels. Its analysts are excited by Eve Sleep’s very strong margin structures and low investment requirements. A simple delivery proposition, which sees the mattress rolled into a box, and low returns rates mean Eve makes far higher margins than web-based fashion retailers for example.

Furthermore, Eve mainly focuses on the design, branding, marketing and selling of its wares with manufacturing and fulfilment outsourced. This means that the business is able to scale quickly internationally without the requirement for significant capital investment.

Sweet (growth) dreams

Bagniewski and his team are ambitious and want to build Eve into the leading pan-European sleep brand. Despite the rapid growth delivered in its short history, it currently has a fractional 0.1% of a fragmented European sleep market thought to be worth £26bn.

The Eve mattress generates the overwhelming bulk of revenue and is being sold across Europe, but included in the offering are pillows, sheets and accessories and the portfolio is being built out to include beds, bedroom furniture and textiles. To drive brand awareness and market penetration the mattress is also being sold through a number of retail partners including Next (NXT), Fenwick and Debenhams (DEB).

Peel Hunt sees growth underpinned by rising brand awareness, new product introductions – Eve has launched a baby mattress, linen sheets and a new ‘baby box’ concept for Mothercare (MTC) – international online expansion and global retail tie-ups.

Eve Sleep’s half-year trading update (12 Jul) showcased strong trading momentum with sales up 126% to £11.5m reflecting strong online-led performances across all territories. UK sales shot up 107% to £6.3m, while international sales surged 153% ahead to £5.2m. The majority of global sales were generated from France and Germany.

Encouragingly, Eve issued a confident outlook and also announced an acceleration of UK retail partner sites following a successful trial at Next and also said talks with similar partners across Europe are underway.

For the current financial year to December, Peel Hunt forecasts sales of £27.2m (2016: £12m) with a widened loss of £13.1m (2016: £10.7m), ahead of £66.8m revenue and an £11.5m loss in 2018. However, 2019 should see Eve Sleep achieve a £1.7m pre-tax profit breakthrough as turnover rockets higher to £113.7m, forecasts which we believe could prove conservative.

Eve Sleep is currently loss-making at group level and won’t appeal to risk-averse, cautious investors. Set against this, Peel Hunt believes the UK business is nearing profitability already – it is only the ambitious European expansion that is holding back short term profitability.

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