A ten bagger in your sleep? (Part I) Purple Innovation $PRPL

It’s hard to think of a sector of the economy in a bigger dry spell than furniture, appliances, or mattresses. The reason for this is that the housing market is more constipated than a senior living community that has run out of milk of magnesia, and the majority of furniture, appliance, and mattress purchases take place when people move into a new home.

I have been wrong about the pace of the housing market thawing out. Two previous attempts at positioning for a consumer durable rebound have failed, Conn’s and The Container Store both wiped out equity holders. I thought that the US central bank would march to the same tune as other central banks and follow their cutting cycle. But Jerome Powell was more serious with his “higher for longer” than he was about “not even thinking about thinking about” raising interest rates.

Is it still early for furniture with a president who is a real estate developer, and who is committed to doing everything in his power to unfreeze the housing market? Maybe, after having been burned twice, I will be paying special attention to how much runway these companies have to make it to the other side of this cycle. But if they do make it to the other side of this desert alive, the survivors will be five baggers or ten baggers.

I suspect that I am still early, maybe even a couple of years early for the furniture market to really have recovered and for the companies to climb back to peak multiples. But we saw with Finance of America Companies (FOA), who went from $5 to $20 on the change from losing money to making money, that there can be a sudden large move in the stock price as soon as the first positive momentum starts to arrive, even if the full recovery is still years away. And Purple Innovation (PRPL) has a management team guiding toward positive EBITDA in the second half of this year, after not turning a GAAP profit since 2021.

Special thanks to EagleFangCapital and Convexititties who brought this name back on my radar. I had seen strong insider buying from Purple about two years ago, but I channeled my Peter Lynch, went to the mall, talked with the sales manager, and decided that it was too early. The one big flaw with insider buying, even heavy insider buying from c-suite executives, is that while they know their own company well, they are often wrong about the major cyclicality of their own business. But I can hardly throw stones, I was wrong about the cyclicality of their business too.

But we are quickly approaching the first rate cuts, with major investment banks still predicting two 0.25% cuts for the remainder of 2025, and some unholy number of cuts in 2026 under a new Fed chair. Things might not go precisely according to that roadmap, but it’s probably close enough. I don’t even think it will be healthy for the economy to cut rates as much as the major investment banks are predicting, but those seem to be the waves we are meant to surf.

Purple was a startup from the Direct to Consumer craze of about ten years ago, with a hyper-elastic polymer based mattress technology. Entrepreneurs were eyeing the markups of retail, and trying to figure out how to bypass traditional channels altogether. It turned out that Google and Amazon were ready to charge as much of a markup for the advertising, and Direct to Consumer fizzled out. But Purple adapted, and now has 12,000 mattresses across the Mattress Firm store network, and access to their showrooms. This rollout is still in the early stages, and should show positive results in the second half of 2025. Also, PRPL is partnering with Costco to place their mattresses in 450 stores for their year-end furniture show. While margins aren’t amazing at Costco, how many Costco shoppers will buy their second Purple mattress directly from the website rather than waiting for it to show up again seasonally in the store?

Just like all housing related businesses, the Covid durable goods pull forward tricked them into thinking that good times would last forever. Purple built a second factory in Georgia, only later to see business slow down in the higher interest rate environment, and to close their two legacy factories in Utah under cost saving initiatives.

It has been a long four years since PRPL had positive operating income, and since that time, debt has been slowly but steadily accumulating. The Net Operating Losses are up to about $238 million, or 3x the current market capitalization, and those losses are a potential future asset as they will shelter PRPL from paying taxes in the years ahead, unless they experience an ownership change. Management has enacted poison pills to protect their NOL’s, as an activist fund, Coliseum Capital, accumulated 47% of shares outstanding at prices about 5x where it is today.

Despite the potential loss of the NOL’s, management is entertaining buyout offers, as several unsolicited offers have come in, and the path forward out of their current financial mess does seem a bit arduous. But management is guiding toward delivering positive adjusted EBITDA in the second half of 2025, which is not a terrible milestone, even if it is adjusted. Revenues for Q2 2025 were higher than Q1, but still down 12% from last year. I am reluctant to get too excited by the cheerleading of any CEO, but it does appear that PRPL has some positive momentum and may have hit their cyclical trough six months ago.

Insider buying at Purple has been strong, although the last purchase was over a year ago. All together, the CEO has purchased $350,000 of company stock, the COO is in for $380,000, the General Counsel is in for $140,000, and there’s another $110,000 from the Chief of Owned Retail, as well as purchases from four directors. Purchases from a General Counsel are relatively rare signal, and like a CFO, are from someone who is always looking at risks and typically does not succumb to drinking cult cool-aide.

Purple currently trades at a price to sales ratio of 0.19x, which is higher than some of their competitors with stronger balance sheets. At their prior peak, price to sales was over 1.8x, and those sales were 60% higher. While a ten bagger is possible here, it is extremely likely that management agrees to a strategic option, either a merger or an acquisition. And since negotiations have been in place since Q4 of last year, and are still ongoing, the odds are good that an agreement is reached relatively soon. So while a ten bagger is possible, it’s far more likely to get taken out at a modest premium in the very near term.

When asked about capital allocation for free cash flow in 2026, the CEO leaned toward increasing store count over debt retirement. PRPL only has about $94 million of long term debt, with most of that a related party loan from Coliseum Capital with interest payments accruing to principal and maturing December 31st of 2026. They also have over $120 million of long term lease obligations, which makes the balance sheet look worse than it is. Under $100 million of long term debt, for a company with $450 million annual revenue, $750 million at the peak, and 40% gross margins isn’t unsustainable. In exchange for the related party loan, Coliseum received 20 million warrants, so fully diluted, PRPL would have a share count closer to 120 million.

Purple is a melting ice cube at this likely trough part of the consumer durable cycle, but it’s melting slowly, and likely to be acquired within a matter of months. The current share price of $0.80 is below the warrant floor of $0.85, so at least one risk is mitigated at this price level. Of course it would be preferable for PRPL to return to growth, return to revenues of over $600 million a year, trade at a price to sales ratio of over 1.0x, and reach a share price of between $5 and $10. But for that to happen, Coliseum Capital would have to reject selling the company for $1.00 to $1.20 in the near term. The ball is in their court, and I couldn’t predict their actions.

But in the meanwhile, if we return to the short-squeezing frothiness of last week, Purple is an excellent candidate for a short squeeze, especially on the announcement of a takeout offer. And with the operating momentum and management guiding toward positive EBITDA for the second half of 2025, the worst should be behind it, and every earnings call is a potentially explosive catalyst. Maybe it’s not the most sound investment, but Purple is likely to be a bit of fun.

Purple Innovation (PRPL) $0.80: $5 by the end of 2027