Blog: Hunting for an elusive number: Casper’s mattress return rate

There are hundreds of numbers in Casper’s S-1 prospectus that tell the story of the company and document the rapid sales growth it has made since its founding in 2014.

In the first few pages of the filing, there is a whole page of numbers that the company chooses to highlight. Among those numbers: 45.5% (net revenue compound annual growth rate from 2016 to 2018), 50.7% (gross margin for three months ended Sept.30, 2019), 31% (aided brand awareness among U.S. general population) and 20% (repeat customer rate for the first nine months of 2019).

But there is one elusive number that you will not find broken out by Casper: Its return rate. And that’s not a good sign, in my humble opinion.

Industry observers have long pegged Casper’s return rate as high as 20%. That would be a big problem for Casper because returns are expensive, and high returns indicate consumer dissatisfaction with the product.

I conducted a fruitless search for Casper’s return rate in the hundreds of pages in the company’s prospectus. Casper does provide a line item for “returns, refunds and discounts,” and that figure was about 20% of revenues in the first nine months of 2019.

But that doesn’t quite give the company a 20% return rate because refunds and discounts must be accounted for. Here I asked GoodBed.com CEO Mike Magnuson for some help. He was a private equity investor focused on digital media and marketing, a management consultant, and he’s got an undergraduate degree in finance and an MBA from Stanford. He’s got finance in his DNA.

In an insightful blog, he made various assumptions about “refunds and discounts,” which led him to estimate that Casper’s return rate is in the 12% to 14% range.

At the Las Vegas Market, I tested that range with various industry players. One online veteran said his analysis puts the return rate in the 18% range.

And then Stifel analyst John Baugh sent me his detailed analysis of the Casper prospectus. He worked with a footnote that disclosed a “product return reserve” line item on the balance sheet and calculated that the annual return rate for 2019 would be approximately 8.7% of gross revenues.

Baugh also wrote that “the rate of returns is increasing in both the year 2018 and the nine months of 2019 and is likely higher for the full year 2019 based on our estimates.”

In an update to his original post, Magnuson reviewed Baugh’s methodology and made a compelling case for how it could be underestimating the return rate by as much as half, while also noting that it does provide a confident lower range for the returns.

Considering the additional input he’s gotten, Magnuson thinks that, if anything, his original estimates might have been on the low side, but he admits he still doesn’t have enough concrete details to make a confident calculation. At this point his best guess puts the return rate in the 12% to 15%-plus range.

He says return rates matter for two reasons: The cost of online returns is built into the price that future consumers pay, making higher return rates bad for customers, and more and more returned mattresses are finding their way into landfills.

Those are, indeed, important points. Casper’s return rate — whatever it may be — matters