Online mattress return rates: The hidden gem in Casper’s S-1 filing?

January 14, 2020 By Michael Magnuson

Last week, Casper announced its much-anticipated plans for an initial public offering. For close observers of the mattress industry landscape, this meant a long-awaited look at the financial metrics of this leading online mattress brand.

Reflecting its meteoric 6-year history, Casper has posted a slate of numbers that are certainly quite impressive in many respects. At the same time, their performance highlights the inherent challenge that they will face in simultaneously seeking both continued growth and improved profitability. In addition to revenue and net losses, gross margin will be a key benchmark of their long-term success on this front, particularly as their distribution mix continues to expand into new channels. Of course, much will be reported on all of that in the media, so my focus in this post is the detail that might just have the biggest long-term implication for the rest of the mattress industry: return rates.

While Casper has chosen not to explicitly disclose return rates in its S-1, they have disclosed the lump sum of “refunds, returns, and discounts” for each period.

This table gives us a good upper bound — i.e., a sense of the absolute maximum that their return rates could be. But of course, to hone in on a more accurate estimate, we need to make some assumptions about refunds and discounts. Following are my assumptions in these areas.

Refunds. Although the term “refunds” is not defined anywhere in the S-1, I assume that the bulk of this line item would refer to cancelled orders. Casper allows order cancellation any time prior to shipment, so the question is simply what percentage of orders are cancelled. On Amazon, sellers must maintain an order cancellation rate of less than 2.5% in order to avoid account deactivation — so, we know that as cancellation rates go in general, 2.5% is really bad. In the mattress category, one of the biggest reasons for order cancellation is delivery delays, which most often are the result of inventory shortages or other logistical issues. While we have certainly heard this complaint levied against various online brands from time to time, Casper has not tended to be one of those brands. To the contrary, delivery speed is an area where Casper has seemed to excel relative to its peers, typically shipping from its facilities within its promised 1-2 days, and even offering same-day delivery in parts of New York and Los Angeles. Based on all of this, my sense is that Casper’s cancellation rate is likely to be fairly low and is unlikely to have changed a whole lot over time. To be conservative though, I’m making an assumption that Casper’s refunds have been around 1% of gross revenue.

Discounts. Although periodic discounts are now a regular part of Casper’s retailing strategy, this was not always the case. For the first several years of its existence, discounts were limited to a “refer a friend” program and discounts for certain affiliate or advertising partners, all of which were in the $50-75 range. This started to change around Black Friday of 2017, when Casper offered their biggest discount to that point ($150 off orders of $1,000+). Following this, Casper made increasing use of discounts during both 2018 (during which they had 15 or more periodic discounts) and 2019 (during which they had 30 or more periodic discounts), and made use of increasingly larger discounts during this time period as well. In light of this data, I have made some estimations of what portion of Casper’s revenue was sold with a discount in each period, and what was the average size of the discount in that period.

What are Casper’s return rates?

Based on the educated guesses we’ve made as to the nature and magnitude of refunds and discounts, it appears that Casper’s return rates have been somewhere in the 12-14% range, with perhaps a slightly upward trend over the 2017 to 2019 time frame.

How This Compares. Although the vast majority of online mattress companies are privately held and do not publicly disclose their return rates, this is a topic that is widely discussed in the industry. Through the chatter we’ve heard, we’ve gotten a distinct sense that return rates in the mid single digits are considered something worth bragging about publicly — eg, Tuft & Needle has boasted of a 5-6% return rate in its consumer-facing messaging — and high single digits is considered something to brag about within the industry. In terms of a range, the lowest rates we’ve heard have been in the 4-5% range, and the highest have been rumored to approach 20%. So if the estimates here are correct, they would suggest that Casper’s return rate falls somewhere right around the middle of that range.

Caveats. While the estimates above are based on real data, they are still just educated guesses. In particular, I would point to the assumptions about the portion of orders that are sold with a discount as an area into which I have the least clear visibility. More broadly, I assumed that returns and discounts for all channels were included Casper’s numbers, but if this was not the case it could affect the return rates by 1-2%. For example, the cost of returns for products purchased from Target could be excluded from Casper’s “refunds, returns, and discounts” line, in which case that channel’s revenue should be excluded from the denominator as well (and a similar caveat could be made about discounts for that channel). Likewise, these numbers include international sales, which could have markedly different return rates from domestic sales.

My Take. While these return rates are certainly far lower than the average return rates in other e-commerce categories (eg, shoes, clothes, etc.), one critical distinction with mattresses is that returned products can not be re-sold. As a result, the entire cost of a returned mattress is baked into the price that will be paid by any future consumer. And even more significantly, in spite of the best intentions most online brands have for their returns to be donated, many returned mattresses still end up in landfills. This has significant long-term consequences for our environment, and is especially concerning given the number of mattresses being returned these days. Making matters worse, generous mattress return policies are ripe for abuse — whether by consumers who use them as a substitute for proper pre-purchase research, or by consumers with a more nefarious intent. In light of these considerations, we believe that there is work to be done in bringing the mattress industry towards what we think of as a more “utopian” return policy for the long term — one that strikes an appropriate balance between consumer friendliness and environmental sustainability. More on that in a future post…