Comfort solutions company Purple Innovation Inc. (PRPL) plans to expand its production capabilities in its Georgia manufacturing facility and open additional showrooms. The Lehi, Utah, company expects to end 2021 with 28 showroom locations and add more than 30 locations in 2022. Its stock generated some momentum on positive hedge fund sentiment. However, BofA analyst Chris Nagle has double downgraded the stock to sell from buy and cut its price target to $16 from $36 on concerns over weak online and wholesale trends.

PRPL posted disappointing third-quarter results and warned that rising input costs, greater channel mix shift toward wholesale, and its planned increase in marketing spend could negatively affect its fourth-quarter results.

The stock has lost 33.3% in price over the past month and 50.1% over the past three months to close yesterday’s trading session at $13.34. In addition, it is currently trading 67.5% below its all-time high of $41.08, which it hit on January 25, 2021. So, PRPL’s near-term prospects look bleak.

Here is what could influence PRPL’s performance in the coming months:

Disappointing Financials

For its fiscal third quarter, ended September 30, 2021, POSH’s net revenue declined 8.7% year-over-year to $170.80 million. The company’s adjusted EBITDA for the quarter decreased 99.7% year-over-year to $0.10 million. In comparison, its adjusted net loss came in at $4.90 million, compared to $17.20 million in income in the prior-year period. Its adjusted loss per share was $0.07, compared to an EPS of $0.27 in the year-ago period.

Ongoing Investigations

Several law firms are investigating potential claims against PRPL on behalf of its stockholders on concerns around the company announcement of disappointing third-quarter earnings, attributed to undisclosed supply chain issues.

Low Profitability

In terms of trailing-12-month EBIT margin, PRPL’s 2.14% is 77.6% lower than the 9.54% industry average Likewise, its 5.06% trailing-12-month ROTC is 33.9% lower than the 7.65% industry average Furthermore, the stock’s trailing-12-month net income margin, ROCE, and ROTA are negative, versus the 6.40%, 17.64%, and 6.26% respective industry averages.

Stretched Valuation

In terms of forward P/E, PRPL’s 124.07x is 610.1% higher than the 17.47x industry average. Likewise, its 48.06x forward EV/EBITDA is 361.6% higher than the 10.41x industry average. And the stock’s 4.94x stock’s forward P/B is 28.8% higher than the 3.84x industry average.

Unfavorable Analyst Estimates

Analysts expect PRPL’s EPS to decrease 500% in the current quarter, 82.4% next quarter, and 57.1% the current year. Also, its EPS is expected to remain negative in the current quarter ending December 31, 2021.

POWR Ratings Reflect Bleak Prospects

PRPL has an overall D rating, which equates to a Sell in our POWR Rating system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. PRPL has a D grade for Quality, which is in sync with its lower-than-industry profitability ratios.

The stock has a D grade for Stability, which is consistent with its 1.35 beta. In addition, PRPL has a C grade for Value, in sync with its higher-than-industry valuation ratios.

PRPL also has a C grade for Growth, and an F grade for Sentiment. This is justified because analysts expect its EPS to decline in the near term.

And the stock has a C grade for Momentum, which is consistent with its 66.2% loss over the past nine months and 59.5% decline year-to-date.

PRPL is ranked #59 of 61 stocks in the Home Improvement & Goods industry. Click here to access all of PRPL’s ratings.

Bottom Line

PRPL is currently trading below its 50-day and 200-day moving averages of $19.94 and $25.09, respectively, indicating a downtrend. Furthermore, it could continue declining in price in the near term due to concerns over manufacturing backlog and supply chain disruptions. Because the stock looks overvalued at the current price level, we think it is best avoided now.

How Does Purple Innovation (PRPL) Stack Up Against its Peers?

While PRPL has an overall POWR Rating of D, one might want to consider investing in the following Home Improvement & Goods stocks with an A (Strong Buy) or B (Buy) rating: Acuity Brands, Inc. (AYI), Kingfisher plc (KGFHY), and Lowe's Companies, Inc. (LOW).

PRPL shares were trading at $13.23 per share on Tuesday afternoon, down $0.17 (-1.27%). Year-to-date, PRPL has declined -59.84%, versus a 26.87% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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