Casper, the buzzy mattress seller adored by millennials, has a costly returns problem that could be a nightmare for its IPO

Casper CEO Philip Krim speaks onstage during Day 1 of TechCrunch Disrupt SF 2018 at Moscone Center on September 5, 2018 in San Francisco, California.

Casper's generous return policy on its mattresses is costing the company tens of millions of dollars, the company revealed recently in its initial public offering paperwork.
In the first nine months of last year, returns, refunds, and discounts cost Casper $80 million — or about 20 cents of every dollar in sales it took in during that period.
The company has also had to set aside increasing amounts of money as a reserve against future returns.
In part thanks to such costs, the company is operating in the red at a time when Wall Street is increasingly skeptical of money-losing companies.
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It turns out that offering an extraordinarily generous return policy on mattresses can be super-costly.

At least that's what Casper's financial statements indicate. In the first nine months of last year, refunds, returns, and discounts cost the company $80 million, according to the document the company filed last week in advance of a planned public offering. That's about 20 cents out of every dollar in sales the company took in, including those that it ultimately refunded.

"That's a high number," said Rob Siegel, a lecturer in management at Stanford Graduate School of Business.

Worse for Casper, that rate is going up. In all of 2018, returns, refunds, and discounts cost the company $80.7 billion, or about 18.4 cents of every dollar it saw in sales, including the amount it refunded. In 2017, such costs added up to $45.7 million, or 15.4 cents for every dollar in sales.

For its part, Casper has recognized that returns represent a significant issue. Reducing returns was one of the top initiatives it listed in its public offering document for improving its financial results.

"As a young company, we are still learning about the factors affecting customer returns and believe we have the opportunity to reduce customer return rates," the company said in the document. "We have identified several opportunities that span policy change, process improvement and consumer education to reduce return rates and increase overall customer satisfaction."

The double-edged sword of selling mattresses online

Traditionally, consumers have purchased mattresses through department or furniture stores where they've had the chance to test them out before purchasing them by sitting or lying on them. By contrast, most of Casper's customers don't get that chance. While the company has several dozen physical stores, it largely sells its mattresses online through its website.

The benefit of such an approach is that on the mattresses that it sells itself, Casper doesn't have to share its profits with retailers or distributors. It also can showcase its products in the way it thinks is best; it doesn't have to worry about having its mattresses side by side with a competitor's in a retail showroom.

But purchasing a mattresses without feeling it first would seem to be a tough sell for many consumers. Mattresses are among the most expensive products consumers buy, and people tend to hold on to them for years and years. What's more, people's tastes in mattresses tend to be idiosyncratic; some like firmer mattresses, others harder ones. Few would want to get stuck with a mattress that doesn't meet their needs.

To address those concerns, Casper and other such online mattress vendors have offered generous return policies. Typically customers can send back a mattress within 100 days of receiving it and get a full refund.

That's led to at least some consumers to attempt to game the system, as The Wall Street Journal reported last month. Such customers have been able to repeatedly get mattresses without ever really paying for them by successively purchasing new ones from different online vendors and then sending them back immediately before the return periods expire.

Casper's return costs are adding up

Even if most consumers aren't taking advantage of the situation, many are indeed returning their mattresses. And the costs are piling up.

At the end of September, Casper had set aside a cushion of $11.6 million to account for returns. To put that number in context, the company had $54.6 million in cash on hand at that point.

As return costs have risen, Casper has repeatedly upped the amount it sets aside for them. Its return reserve stood at $8.6 million at the end of 2018 and $5.3 million at the end of 2017.

Casper has "a very expensive [business] model, particularly because of their guarantees," said David Hsu, a professor of management at the University of Pennsylvania's Wharton School.

Indeed, Casper's high return costs are one of the big reasons why the company, despite having a healthy growth rate, is racking up big losses. In the first nine months of last year, the company lost $67 million, up from about $66 million in the same period a year earlier.

It remains to be seen how public investors will treat the company. Other money-losing startups saw a poor reception from Wall Street last year. Uber debuted at a price far below the level at which many of its bankers predicted. It, Lyft, and Slack all saw their share prices fall after they went public. And WeWork was unable to complete its offering, despite repeatedly lowering its valuation, as investors pushed back against its losses and questionable transactions involving its CEO.

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