Was I wrong about this Neil Woodford-backed small-cap stock?

Is this lossmaking small-cap stock about to surprise on the upside?

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It’s not been a happy few months for holders of newly-listed mattress seller eve Sleep (LSE: EVE). Since coming to the market back in May, the share price has fallen by 20%, suggesting that my initial thoughts on the Neil Woodford-backed company might have been correct, at least for now.

Will today’s interim results be the catalyst for a change in investor sentiment? Let’s check the numbers.

Soaring revenue

In the six months to the end of June, revenue jumped by 126% to £11.5m. International sales were particularly strong — rising 153% compared to the UK’s still-really-rather-good 107%. What’s more, this positive trading momentum appears to have continued beyond the end of the reporting period. Over July and August, the company achieved underlying revenue growth of 129% year-on-year.

Of course, this kind of rise in sales isn’t completely unexpected when it’s revealed that eve expanded into nine new territories over the reporting period, bringing the number of countries in which it has a presence to 15. According to the company, this rate of growth is “significantly ahead of schedule“. It also needs to be remembered that sales increases of this kind aren’t all that rare in young businesses starting from relatively low numbers compared to much larger peers.

Nevertheless, credit where it’s due. The company declared that unprompted awareness of its brand had increased to 4.1% by the end of June and to 5.4% by September. This makes eve Sleep the eighth most recalled mattress brand in the UK, higher than home furnishings giant Ikea. Recently-announced partnerships with Next Home and German retailer Karstadt should only serve to further increase consumer recognition over time, given that eve’s products will now be available to buy “in 146 stores in Europe’s two largest mattress markets“.

Confession time?

So, have I got it wrong when it comes to eve Sleep? Clearly, the huge rise in revenue can never be a bad thing, even if the aforementioned international expansion and ongoing investment in growing brand awareness led the company to record a pre-tax loss of £9.1m (compared to £3.2m in H1 2016). Having Neil Woodford as a major shareholder is another positive, even if — as far as his investments are concerned — the star fund manager has had a summer he’d like to forget.

Nevertheless, I remain rather sceptical on Eve’s prospects and the idea that any company with a low cost, disruptive, online-focused business model will automatically succeed. Despite the recent dip in value, a market cap of £112m continues to feel rather rich considering it sells the kind of products that people tend not to replace on a regular basis. The not-insignificant cost of mattresses also suggests that it might be included in a list of companies that consumers are most likely to shun at the first sign of an economic downturn (which, given our forthcoming departure from the EU, rising inflation and slowing wage growth, could be on the horizon). In such a scenario, I struggle to see how non-mattress sales at eve — which currently only make up 10% of the company’s total revenue — will be enough to cushion the blows. 

Today, CEO Jas Bagniewski stated that eve has “much to prove” in the £26bn European market in which it operates. Although recent progress is encouraging, I’d say that it still has much to prove as an investment.  

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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