What happened
Shares of mattress company Purple Innovation(NASDAQ: PRPL) dropped on Tuesday after fellow mattress company Tempur Sealy(NYSE: TPX) announced it was acquiring mattress retailer Mattress Firm in a deal valued at $4 billion. As of 2 p.m. ET, Purple stock was down 12%.
So what
For its part, Tempur Sealy stock was flat, even though it was the company that had news today. In addition to announcing financial results for the first quarter of 2023, it announced that it's acquiring the largest specialty mattress retailer in the U.S., which is Mattress Firm.
Why would Purple stock trade down on this news? Well, Mattress Firm is the company's largest wholesale partner, and the possibility of Tempur Sealy acquiring Mattress Firm was specifically addressed in the risk section of Purple's annual report. The report says, "We understand that it is possible that Mattress Firm, Inc. may be sold to Tempur Sealy International, Inc. which could disrupt our relationship with Mattress Firm or prevent us from continuing to sell our products in favorable placements alongside Tempur Sealy products within Mattress Firm stores."
In other words, if Tempur Sealy successfully closes its acquisition of Mattress Firm, it's possible (and logical) that it would promote Tempur Sealy mattresses over mattresses from Purple. And that's why this mattress stock is down today.
Now what
In 2022, nearly 43% of Purple's revenue came from wholesale partner channels, which include Mattress Firm but isn't limited to it. Therefore, this could materially impact the company's financial results, depending on what happens.
If there's a silver lining here, it's that the majority of Purple's revenue is direct-to-consumer and comes with better profit margins than selling through wholesale partners. That said, it's something management will need to navigate carefully.
Purple is scheduled to report financial results tomorrow, May 10, after the market closes. I would expect management to at least say something about Tempur Sealy and Mattress Firm then.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
