Eve Sleep : 2021 Interim Results

eve Sleep plc ("eve" the "Company")

Interim Results

Good H1 led by strong UK&I performance, on-course for full year expectations

eve Sleep, the direct-to-consumer sleep wellness brand operating in the UK, Ireland (together the "UK&I") and France, today issues its results for the six months ended 30 June 2021 (the "Period").

Financial Highlights1

Business Highlights

• UK&I revenue increased 19%year-on year and 15% on H1 2019
• Average order value in the UK grew 31% as mattress purchases were increasingly accompanied with bedroom furniture, bedding and other sleep accessories from the growing range
• Two-yearcustomer repeat rate4in the UK increased 160 bps year-on-year to 14.5%

• French revenues in H1 decreased 8%year-on-year on minimal Q1 marketing spend ahead of a new marketing campaign and Covid related retail partner store closures
• Gross profit margin gains secured in 2020 largely held despite inflationary pressures
• Marketing investment across the business has been first half weighted
• Operating cash outflow of £3.1m is first half weighted, in part due to £0.9m ofone-off factors relating to increased stock holding and the payment of VAT deferred from Q1 2020, and £0.3m for other working capital movements

Post Period End

• July saw the successful launch of the 'Sleep Away' sleepover mattress with strong early sales
• In September the new premium foam mattress range goes live

Current Trading and Outlook

• Strong trading momentum in the UK&I has continued with revenues ahead of board expectations at +46% for July and August against 2019pre-Covid equivalents
• Group revenues in July and August increased 1%year-on-year against very strong comparatives and grew 26% on 2019 pre-Covid equivalents
• Net cash as at 31 August 2021 increased to £5.9m, with minimal H2 outflow expected
• The UK&I ison-course to report a healthy positive marketing contribution for the second consecutive full year as the region moves towards profitability in 2022

Cheryl Calverley, CEO of eve Sleep, commented:

"We are starting to reap the benefits of our three year rebuild strategy. Our UK&I business continues to go from strength-to-strength, with our re-engineered supply chain able to meet continued strong demand, with sales up 46% in July and August on 2019 pre-Covid comparatives. The ongoing expansion of the product ranges is gaining traction, with new accessory ranges driving growth in customer numbers, customer repeats and average spend through the year. This gives us increasing confidence for the full year outturn for the UK&I, which we expect to generate a healthy profit pre overheads for the second consecutive year.

Our focus for the next 12-18 months is on delivering a core UK business that is both growing and sustainably profitable, whilst building our scale in France to generate a similarly accretive business there in the medium term. To achieve these growth objectives we continue to expand our sleep wellness offering with a strong pipeline of new products for the second half of the year, alongside the launch of our personalised sleep content engine, which will serve information to customers on a wide range of sleep related topics, further creating a differentiated business which meets a fundamental and growing customer need and derives as a result improving profitability."

Footnotes

1. Financial data has been rounded for presentation purposes. As a result of this rounding the totals, comparatives and calculations presented in this document may vary slightly from the arithmetic totals or calculations using such data.
2. Marketing contribution is defined as the profit/loss after marketing expenditure but before overhead costs; a measure also referred to as operational profitability.
3. Underlying EBITDA is defined as earnings before interest, taxation, depreciation, amortisation, impairment,share-based payment charges connected with employee remuneration and fundraising-related expenditure.
4. Based on the cohort who first ordered in H1 2019 compared to the cohort who first ordered in H1 2018 and then placed subsequent orders over the following two years.

Summary

Good first half

The UK&I business continues to gain momentum. Looking through all of the distortions to trading patterns resulting from the pandemic, revenues for the UK&I in the first half of the year were up 15% on pre-Covid H1 2019 comparatives. This growth is despite the decision to exit Amazon sales shortly after the end of H1 2020 and is testament to the success of the three-year rebuild strategy, which made structural improvements to the business across product and customer service, infrastructure and marketing, alongside a greater focus on profitable sales.

Trading momentum in the first half of 2021 in the UK&I continued throughout the first half, despite more challenging comparatives in May and June. Revenue growth for the half of 19% year-on-year in the UK&I was driven primarily through online channels, with a softer performance overall from retail partners, reflecting lock down restrictions over the first quarter and to some extent the permanence of channel shift to ecommerce. However, some retail partners bucked the trend with both Argos and Shop Direct performing strongly. Ireland recorded a strong performance, generating year-on-year revenue growth in excess of 130%, although it remains a small part of the overall business.

Demand was strong across the mattress range, with eve's hybrid mattresses selling particularly well. The underlying strength in the core products continued to be supported by the 2020 Which? survey, rating eve's original and its premium hybrid the two best mattresses in the UK. Five of the six eve mattresses now have a Which? Best Buy rating and in June 2021 eve's premium hybrid mattress received the Indy Best Award. Substantial progress has also been made in the period with range extensions into the wider bedding and sleep wellness categories, which was one of the three pillars of the rebuild strategy. Sales of premium bed frames remain strong and during the period, eve launched the new, entry level 'minimal' bedframe.

An important development in the period was the increase in ancillary sales of new products, which drove both an increase in average basket size and the number of customers in the period. Recently launched new products, including the weighted blanket, morphee sleep aid, the 'sleep away' sleep over range and the temperature balancing mattress protector, alongside a redevelopment of the 'baby sleep' offering, sold well and reflect eve's increasing focus on the broader sleep wellness category. The broadening of the product range in the UK has been a key contributing factor to the 31% year-on-year growth in the average order value and the improvement in the UK two-year

customer repeat rate KPI, which for the first six months of 2021 stands at 14.5%, a 160 bps year-on- year increase.

eve's business in France is at an earlier stage in its development than the UK&I, with a lower level of brand awareness, a more limited range of products on the website and a less advanced customer experience. While much of eve's French business has been restructured over the last three years, there is still a lot of work to do in order to match the depth and breadth of product ranges and the high quality customer experience achieved in the UK. Restructuring has so far included manufacturing consolidation, the move to the more stable Shopify ecommerce platform and a reduced cost base, combined with defining a more distinct brand position for this local market. During these initial stages of restructuring the French business has received minimal marketing investment.

The majority of the first half of the year in France was spent preparing for the launch of the new marketing campaign - 'La vie en jaune', which commenced in May. Ahead of the new campaign, marketing spend remained minimal and retail partner store closures resulting from Covid restrictions, both impacted on revenues in the period, which were marginally lower year-on-year at £2.2m (H1 2020: £2.4m).

At the Group level, revenues for the period increased 13% to £13.9m (2020 H1: £12.2m), reflecting the strength of trading in the UK&I. The substantial gains made to the gross margin over the last two years, resulting from the rebuild strategy and the focus on profitable sales have been largely retained. The gross margin in H1 2021 was broadly flat at 55.0% compared with H1 2020 but up 270 bps on the 52.3% reported in H1 2019, despite the existence of inflationary pressures since the second half of 2020, as previously highlighted. These inflationary pressures have been offset largely by the strength of the eve brand and a more premium product offering, allowing higher retail pricing to be passed through to customers without significant adverse effects on volumes.

Marketing contribution is an important metric for eve, representing the profit or loss after marketing costs but before central overheads, with 2020 being the first year in which this measure of profitability turned positive. In the first half of 2021 marketing contribution remained positive at £0.7m, but reduced year-on-year by £0.8m (2020 H1: £1.5m), as a result of the upfront marketing investment associated with the new French advertising campaign and the first half weighting of marketing spend in the UK&I. In total, marketing investment expensed in the first half increased year-on-year by £1.4m, reflecting a higher £0.6m in the UK and £0.8m in France. The impact of this investment flowed through into the higher EBITDA loss of £1.9m reported for the period (2020 H1: £0.8m), with the payback on this investment expected to start to flow through in the second half of the year and over 2022. Marketing contribution for the UK&I was broadly flat at £1.2m for the period, reflecting the first half weighting of marketing investment, which is expected to benefit the second half performance.

The operating cash outflow in the period was £3.1m. This reflects the EBITDA loss of £1.9m, £0.9m of one-off factors including the payment of VAT, previously deferred under the UK Government's Covid support measures, a planned increase in stock, in order to mitigate against any supply shortages and other working capital movements of some £0.3m.

At the Company's AGM in May 2021 Paul Pindar stepped down as Chairman of the Company, a position he had held since before the IPO and Mike Lloyd, COO of McCarthy & Stone and a former director of AA plc was appointed to the role. The board was also strengthened with the appointment of Masood Choudhry as a Non-Executive Director in February. Masood remains at the forefront of ecommerce, having held senior leadership positions in logistics at some of Europe's largest operators, and is currently Senior Vice President of Logistics at Zalando. Collectively these appointments provide

the executive management team with fresh perspectives, direct access to a wealth of expertise and renewed energy.

Market overview

Sleep is increasingly recognised as an essential element of wellness at a time when wellness has never been more important. There is a growing body of research and evidence which testifies to the importance of sleep and the risks to physical and mental health of insufficient sleep. In a poll commissioned by eve and taken shortly after the start of the pandemic, as many as 48% of respondents said that they were kept up due to worry about Covid-19 and nearly one in four admitted that their quality of sleep was worse than ever. 'Sleep' has now overtaken both 'diet' and 'exercise' as the most searched for term on google (UK) across the 'wellbeing triad' of 'sleep', 'diet' and 'exercise', showing the increased awareness that consumers have of this vital component of wellbeing.

With the increasing understanding of the importance of sleep has come consumer change. Not only are consumers spending more on sleep wellness related products, they are also willing to spend more on the central element of a good night's sleep; the mattress. The strong sales performance of eve's premium hybrid mattress testifies to this point, generating some 30% of mattress sales by volume. Every customer that purchases an eve mattress is asked at 100 days whether they're sleeping better thanks to their eve, and more than 80% tell us they are. This is a strong piece of advocacy for the quality and effectiveness of our products.

Sleep is a huge market by value, which has evolved substantially since the start of the pandemic. Data from Euromonitor estimates that the European sleep market is worth approximately £26bn, with the Core Markets that eve is focused on (UK&I and France) being worth approximately £6bn. The advent of the first national lockdown from March 2020 and the consequent switch to working from home, coupled with a lack of leisure spending alternatives, drove a strong increase in industry wide demand for bedding and homewares products. Consumers en masse literally 'bedded down' for lockdown as they sought to renovate their homes and bedrooms. Data from Barclays UK Consumer Spending Reports show that retail spending in the Household category grew each and every month year-on- year through the second half of 2020 and this positive trend has continued throughout the first half of 2021.

The growth in spending has been online led, resulting in an acceleration of the trend to ecommerce. Recent data from the Office for National Statistics (ONS) shows that whilst the percentage contribution of non-food retail sales online has fallen back somewhat in recent months as lockdown restrictions eased and the high street re-opened, retail's online share remains substantially ahead of pre-pandemic levels. In June 2021 non-food online sales represented 23.1% of total non-food retail sales, which compares with 15.5% in December 2019, according to ONS data, with eve's own market research indicating that 50% of mattresses are now bought online in the UK. The management team at eve anticipate that this shift to online will be sustained.

Whilst the sector remains fragmented and highly competitive the competitive landscape across beds and mattresses has eased somewhat, with a number of online mattress providers choosing to retrench from the UK market, alongside a reduction in store based competition, both permanent and temporary as a result of the pandemic. There is also evidence to suggest that the mattress in a box brands are growing their share of the market with eve's market data indicating that some 15% of mattresses are now bought from 'direct to consumer' brands in the UK. Despite the level of ongoing competition in mattresses, there is no company that as yet has established itself as a wider brand operating in sleep wellness. eve's ambition is to achieve just this; to be seen as the go to brand for sleep wellness products, content and support across a range of categories and sales channels.