Purple Innovation, Inc. Q1 FY2021 Earnings Call

Good morning, ladies and gentlemen. Welcome to Purple Innovation First Quarter 2021 Earnings Conference Call. It is now my pleasure to introduce your host, Mr. Brendon Frey of ICR. Please go ahead.

Thank you for joining Purple Innovation's first quarter 2021 earnings call. A copy of our earnings press release is available on the Investor Relations section of Purple's website at www.purple.com. I would like to remind you that certain statements we will make in this presentation are forward-looking statements. These forward-looking statements reflect Purple's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting the company's business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements included in our first quarter 2021 earnings release, which was furnished to the SEC today on Form 8-K as well as our filings with the SEC referenced in that disclaimer. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. Today's presentation will include references to non-GAAP financial measures, such as EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures is available within the earnings release, which can be found on our website. With that, I'll turn the call over to Joe Megibow.

Thank you and good morning everyone. With me on the call today is John Legg, our Chief Operating Officer; and Craig Phillips, our Chief Financial Officer. Following our prepared remarks, we'll be happy to take your questions. As you saw from our earnings release issued earlier this morning, 2021 is off to a very good start. First quarter revenue and adjusted EBITDA were up significantly on a year-over-year basis and both meaningfully exceeded our expectations. Given our recent performance, we are pleased to be raising full-year guidance which Craig will walk through momentarily. The year began with strong demand in our digital channel and as the quarter progressed, we experienced a sharp acceleration in our wholesale business. The product and marketing strategies we are executing will showcase the premium nature of the Purple brand and our differentiated comfort technologies, along with our recent capacity expansion combined with improving traffic at brick-and-mortar retail and the impact on consumer spending from government stimulus all contributed to our outperformance. A few of the financial highlights from Q1 include net revenue increasing 52% to $186 million, gross margins improving 340 basis points, operating income increasing 125% to $16.9 million and adjusted EBITDA more than doubling to $22.8 million. Looking at our performance in more detail, I’ll begin with our DTC business. DTC revenue increased 54.8% to $125 million. We take the post-holiday selling season off with a strong first week of January and carry that momentum into February before accelerating during an even stronger Presidents Day. Momentum remained high through the rest of the quarter and we saw a peak when the March stimulus payments were received. Our average order value with mattresses increased 6% year-over-year driven by a combination of product mix and pricing increases. Moving onto our Purple brand showrooms. They continue to grow in size and importance to the DTC business. We entered Q1 with 9 showrooms, compared with only 4 in the year ago period. We signed several new leases during the quarter so we were able to open in April and we remain on track to add between 20 and 25 this year, all locations are performing very well with our older showrooms now exceeding pre-pandemic sales volumes and as to our newest locations they have scaled faster than any of our original locations. We recently introduced a new store design that looks amazing with elevated presentation and an opportunity to tell the full brand and technology story across our complete assortment. Looking at our product performance, our innovative mattresses continue to lead our business and within mattress demand continues to be strong, particularly our hybrid premier product line underscoring the progress we have made advancing the consumer recognition of the premium benefits of the Purple products. Our non-mattress products, our disruptive pillows had a banner year and were up nearly double in Q1 over the same period last year, helped in part by the success we have experienced launching Harmony with our wholesale partners. Seat cushions nearly doubled from the prior year as we capitalized on the momentum that started early in the pandemic, and have continued to learn and improve our product, merchandising, and marketing. We launched a new adjustable base that we're really excited about and is already seeing triple the attach rate that our previous model received reflecting the right mix of style, functionality, ease of shipment, and price point. Our other bedding products also experienced substantial growth similar to pillows and seat cushions in the first quarter. We are very pleased with our progress in driving non-mattress products, lead with pillows and seat cushions as standalone products and continue to sell the majority to new to file Purple customers who have not yet purchased a mattress. We remain bullish on the CRM opportunities this is creating. And as to engaging new customers, on April 1, we launched the Purple Squishy or miniature sample mattress and pillow as an actual purchasable product, each one shipped in its own adorable matchbox container. And in unit volume we are selling at similar levels as pillows or seat cushions. Not surprising to our brand, we have seen fan videos with more than 10 million views in total, featuring the new Squishy, which brings us to marketing. Our brand evolution continues to make progress as we continue to focus on the differentiation of our product with clear benefits at the center of the campaigns. We have also seen significant performance from both testimonial formats and to focus on Made in USA, which is a genuine source of pride for us. Although we are early in our capabilities, we are seeing meaningful improvement in CRM and repeat customers as we continue to increase the size of our database and find effective ways to directly engage, led by both our maturing email capabilities and success with direct mailers. This has resulted in an increase of repeat orders of approximately 75% versus the same period last year. From a promotional activity perspective, we leaned heavily into Presidents Day, a typically large mattress holiday and also played on the aspect of sleep related to daylight savings, both of which were successful campaigns. Finally, for product and marketing, I'm thrilled to report on our recent announcement of our partnership with Dr. Michael Breus, as our new Chief Sleep Advisor and first advisory board member. Dr. Breus will be overseeing academic research regarding the efficacy of our products, as well as assisting in research on new product development we have underway. As Dr. Breus stated, our hyperelastic polymer is like nothing he has seen in all his years as a sleep researcher and clinician. We look forward to his help with formally demonstrating and documenting what we and our customers have known for years. Switching now to wholesale, our wholesale revenue increased 48% to $62 million, our best performance to date, and continues to evidence our ability to compete side by side with traditional players. As I mentioned earlier, the pace of wholesale sales picked up as we move through the quarter with sell-through strongest in March. Our performance in existing doors, same-store sales have returned to pre-pandemic levels consistent with Q1 last year, with most growth coming from new doors added. Also encouraging is that newer accounts such as love and furniture have been meeting expectations and fleet country and Canada is starting to reopen with only 40% of locations closed as of this month. In addition to our strong brand and product momentum, our wholesale performance also benefited from some external factors. Specifically, store traffic has continued to improve as more of the U.S. gets vaccinated shifting a portion of the volume online during the pandemic back to physical retail. More stores are open compared with recent quarters, especially in Canada, and similar to DTC we have seen spikes in wholesale sell-through correlated with government stimulus checks. And as of mid-March, we are starting to see easier comparisons due to store closures last year. The strong momentum in wholesale has carried over into the second quarter so far. In Q2, we are seeing higher sell-through at existing doors and anticipate that trend going forward as we lean into merchandising and advertising strategies, and have therefore adjusted the number of new doors we plan to add in 2021. We previously expected to add over 1500 doors in 2021. However, by refocusing our resources on maximizing existing door productivity first, we now expect to open between 800 to 900 total doors in 2021, which both achieves our stated net revenue goals and creates even more opportunity for the future. Moving on to production. As I stated last quarter, we anticipate 2021 being our first year where we deliberately build access manufacturing capacity, and we are well underway in this regard. Purple South in McDonough, Georgia is in production making Purple Grid, assembling mattresses as well as making both seat cushions and pillows. Max 8, the first machine at Purple South has been in full production mode since February. In May, we brought Max 9 online and Max 10 and Max 11 are on schedule and will follow later this year. These four machines are expected to increase our mattress output by over 65% by the end of 2021, which will further expand as we bring out Max 12 and 13 next year. And with our current capacity, we are already producing record levels of mattresses in April. We are also completing our work on our entirely new next-generation Max machine, which is already able to make Purple Grid in limited capacity and which we anticipate coming online in Purple South later this year as well. We are very pleased with the start to our mattress, pillow and seat cushion manufacturing assembly and fulfillment activities in Georgia. In order to provide us with greater flexibility around our future plans for this location, which could include additional production for a fast growing pillow and seat cushion business potential space for additional mattress Max machines and regional expansion of our customer care operations, we recently took the opportunity to amend our lease and increase the size of the facility by an additional approximately 300,000 square feet. This expansion will allow us to take advantage of economies of scale as we increase our presence on the East Coast, which along with our facilities in Utah provide us with a great foundation to meet the growing demand for our brand and products, drive efficiencies in our cost structure, and better serve our consumers and wholesale customers. We also continue to invest in quality and operational improvements in all of our Max machines and assembly lines and have recently introduced significant advancements in semi-autonomous raw material feeds, mattress assembly and fulfillment. These efforts continue to lower labor costs per unit and increase our overall capacity. I'll now turn it over to Craig, who will review the financials and our outlook in more detail.

Thanks, Joe. As Joe outlined, 2021 is off to a strong start from both a revenue and adjusted profitability standpoint. For the three months ended March 31, 2021, net revenue was $186.4 million, up 52.3% compared to $122.4 million in the prior year period. The revenue increase was driven by strong demand for our entire product portfolio across all channels. For the quarter, DTC channel net revenue increased 54.8% year-over-year, and wholesale channel net revenue grew 47.7%. Gross profit dollars were $87.5 million during the first quarter of 2021 compared to $53.2 million during the same period in 2020 with gross margin at 46.9% versus 43.5% in the first quarter of 2020. This gross margin increase of 340 basis points year-over-year can be attributed primarily to channel mix shift towards DTC and fixed costs leverage on higher revenue and production volume. DTC net revenue comprised approximately 67% of net revenue for the quarter, compared with approximately 66% in the same quarter last year. Operating expenses were 37.9% of net revenue in the first quarter of 2021 versus 37.3% in the prior year period. The 60 basis point increase was driven primarily by additional administrative costs to support continued accelerated growth, partially offset by efficiencies in marketing and selling costs. Marketing and Sales expense as a percentage of net revenue decreased to 29.2% compared with 30% last year, due to leverage on higher net revenue, and more efficient marketing spend partially offset by additional marketing spend to increase brand awareness and the addition of company-owned showrooms. For the first quarter, we reported operating income of $16.9 million, compared to $7.5 million in the first quarter of 2020, an increase of 125.3%. Net income for the quarter was $20.9 million compared to net income of $28 million in the year ago period. As previously disclosed, we recently determined our outstanding warrants should be accounted for as liabilities, and recorded at fair value on the date of the transaction and subsequently remeasured the fair value at each reporting date. For the three months ended March 31, 2021 and 2020, we recognize non-cash gains of $9.1 million and $21.6 million respectively, associated with the change in the fair value of warrant liabilities. Excluding the impact of a company's tax receivable agreement and the change in the fair value of the warrant liability items, adjusted net income was $12 million or $0.17 per diluted share based on an adjusted weighted average diluted share count of $68.6 million compared to adjusted net income of $4.6 million or $0.08 per diluted share based on an adjusted weighted average diluted share count of $58.3 million. Adjusted net income has been adjusted to reflect an estimated effective income tax rate of 26.4% for the current year period and 25.4% for the comparable prior year period. EBITDA for the quarter was $27.8 million compared to $30.8 million in the first quarter of 2020. Adjusted EBITDA, which excludes certain non-cash and other items that we do not consider in the evaluation of our ongoing performance, as detailed in today's earnings release was $22.8 million compared to $10.6 million in the same quarter last year, an increase of 115%. Moving to our balance sheet, as of March 31, 2021, the company had cash and cash equivalents of $103.8 million, compared to $123 million at December 31, 2020. The decrease was driven primarily by capital expenditures of $12.3 million primarily related to manufacturing capacity expansion, showroom expansion, and net cash used in operating activities of $9.4 million. Net inventories totaled $63.3 million at March 31, 2021, compared with $65.7 million at December 31, 2020. Turning to our guidance, based on first quarter results, we are raising our 2021 outlook. We now expect full year 2021 net revenue to be between $860 million and $900 million, up from its previous range of $840 million to $880 million. The new range represents an increase of 33% to 39% over 2020 results. Considering our first quarter results, adjusted EBITDA is now expected to be between $95 million and $105 million, up from his previous range of $90 million to $100 million. This includes consideration for recent trends indicating an even greater channel mix shift toward wholesale in the second quarter, which could put additional pressure on current margin. In the second quarter of 2021, we expect net revenue to be between $200 million to $210 million and adjusted EBITDA between $21 million and $25 million. We continue to expect capital expenditures for 2021 to be in the range of $45 million to $50 million, consisting primarily of approximately $20 million for the continued build-out of the Georgia manufacturing facility, and $19 million related to the acceleration of showroom expansion, as well as expansion of wholesale displays and additional equipment for production and innovation facilities. I'll now turn it back to Joe for his closing comments.

Thanks, Craig. As you can hear, we remain very optimistic about 2021. I previously stated that this would be an investment year, and I'm very pleased with the significant progress we've made and anticipate continued investment in building out the team, investment in manufacturing and supply chain capacity, investment in the e-commerce platform, investment in contact center capabilities, investment in showroom expansion, and investment in innovation with not only a focus on product innovation, but renewed focus on manufacturing and materials innovations as well. It's worth reminding that the overwhelming majority of our revenue comes from manufacturing equipment of our own design using materials of our own invention. We are very excited about what all of that will bring over the next few years. As to the balance of 2021 as Craig stated, we have raised our full-year guidance reflecting the over-performance in Q1. We have learned to adapt to a seemingly endless run of unpredictable events and have continual confidence in our team's ability to successfully react and where possible arbitrage opportunity. With that in mind, we remain confident in the balance of the year as originally planned. The one change we see possible would be mix shift from DTC to wholesale if we find additional wholesale opportunities that are growing capacity can support and which could create gross margin pressure. We would still view this positively toward our long-term strategy of taking share, which has significant long-term benefits, and long term is what gets us most excited with our many anticipated innovative premium product expansions, geographic and channel expansions and strengthening brand, all of which remain at the core of our growth strategy. In support of this, we anticipate hosting a virtual investor day by the end of June to discuss our multi-year strategy and operating goals. At this time, we will open the call up to questions.

Our first question is from Atul Maheswari with UBS. Please proceed with your question.

Good morning. Thanks a lot for taking my question. You did not call out supply chain and form issues as impacting you in the first quarter. So A, was that an issue at all? And do you leave some sales on the table because of those issues? And if it wasn't an issue, how were you able to sidestep some of those pressure points that others in the industry called out?

Hi, thanks for the question. No one in the industry has been completely immune from supply chain challenges. One advantage we have is that our dependence on foam is less than many other manufacturers, as the majority of our best-selling mattresses have coil-based cores topped with our Purple Grid, which contains no foam. This design reduces our dependency on foam, which has been beneficial. We have been working with multiple suppliers and heavily focusing on a dual or multi-source strategy to supplement our traditional suppliers. It has been a close situation, but we have managed to stay just slightly above our needs.

Got it? That's helpful. And then as my follow-up on your expectation now of adding only 800 to 900 wholesale doors versus 1500 plus earlier, does that add more risk to your guidance, given your reliance on a smaller number of doors to fulfill your revenue expectations? So what is the thought process behind it? I'm assuming the contribution margin on these stores is going to be higher, but I'd love to get your thoughts on it? Thank you.

Yes, it's. So we said this last quarter as well. There's nothing magical in our minds on a specific number of stores. Really, it's about hitting the revenue goals that we anticipate around wholesale and in meeting that consumer demand. The most efficient opportunity we have is to sell everything we can in the doors we have. And we've been recently emboldened by our ability to increase same-store sales and see growth in the doors we have, which also then increases the value of every door and every future door that we would go into. So really, it's just a matter of with the resources we have, maximizing what we can get out of our existing stores first, and then augmenting that with growth and newer stores; it's recognizing it's more expensive to open additional doors, and there's a ramp, and you know that there's more of a delay in getting the full value and opening new doors, which is just the nature of going into anything new. So it's going to be a balanced mix of both. It's just we had started the year with a preconceived notion of what every individual door could contribute. And then you build out from there, we're discovering we actually do have more opportunity in the doors we're in. And that's very exciting.

Got it? And if I can squeeze in one last one, on the gross margin. I know you call out DTC mix as a tailwind. But really direct-to-consumer was largely in line with the first quarter of last year, and then you probably also had some costs associated with the new Atlanta facility. So maybe can you provide some more details on what drove the gross margin expansion in the first quarter? And how much of that is sustainable versus one time? Thank you.

Sure, Craig, you want to take that?

Yes, there were a couple of factors. We actually when we compare it to the prior year, some of our freight costs were actually improved as a percentage of revenue. And the fact that we exceeded our expectations on revenue, because of the additional volume, we were able to leverage a lot of our fixed costs. So that's primarily what drove up our margins.

And our next question is from Keith Hughes with Truist. Please proceed with your question.

Thank you. Did you give us any sort of feel, in terms of growth differences between price points in the quarter? Was it shifted more to the higher and lower end of your offering?

Sure, you don’t have the mix shift that we've had. Yes, so we are increasing. And this has been a multi-quarter trend, really a multi-year trend to go up market. So more and more of our overall share is our hybrids. And we're continuing to grow especially with our hybrid premieres. So, yes, we're becoming both less of a foam core mattress company on the mattress side, and we continue to lean upward.

Regarding the earlier discussion about the lower numbers this year, is that due to some customers you expected to acquire but didn't, or is it because of slower offerings with fewer new customers opening doors?

Yes, again, customer here, I assume you mean is wholesale partners versus end customers, as we're not seeing any waning of demand whatsoever. So there's nothing versus slowing here. It's really just a shift in focus. We have a finite number of resources, and it's a matter of where we invest our energies. So there is still an enormous amount of demand for our product out there, there's still an enormous amount of demand from the retailers that are out there. It's just spinning up a large retail arrangement takes many, many months, and a lot of work and typically involves piloting in a few stores, proving it out, getting the training done, and then ramping up as we prove our, we're very big believers in sort of earning our key proving our ability to execute on the floor, which we always do. So we're not slowing that down at all. It's just again, we're recognizing we were leaving money on the table that we can go after now in the doors we were in. And we are investing there first, as it's the most efficient way for us to expand our wholesale revenue. And again, as I said in the prior questions, it just increases the overall value of every individual door, which is a great place to be.

Okay, thank you.

And our next question is from Matt Koranda with Roth Capital Partners. Please proceed with your question.

Hey, guys, thanks. Just on the DTC side in the quarter. And going forward, I just wanted to see if you could maybe discuss a little bit more about your own showroom contribution to revenue in the DTC channel this quarter. And wanted to get a sense for how you see that playing out as you add doors over the rest of the year. Remind us again, I think I caught in the commentary still about 25 doors expected to be added to the cadence of that will be helpful as well for the rest of the year.

Yes, so I mean, we're at about 11 doors right now. And as we said in the prepared remarks, the new design and the newer doors are outpacing the original doors, both in terms of their trend, as well as the their sort of ramp speed, how quickly they become fully productive. So, we're increasingly emboldened with, with the success of our showrooms and our ability to execute on growth there. Given the number of doors, we are anticipating opening, balancing for the year, it's obviously going to be a pace that's picking up. I mean, we're going to be likely to call it within a month or two, we'll be opening roughly a door a week, just to hit those numbers by the end of the year. And our pipeline on leases signed or leases nearly ready to go and locations we're looking at, are fully on track with meeting those goals. So we feel very, very good about that. Now, all in, it's still a relatively small piece, a single digit percentages of overall DTC, which just given the store accounts, it's going to be a little while, a few quarters before it starts becoming any meaningful amount. But it is contributing and growing. And I also we don't, it tends to get forgotten in this. But in addition to our showroom doors, and DTC, we've also been continuing to invest substantially in our contact center. We are still believers of called human-assisted selling, which you obviously get in a showroom setting where you can directly engage with our employees. But our ability to do that virtually through phone and chat continues to be one of the highest growth engines in this business. And is really going to be the second channel behind DTC way ahead of showrooms in our ability to grow and again it's continuing to be our fastest growing channel.

Great, that's helpful, Joe. And then just on the gross margins, it seems like embedded in your outlook, we may expect gross margins have sort of peaked in Q1. But it looks like seasonally if we look at the historical patterns, Q1 is relatively lower than the rest of the quarters. It sounds like you're alluding to just the mix shift is the main explanatory variable there in terms of why we’re probably not going to see increased gross margins for the remainder of the year. But maybe just wanted to see if you could discuss that interplay a little bit, Craig, that'd be helpful.

Yes, I would say that it's you're right. That is what we were trying to convey is that, as we continue to grow the wholesale side of the business, there will be pressure on margin, and we have seen the trend of okay, sales continuing to improve in the first quarter typically is one of the lowest margin quarters for the year. So what you're saying is true. And that is the turn that we're seeing.

I just, I want to be clear that we are, our positioning that we have a lot of opportunity for gross margin expansion remains. I mentioned in the prepared remarks our significant investment in operational improvements that were both driving more volume out of the equipment, we have reducing labor costs per unit, reducing waste. I mean, we have significant investments we continue to make and our operational efficiencies. I would say, we're not even mid-innings there. We're still in early innings there. So as you said, certainly mix shift is a very big contributor to overall margin as wholesale margins are dramatically lower than our own channels. There's also the overhead of the investment. I mean, we've taken on 300,000 square feet more in outside Atlanta, which we're continuing to build out. So it's an investment year, but I just I want to be clear that our opportunity to expand margins is it's still very real. And under all of this investment, we're seeing those benefits.

And our next question is from Bobby Griffin with Raymond James. Please proceed with your question.

Good morning, buddy, thank you for taking my questions. Craig, Joe, I just wanted to maybe touch briefly on raw materials and pricing, and what you guys are kind of doing on the pricing side and what's embedded for pricing through the rest of this year 2021.

Yes, hey Bobby. So raw materials, as with everyone in the industry, we are seeing some inflation and pricing, which we're certainly hoping is peaking out here. And we're finding ways also to, through our sourcing strategy, be as efficient as we can in our cost of goods. We did just raise prices a couple of weeks ago. And as we've gone through this in prior quarters, recall that because of our wholesale contracts, it can take 30 to 60 days before we see the full benefit of those price changes flow through. But we did raise prices. Again, we believe this is the fourth time we've done this now, successfully so far early data shows that it's yielding the results we anticipated. So we'll continue to look at it if I mean, we clearly have some opportunity to raise prices. We've talked about, we're going to continue to offer models that allow us to have higher price points intrinsically as the year progresses. But I'd say it's fairly straightforward. Craig, anything you'd like to add?

Yes, I was going to say, there because of the product, because of the raw materials, we're using a lot of products that we buy from vendors. We're trying to find other vendors where we can potentially manage those costs a little better. Just expand those supplier base as well.

Okay, I appreciate. And Joe, I also want to circle back on just kind of the better productivity you're seeing inside wholesale on a per dollar basis. I mean, I think the slowing down the door growth is actually a meaningful positive when you kind of dive into what it's implying. You're getting now on your same-store doors, so can you maybe touch on what you're hearing from retailers of why you're getting that acceleration, better marketing any of the things you're doing to kind of push there? Is it a fact that you guys just had better supply because you weren't relying on foam? Anything there to help us understand what's driving this good new productivity or better productivity inside your same-stores? Because that's a very positive long-term trend here?

Thank you for highlighting that point. We're currently embracing a new trend and actively working to understand it. There are several factors at play. Firstly, we've identified an opportunity for expansion. Following COVID, we have partners who may not have fully grasped the potential of our products. For instance, Raymour & Flanigan began working with us in February last year, right before the pandemic hit, and now, as things return to normal, they are reinvigorated and ready to engage. Initially, we had only two beds displayed in their store, but there’s potential to increase that to three or four, which is a positive development. A similar situation is occurring with our early collaboration with Rooms to Go, where we started with just a few beds and are now earning the chance to occupy more floor space, leading to increased sales. A portion of our strategy is ensuring we have a complete range of products available for sale. Additionally, many of our displays in various stores have been in place for several years, so we need to reinvest in showcasing our products. We’ve learned from our showroom strategy how to enhance our presentations and sales techniques. With an investment in building our Field Sales Team, we've seen improvements in how we partner with retailers and promote our products in physical stores. It all comes together to show that, as a relatively young company, we have not yet reached our full potential in the retail spaces we occupy, and we are actively exploring ways to enhance that. One other aspect to mention is our new accessory lines, particularly the Harmony Pillow, which we’ve introduced in many of our wholesale partner locations. Accessories are more than just add-ons to mattresses; they offer standalone value. This focus on unique, high-quality products presents a new opportunity for many of our wholesale partners who may have underperformed in this area. It also allows us to deepen our brand presence and engage customers more effectively in retail environments.

Thank you. That's helpful. And then I guess just one quick modeling question. The $2 million of Georgia facility production costs that was kind of called out just the EBITDA walk. Did that mostly hit gross margin or cost of goods sold? And is that a decent run rate for us to use for next couple quarters?

That is mostly in gross margin, I believe. And going forward, I wouldn't continue to use to know, because we are now up and running, facility open in the first quarter, so that will likely continue to decline.

Okay. I appreciate it. Thank you, Craig. Best of luck, guys. Thank you so much.

Thanks.

Thanks, Bobby.

And our next question is from Susan Anderson with B. Riley FBR. Please proceed with your question.

Hi. Good morning. Nice job on the quarter. I was wondering if you could talk about maybe the marketing spend. I think you mentioned that you're more efficient with it in the first quarter. Maybe if you can give some color around that was that just shifting to more digital? And then also your expectations for the rest of the year? I think first quarter you all said, its higher year-over-year.

Yes. Hi, Susan. We did achieve some leverage in marketing during Q1. As we've noted previously, there are significant opportunities to optimize our marketing efforts. Marketing expenses are rising as platforms become more costly, and competition is increasing, leading us to see a return to pre-pandemic spending levels, and in some instances, even surpassing them as discretionary spending increases. In Q1, we had the chance to optimize without facing the usual level of investment and competition. Additionally, the economic boost from stimulus funds last quarter was beneficial for us. However, with more available funds, we may find ourselves working less rigorously to attract those customers. Our team is growing, and we are continually looking for ways to expand our market and leverage our position. I've frequently highlighted our ongoing investment in customer lifetime value and CRM, which helps reduce our acquisition costs per transaction. Nonetheless, the environment is becoming more competitive and costly, presenting challenges we will need to navigate going forward.

Got it. Okay. That's helpful. And then I was wondering if you could talk about the performance of the non-mattress products versus mattresses? And then also any new products you have rolling out for the rest of the year?

Non-mattress products are continuing to outperform mattresses, which is fantastic. I want to emphasize this because it's true. This success isn't solely due to our brand name; these are exceptional products that hold their own merit. We could maintain a robust business solely by selling non-mattress items. We are learning more effective ways to market and sell these outstanding products. Additionally, there are significant opportunities for line extensions and new product launches in this category, more so than with our mattress line. The potential channels for selling these non-mattress products are much broader than those available for mattresses. For instance, we are expanding our seat cushions into various locations where consumers shop, and truck stops have quickly become one of our top retail spots for these products. It's exciting to see these opportunities develop. As for new offerings, we have hinted at some exciting products in the works that demonstrate significant advancements, and they will be ready when the time is right. We expect to launch some of these by year-end, with many more to follow in the coming years. Great. That sounds great. Thanks so much. Good luck, the rest of the year. Thank you.

And our next question is from Brian Nagel with Oppenheimer. Please proceed with your question.

Hi. Good morning. First off…

Good morning, Brian.

It's a nice start to the year. My first question is for Craig and Joe regarding the stimulus. You both talked about the benefits of the stimulus in your comments. If I remember correctly, when the pandemic stimulus started last year, you mentioned not seeing a direct benefit to your business. Has that changed now? Have you seen a benefit from the stimulus? Additionally, how should we view the sustainability of that benefit? Now that we're halfway through the second quarter, the guidance you provided suggests strong trends will continue. How much of this is driven by stimulus, if at all, and how long do you think this will last?

Yes, you're remembering correctly some of our discussions from mid-last year. It was really about understanding the difference between correlation and causation. We observed a strong correlation, but when we surveyed our customers directly about whether stimulus influenced their purchasing decisions, the answer was a clear no. However, the correlation remained strong. It has been challenging for us to establish definite causation. Still, we consistently see a tight connection where any sudden increase in discretionary spending leads to predictable increases in our results. At some point, we just acknowledge the correlation and recognize that the flow-through occurs. Regarding our annual operating plan, we didn't factor in expectations for stimulus, which is partly why we're noting some benefit. I believe we executed very well in Q1 and have shown an ability to capitalize on these moments to capture customer interest. We consider that overperformance as a positive and remain optimistic about our aggressive plan for the remainder of the year.

Got it. That's really helpful. And then the second question, or the follow-up question I had just with regards to new products. I know we talked about the past. But any update there with the new, particularly the higher-end type products you'd plan to launch?

Yes. Again, we don't spend a lot of time talking about unreleased product, as you know, I've been consistent on that. We had said we were going to launch some significant addition to our line by the end of the year. We still believe that is in the realm of possibility. As with any significant endeavor on the innovation side, you learn as you go. These are these are multi-year initiatives that are about invention and discovery. And we're learning a lot. And as I said, we're very emboldened with how far we've come and what we've learned. At this point, again, I do anticipate we'll be able to launch more premium product that represents the outcome of significant investment of ours by the end of the year. Beyond that, we have not invested at this time.

Great, I appreciate it. Rest again. Thank you.

Sure. Thank you.

And our next question is from Brad Thomas with KeyBanc Capital Markets. Please proceed with your question.

Hi, good morning. Nice start to the year here. I had a couple follow-ups on gross margin, if I could. The results really impressive here. Understanding that channel has been a really important factor in how gross margin has played out in recent quarters. I guess putting that aside, can you talk about some of the underlying puts and takes and how we should think about those going forward?

Yes. Are you referring to the puts and takes as a result of channel?

I'm saying if we ignore channel and we just think about manufacturing costs, price, things like that. How to think about puts and takes on gross margin?

Yes. So, some of the puts and takes, we've already talked about the raw materials when it comes to foam and coil and the price differences we've been seeing recently. That's one piece. Another is freight out. With as much traffic as there is in freight, that can vary, sometimes widely. Others are, as we continue to build out Atlanta and increase the production there, we're going to start getting more leverage on the fixed costs in that facility. Grantsville, as well as we continue to improve manufacturing process and gain efficiencies out of that, those are certainly tailwinds.

Okay. Alright. That's helpful, Craig. And just thinking about, again, I know that in 2Q you're up against much tougher gross margin comparison with what's happened to DTC. But on a sequential basis, it seems like maybe the quarter could be sort of similar to what you just saw in 1Q from a mix standpoint. Your revenue guidance obviously points to even more revenues than what you just did in 1Q. So how should we think about how that affects gross margin sequentially? I mean, does it need to step down a lot from where it just was? Or can it be in the range of where you just posted from 1Q?

I understand you want to set aside the channel mix. What we have demonstrated over the past few years is our ability to quickly expand wholesale, which is much more flexible than our ability to grow direct-to-consumer (DTC) sales abruptly. DTC growth typically follows a curve: you invest, the flywheel starts turning, and growth occurs. Before the pandemic, and obviously during it, we experienced an unexpected surge in DTC sales that happened almost overnight, which is not the norm. Historically, we would increase our capacity and immediately allocate that additional capacity to wholesale as DTC sales gradually ramped up. By the time DTC was catching up, we would be adding even more capacity, and this process would create a back and forth that took advantage of significant wholesale expansion while DTC growth followed a more traditional curve. I believe we will return to that method. John Legg and his team have been tirelessly working to build our capacity, and we're pleased with our progress. In addition to expanding our grid and iron capabilities with more Max Machines and injection molding machines, the efficiency improvements we are achieving are impressive. We are investing heavily in semi-automation and streamlining processes, which includes managing raw material costs by purchasing in larger bulk, resulting in less human intervention, greater consistency, and reduced waste. These advancements are enhancing our product quality and yield. With this increased capacity, we have the opportunity to focus more on wholesale, which we can accelerate quickly. If we can achieve substantial growth in wholesale—an area where we see increasing opportunities—it could positively impact our gross margins in the short term. We have to balance our short-term and long-term strategies while ensuring we maintain a consistent overall ratio over time, but we could experience significant fluctuations in any given quarter.

Got you. That's really helpful context. Joe. Thank you. If I could add one more follow-up just around that wholesale opportunity that seems so exciting, and seems like you're seeing some really encouraging data points from. When you look across your partner base and look at what the offering is, the number of beds they have per store, how they sell the accessories or adjustable bases that they may be utilizing. How far along are you in identifying sort of best practices? And can you talk about the opportunity to speak more with those retail partners until and continue to point them towards how to maximize their Purple volume?

Yes. We've come a long way since our early days when we struggled as partners to our retail collaborators. At that time, we were unsure of ourselves and what we needed to know. Since then, we've learned significantly and have improved our role as a supplier. We're now competing with well-established institutional players who have been in the game for decades, and they are starting to take notice of us. As a result, we're facing more direct competition. We have enhanced our team by bringing on experienced leaders from the industry to help us navigate contracts and field operations. Our team is still quite small but filled with talented individuals. I see a lot of potential ahead of us, and I believe our learning and optimization journey is far from over.

And our next question is from Jeremy Hamblin with Craig-Hallum. Please proceed with your question.

Thanks. And I'll add my congratulations on the strong execution results. I want to come back to wholesale doors for a second. I might have missed this. But I think you said, you ended last year at a little over 2200 wholesale doors. How many did you add in Q1? Roughly, how many do you think you might add in Q2? And then, kind of as a follow-up to that. The limiting factor on 800 to 900 wholesale doors added versus 1400, 1500 that you might have expected earlier this year? Is that capacity constraint or some other reason why you wouldn't add more doors now as the brand is growing?

The numbers are inconsistent largely due to the situation at Sleep Country, Canada. At the end of last year, around 275 to 280 locations were operational, but most were closed by year-end due to the most recent COVID surges in Canada, particularly in Ontario, which remains largely shut down. In the first quarter, about 60% of those locations were closed, but now that figure has improved to around 40%. Despite adding locations, we haven't seen consistent performance across our doors, many of which were particularly impacted by the closures at Sleep Country. Last quarter, we added fewer than 50 locations, which is a modest increase. As some of the closed doors start to reopen, we expect to see more coming back online. There's been no capacity constraint; rather, retailers are focusing on regaining business as it begins to recover. Opening these doors now, particularly with deals like those with Sleep Country, involves extensive negotiations and training for potentially hundreds of locations. This is in line with what we had previously guided. We anticipated a slower start to openings in Q1, with a ramp-up expected in Q2 and a significant increase in Q3, aligning with our business cycles and nothing more.

So, embedded within that response, then does that mean that 2022 could look like that's also a year with fairly significant door growth, given that, clearly the consumer is demanding Purple products. And I know there's in terms of inventory turns, it takes some time to gain slots, especially for the first time. But then to add slots, which sounds like what's happening now? Is this something where you could see 800 or 900 more doors added next year simply because the consumer is demanding it?

Yes, the last point I made is the most crucial. We need to address consumer demand and tap into a market that is mainly brick-and-mortar and offline. We see ourselves primarily as manufacturers of innovative, premium mattresses rather than just an online or direct-to-consumer player. Our goal is to reach as many consumers as possible. We don't believe deep penetration into wholesale is necessary because we can sell directly through our online platform, our own showrooms, and our contact center. We're aiming for a 70/30 split between owned retail and wholesale. There’s opportunity for growth, and I think the potential for hundreds more locations next year is certainly feasible. However, I believe we will eventually reach a balance, likely around 2500 to 3000 locations, where we can satisfy consumer demand, regardless of how they choose to purchase, while maintaining strong relationships with our customers. Okay. And then just as a follow-up on the gross margins. So mix was 34% in Q1 last year with 33% wholesale this year. I think Craig called out a couple of million dollars in startup investment costs that had dragged on your gross margins. And yet you still delivered 47% gross margin. It would seem like that's almost like your baseline on a go-forward basis, understanding - but is there something that we're missing in terms of like, what's the maximum percent of revenues that you could see wholesale accounting for in any of the quarters? Like, you have headquarters where it was above 40%. But for the most part, it sounds like you're calling out 70/30 split, maybe it's 65/35, some quarters. Will the mix get much higher than where it is now? Well, I think we're going to leverage all the capacity we have and lean as hard as we can into whatever we can grow. I'd a flashback to the days before we ever knew the pandemic was going to happen. Our original plan that we were guiding to call it nearly five quarters ago now into 2020, actually was built around some substantial wholesale expansion, where we were talking about wholesale getting back into the mid to high 40% of total net revenue. As the capacity we were building out, especially with our new facility in Purple South and in Georgia, that was the fastest path to growth, the fastest path to consumer penetration, as again, DTC build up. It turned out, the opposite happened, wholesale fell down as everything closed down last year. And we were presented with unexpected and unprecedented opportunity to substantially grow DTC. But I think we're getting back into the world we were in pre-pandemic, where there's a lot of addressable markets. There's a lot of consumer demand that we can go after efficiently and quickly through wholesale that we anticipate going after. And that could mean cannot over the long haul, but on a quarter-by-quarter basis, it is possible that we could find ourselves in the 40s, again, on percentage of total net revenue, depending on the timing, and then how quickly the ramp goes with some of the wholesale expansion we're anticipating.

And our next question is from Seth Basham with Wedbush Securities. Please proceed with your question.

Thanks a lot, and Good morning. My question is around the performance within the mattress category at existing doors of your largest and oldest wholesale customers. Could you give us some color on how you're performing there, if you're still gaining share?

Yes, good morning. It's difficult for us to calculate our market share since some of our biggest and oldest customers are private companies, and we don't always have complete data. However, I can say that we are still experiencing growth, and recently, it has been significant. That's encouraging. It's challenging to determine if our growth is faster or slower compared to theirs, but I believe we are likely growing at a similar rate. Therefore, I'm not certain we are currently gaining market share. Nonetheless, I do think we are contributing to the overall growth of the business. So, yes, I believe it's healthy, and we continue to see opportunities for expansion, with plans to keep expanding.

Got it. And if you add in accessories, including pillows to the product set, do you think that you're more meaningfully growing share within your largest and oldest customers?

Yes, some of our earliest customers were very focused on mattresses rather than accessories, seeing that as an opportunity for themselves. Our early success, especially with the Harmony Pillow, has been very positive. I believe that provides us with the chance to increase our market share, and our initial performance has surpassed everyone's expectations. While it's still early to make long-term projections, we are very pleased with our early results and see significant potential ahead. Yes. We haven't completely developed the plan for that yet. We had the chance to acquire additional space at the facility we were already using, as we mentioned last quarter; we were already in search of our next or third location. As we calculated, we discovered opportunities for economies of scale in manufacturing that we could leverage by expanding in Georgia where we are currently located. We also have other needs. Our contact center is expanding, which plays a significant role in our overall direct-to-consumer business. We're out of space in our facilities in Utah, and we're seeking options on the East Coast. This situation has opened up various benefits, as we expect to co-locate a sizable owned contact center at this facility as well. We're still in the process of developing the plan. Regarding the mix of max machines, injection molding machines, fulfillment and distribution, and contact centers, we just received a substantial amount of space that we can utilize effectively. However, at this moment, it represents more opportunity than defined outcomes.

And our last question is from Curtis Nagle with Bank of America. Please proceed with your question.

Good morning. Thank you for my question. Could we discuss productivity run rates, particularly in relation to your existing versus new stores? Joe, in the past, you mentioned that the annual revenue contribution is something over one million per store. Could we explore more about how things are currently positioned for your stores?

Yes. Our showrooms, yes, it's well north of that number. And we anticipate some significant expansion in the four-wall productivity. As I said, in the prepared remarks, we're very pleased with the performance. The newer stores are outperforming the original stores and the original stores are back to pre-pandemic levels, actually higher than pre-pandemic levels. They're modest capital investment to build out, call it, mid-six figures. And we anticipate a true ROIC and maybe, call it a year or a little longer. So I mean, really efficient, really good economics. Pleased with the performance of those in well north of a million per stores, as you said, and we see a lot of growth potential there.

Got it. And just to clarify, I think you just said that return on invested capital is roughly a year? If that's the case, that is pretty good.

Yes. You're a little longer depending on the door. But yes, it's call it, give or take closer to the year mark than anything else. Perfect. Awesome. Alright. Well, good luck in the rest of the year. And thanks very much. Thank you. Great. Thank you so much. We are off to a terrific start this year. We are executing as planned and intend to continue to invest in our growth and capabilities throughout the balance of the year. Looking forward, we've remained very optimistic both near-term and even more so as we look out over the next few years. Our investments in new products and capabilities continue to go very well. And we look forward to sharing more of this strategy soon. I want to personally thank our nearly 1700 employees for their relentless commitment and unwavering belief in our mission and goals. To all of our customers, employees, and partners, stay healthy, be safe, and sleep well.

This concludes today's conference. And you may disconnect your line at this time. Thank you for your participation.