Purple Innovation, Inc. Q4 FY2023 Earnings Call

Good afternoon, ladies and gentlemen. Welcome to Purple Innovation's Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. It is now my pleasure to introduce your host, Brendon Frey of ICR. Please go ahead.

Thank you for joining Purple Innovation's fourth quarter 2023 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 Innovation'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 fourth quarter 2023 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 reference to non-GAAP financial measures such as EBITDA, adjusted EBITDA, adjusted gross margin, 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 Rob DeMartini, Purple Innovation's Chief Executive Officer. Rob?

Thank you, Brendon, and good afternoon, everyone. With me on today's call is CFO, Todd Vogensen. After our prepared remarks, we'll open the call up to your questions. While it has taken us a few quarters longer than we originally anticipated, we're extremely encouraged by the response to our new product lines from both consumers and our wholesale partners. Encouragingly, the green shoots we saw in the fourth quarter have continued into 2024. Our fourth quarter performance represents an encouraging finish to what was a transformative year at Purple Innovation. Sales increased year-over-year for the first time in eight quarters, in line with our guidance and despite lower advertising spend and industry seasonality, sales also increased sequentially from quarter three. The fourth quarter marked the continuation of positive trends in each of our distribution channels, in total and relative to recent industry growth rates. This was the third consecutive quarter that wholesale, showrooms, and e-commerce all registered sequential growth. Supported by the outperformance over the Black Friday/Cyber Monday holiday weekend, showroom sales for the quarter were up mid-teens year-over-year with more than 60% of locations comping positive, and e-commerce sales were slightly positive compared with Q4 last year as this channel further stabilized after 10 quarters of year-over-year declines, and our advertising initiatives gained traction. Wholesale also performed well over the holiday period with the channel nearly flat to Q4 last year. Our improving top line performance, combined with enhancements we've made to our manufacturing, supply chain, and product engineering drove a meaningful sequential improvement in our bottom line, including positive adjusted EBITDA for the month of December. As I said, 2023 was a transformative year for the company. We embarked on our path to premium sleep strategy aimed at establishing Purple as a formidable challenger brand in the premium sleep category. And despite sluggish industry trends, we made significant progress against this goal, capturing market share and building momentum for 2024. To recap the year, we executed the largest, most innovative new product launch in company history. We introduced nine new mattress models across our new three-tiered offering, including our premier and luxury collections, Restore and Rejuvenate, with Rejuvenate elevating our price points into the $5,500 to $7,500 range. We simultaneously began the process of repositioning Purple as a premium brand with the launch of a new campaign 'Sleep Better, Live Purple' which communicates how our proprietary GelFlex Grid delivers deep, uninterrupted sleep. Following a period of reduced advertising investments ahead of the transition, we elevated our spending in the second half to support the launch and enhance consumer awareness and interest in the differentiated benefits of the Purple brand. At the onset of 2023, we expected the mid-May launch of our new products and new marketing would coincide with an uptick in industry demand after nearly 18 months of double-digit declines. While industry unit growth has yet to rebound, we made steady progress as the year unfolded as evidenced by the sequential quarterly improvements in our top and bottom line results. Our investments in product innovation, brand building, and marketing, including enhanced point-of-sale materials, have paid dividends across our distribution channels. With respect to wholesale, we increased our total number of floor slots by approximately 10% in 2023. More importantly, the collaborative approach we've taken with our retail partners to grow both of our businesses through higher-priced, higher-margin products has forged stronger relationships that we believe will lead to door productivity gains going forward. We remain grateful for the trust of our retail partners and the growing opportunities we have together. In our showrooms where we control the presentation and selling process, the launch had the most immediate impact. Our sales teams have done a good job upselling consumers into our Restore and Rejuvenate mattresses, driving an increase in average mattress selling price, post-launch. These improving trends helped offset the softer industry-wide traffic and returned the majority of our comp stores to positive territory in the fourth quarter. With our price points moving higher and industry transactions shifting more towards brick-and-mortar, we're encouraged with the stabilization of our e-commerce channel showed in the first half of 2023 and the quarter-over-quarter growth it achieved in the second half. Our new product and marketing strategies had a positive impact on purple.com site traffic and more recently, we've seen an uptick in conversion, thanks to some of the adjustments we've made to the user experience. Below the revenue line, we also made important progress to ensure the company is positioned to drive profitable growth. Our Chief Operating Officer, Eric Haynor, and his team have done a good job optimizing our manufacturing facilities and gaining efficiencies throughout our supply chain. This has allowed us to stabilize adjusted gross margins around 37% on current volumes, providing a clear path to 40% gross margins as we expand our top line and benefit further from the operations team's continued work. Meanwhile, our Chief Marketing Officer, Keira Krausz, and her team evolved our marketing mix throughout 2023 to more efficiently reach and convert consumers across all channels. Based on recent learnings that are being applied to our forward plan, we expect to leverage marketing and advertising in 2024 by being more productive with our spend. As you recall, Eric and Keira both joined Purple in 2022, along with Chief Innovation Officer, Jeff Hutchings. In 2023, we rounded out our leadership team with three important hires, adding Scott Kerby as our Chief Owned Retail Officer; Tricia McDermott as Chief Legal Officer; and Todd as our Chief Financial Officer. I'm extremely pleased with the experience and the caliber of the management team we've assembled at Purple and believe the work they and our entire organization have done has built the foundation for profitable growth in 2024 and beyond. And we have a clear plan in place centered on five key initiatives designed to ensure we're on the right path towards this overarching objective. First, we're focused on improving productivity of existing showroom and wholesale doors. While showroom expansion has been an emphasis for the last few years, in 2024 we will slow door growth and prioritize the profitability of existing showrooms through new top line and cost initiatives. One of the bigger opportunities we're focusing on is accelerating sales by leaning into third-party consumer financing to drive higher average tickets as customers both trade up and into our higher-tier offerings and bundle products like our new smart bases. We'll also rethink how we approach selling in our stores and shift to a more intentional selling environment with a focus on conversion, especially for consumers that are already in their purchase journey. From a cost perspective, we'll look to restructure current arrangements, including leases and overhead, to better align with the current level of revenue per store and enhanced channel profitability. In addition to being profitable growth vehicles on a stand-alone basis, our showrooms, especially the ones in high-traffic areas, serve as a form of advertising that's driving both traffic into our partner stores and overall demand for our mattresses. Our recent consumer research indicates that those consumers who didn't make a purchase on their first visit to one of our showrooms, approximately 25% then went on to shop at a wholesale partner store in a subsequent visit. The in-store education and the premium experience provided by our showrooms creates a high-quality, high-intent potential purchase, either directly or through one of our wholesale doors. With respect to wholesale, while we've made great strides over the past year with our partner relationships, we're aiming to create even more synergies to drive increased door productivity in 2024. We will look to leverage co-op dollars with our partners and provide more marketing support, while also conducting monthly and quarterly joint business reviews to solve for revenue growth together. Additionally, we'll look to continue our efforts around product education for retail sales associates to ensure they understand the benefits of our unique Gel Grid technology and help continue to grow enthusiasm for the Purple brand alongside our direct efforts. Our second area of focus is on improving e-commerce mattress conversion. In 2024, we will continue to test different messaging and different mediums to drive better conversion results. While our recent site improvements and shift in media strategy have sequentially improved both the quality of traffic and conversion rates, we believe there are significant opportunities to improve both the quality of traffic we are driving to our website and the conversion of that traffic into customers. Third, as we mentioned last quarter, driving gross margin improvement will also be a significant initiative in 2024. Several actions planned or already underway include select price increases on certain mattress models in some of our ancillary products, steadily increasing the mix of our higher margin, higher average selling price Premium and Luxe mattresses, reducing reliance on air freight, and several initiatives to improve our manufacturing and sourcing efficiency. Fourth, we'll look to improve marketing efficiency. In 2023, we strategically spent a larger portion of our marketing dollars on brand awareness to support the launch of the new product lineup and new brand position. With our product and new brand now in market, we will still invest behind awareness building, but we'll shift our spend towards more efficient marketing tactics as we focus on customers already in the mattress market with consideration and conversion ad spending. We'll also plan to return to our highly effective experiential and demonstrable product advertising, starting with a reintroduction of our egg drop video. And lastly, bringing new products and innovations to market remains a core focus of the company in 2024. Purple was built on innovation and intellectual property that improves our consumers' comfort and sleep. With a strong innovation engine led by Chief Innovation Officer, Jeff Hutchings, I'm pleased to share that we currently have a strong pipeline of new products that are expected to come to market over the next 12 to 24 months and several technological innovations currently in development. This continued focus on our innovation heritage not only creates excitement for the brand, but it also cements our leadership in grid-based technology and drives new margin improvements as we leverage our frequently copied, but never duplicated intellectual property in new and exciting ways. To support the initiatives I just outlined in January, we refinanced our debt and added liquidity to our balance sheet. Along with our existing cash position, we are confident this new facility provides us with the financial flexibility to execute our path to premium sleep strategy and to invest in growth. I'll now turn the call over to Todd to discuss the 2023 financials in detail as well as our outlook for 2024.

Thanks, Rob. We were pleased to end 2023 with fourth quarter results that were in line with our expectations, and we look forward to building on our momentum throughout 2024. Now jumping to our recent performance. For the three months ended December 31st, 2023, net revenue was $145.9 million, an increase of 1.1% compared to $144.3 million in the prior year period. The year-over-year increase was largely due to the growing positive response to our new product lineup, partially offset by the continued industry-wide softness for home-related goods. By channel, direct-to-consumer net revenue increased 4.3% versus the prior year period. Within DTC, e-commerce increased 0.5% as our focus on driving higher quality traffic to our website gains traction. Showroom net revenue increased 17.5% driven partially by the addition of five net new showrooms over the past 12 months, along with higher average selling prices compared to last year. The increase in DTC was partially offset by a 2.7% decrease in wholesale net revenue, while down year-over-year, our wholesale channel performance in the fourth quarter was better than the industry trends mentioned earlier, driven by growing consumer adoption of our new product line. Gross profit was $48.5 million during the fourth quarter compared to $49.9 million during the same period in 2022, with gross margin rate at 33.2% versus 34.6% last year. Gross margin in the fourth quarter of 2023 was impacted by costs associated with the launch of the new product line, including the industry standard price reductions on the sell-in of new mattress floor models to wholesale partners and incremental air freight costs associated with the purchase of materials for our new products. Note that we've completed the new product rollout in the fourth quarter with the launch of our new line at our largest customer, as a result, Q4 is the last quarter we expect these types of adjustments. Net of these costs, adjusted gross margin was 36.7% in the current year quarter. Adjusted gross margin improved by 210 basis points compared to last year due primarily to manufacturing efficiencies from higher production volumes in 2023 and increased average selling prices of the company's expanded product line. Operating expenses were $64.7 million compared to $61.9 million in the fourth quarter of 2022. The increase was largely driven by growth in advertising spend to support the launch of our new product line and the cost of five net new showrooms in 2023, partially offset by a $4.1 million decrease in G&A expense related to lapping special committee costs from 2022 and an insurance recovery on special committee costs in 2023. As a percent of revenue, operating expenses were 44.3% compared to 42.9% in the fourth quarter of 2022. As a result, adjusted net loss in the fourth quarter of 2023 was $15.8 million compared to an adjusted net loss of $8.1 million last year. Adjusted EBITDA was negative $9.8 million versus negative $0.8 million a year ago, and fourth quarter adjusted loss per share was $0.15 compared to an adjusted loss per share of $0.09 in the fourth quarter of 2022. Now to our full year results. For the 12 months ended December 31, 2023, net revenue was $510.5 million, down 10.9% compared to $573.2 million in the prior year. Overall, full year net revenue growth was negatively affected by difficult market conditions for the home-related goods category, coupled with several headwinds associated with the conversion and launch of our new product line. These headwinds included the industry standard practice of the discounted sell-in of floor models and increased discounting on legacy products. By channel, DTC net revenue declined 10.2% year-over-year, primarily due to decreased e-commerce channel demand, which was partially offset by growth in Purple showroom revenue driven by the addition of five net new showrooms in 2023, the annualization impact of adding 27 net new showrooms through 2022, as well as higher average selling prices driven by the consumers' adoption of the new higher-tiered product within the channel. Wholesale revenue declined 11.9% due to the softening industry-wide demand and the previously mentioned transition factors. Gross profit was $171.8 million in 2023 compared to $208.1 million in 2022, with gross margin rate at 33.7% versus 36.3% in 2022. The decrease in gross profit over the prior year was primarily due to the impact of the new product launch in May, including new floor models being sold to wholesale partners that reduced pricing, higher labor and freight costs, and decreased manufacturing efficiency. Excluding the product transition costs, adjusted gross margin for 2023 was 37.2%, a 90 basis point improvement over 2022, reflecting increased average selling prices of the company's expanded product line. Operating expenses were $285.5 million or 55.9% of net revenue in 2023 versus $250.8 million or 43.8% in the prior year period. The increase in operating expenses was primarily driven by showroom expansion, along with an increase in advertising spending from 12% of revenue to 14% of revenue to support the new product launch and $9 million in incremental special committee costs from earlier in the year. As a result, for the full year of 2023, adjusted net loss was $73 million compared to an adjusted net loss of $31.4 million last year. Adjusted EBITDA was negative $54.7 million versus negative $0.2 million a year ago, and adjusted loss per share was $0.70 compared to an adjusted loss per share of $0.38 in 2022. Now turning to the balance sheet. Net inventories totaled $66.9 million at December 31, 2023, compared to $73.2 million at December 31, 2022, and $72.1 million at September 30, 2023, representing decreases of 8.6% and 7.2%, respectively. At year-end, we had cash and cash equivalents of $26.9 million compared with $41.8 million at December 31, 2022. Our decrease in cash consisted of cash used in operations of $54.7 million and capital expenditures of $15.2 million, primarily related to additional manufacturing facility investments and showroom expansion, all partially offset by proceeds from the company's stock offering in February of 2023. As Rob mentioned earlier, in January 2024, we amended and restated our two primary outstanding debt facilities, an ABL credit agreement and a term loan agreement with the company's previous lenders. At the same time, we established a new upsized term loan of $61 million with approximately $22 million of incremental available capital, resulting in approximately $48 million of cash and cash equivalents subsequent to the January transaction. Turning now to our outlook for 2024, we are confident that the foundation we have built in 2023 has the company positioned for continued improvement in the year ahead. While we're encouraged by our recent progress, we recognize that the macroeconomic environment remains challenging with limited near-term visibility. Taking all this into account, we're expecting 2024 net revenue to be in the range of $540 million to $560 million, reflecting mid to high single-digit percentage increase versus 2023. We also expect negative adjusted EBITDA to be between $20 million and $10 million and capital expenditures to be $10 million to $12 million. In terms of how the year unfolds, we expect quarterly revenue and adjusted EBITDA performance to improve sequentially as we progress throughout the year, with positive adjusted EBITDA and cash flow in the second half of 2024. While we don't plan to give quarterly guidance throughout the year, since we are more than three quarters of the way through the first quarter, we are providing specific details in this instance. For the first quarter, we expect net revenue to increase by a low to mid-teens percentage to approximately $120 million to $125 million, and negative adjusted EBITDA to be approximately $15 million to $10 million. Also, you will have noticed today that we issued a press release on an agreement that we've reached with Tempur Sealy. We'd be happy to answer any questions on this press release as we go through our question-and-answer period.

We will now start the question-and-answer session. Our first question comes from Brad Thomas with KeyBanc Capital Markets. Please go ahead.

Hi. Good afternoon and thanks for taking my question. I wanted to just kick off with a follow-up on Todd, I believe your commentary about how 1Q is tracking certainly seems to be very strong if I heard you right, with revenues running up in the mid to high-teens. Can you talk a little bit more about what you've been seeing over the last few months here?

Sure. It's really been a continuation of the good momentum that we saw as we were exiting the year. So as we've gone through Q1, we are continuing to see good momentum, good progress really across all channels and expect that to result in the revenue that is up, call it, a low to mid-teens percentage as we go into Q1. As we look across the year, obviously, we're wrapping around on the launch of our new products that was in May of last year. So the compares are a little bit easier earlier in the year than as we go through the year. But with that being said, good positive start to the year for us.

That's really helpful. And then, Rob, you touched on a number of efforts to continue to drive productivity at a door level. And so I was hoping you could just highlight those a little bit more and talk about what kind of a lift you think you see when you have a door that's really had the training, the point of purchase materials, the marketing that you need to have in that marketplace? And maybe any more color around what kind of a lift you're seeing out of these new products when you really put the full effort behind it.

Thanks for the question. I'll divide my response into two sections: the wholesale side and the showroom side. In wholesale, we have three initiatives. The first focuses on the training of our customers' sales teams. Historically, we have done well with large events, but we are now prioritizing more frequent training visits to boost their confidence in selling our distinct products. Although other brands perform well in this area, it's particularly vital for us because our product is unique. The second initiative involves improving our presence on the sales floor. As I have mentioned previously, we aim to be a premium challenger in position 1B, and we have numerous initiatives aimed at enhancing the product, with early results showing promise. The third point, as I mentioned earlier, is that we are still establishing ourselves as a wholesale partner. Our customers have indicated that we can improve in several areas, particularly in how we coordinate and communicate our promotional calendar and marketing investments. Currently, I would rate us a C in this area, but I am confident we can achieve an A. On the showroom side, where we can manage the environment more effectively, the focus should be on enhancing consumer financing. We are currently lagging behind benchmarks from both furniture and mattress retailers, being 10% to 20% lower in sales related to consumer financing. The second aspect is that our showrooms were initially designed for customers to see and experience products, and we have received high ratings for this. Now, we want to achieve similar ratings for encouraging purchases, whether through our channels or elsewhere. If customers are in our channel, we aim to maximize the volume of sales, ideally with items other than mattresses. Presently, we are shipping a large number of pillows after in-store orders, but we could save costs by allowing customers to take these products home directly. We have initiatives in both wholesale and showrooms that we believe will enhance productivity.

Very helpful. Thanks so much and good luck here. Thank you.

Thanks, Brad.

Thanks a lot and good afternoon. My first question is just on the success of your advertising campaign as you've shifted a little bit to focus on bottom of the funnel and also move to the egg drop commercial. Can you give us some color on how that's done and what kind of savings do you expect to generate on advertising in 2024?

Thank you. This is an ongoing challenge. We are always striving to improve our return on advertising spend. As mentioned earlier, we invested significantly in the initial launch for awareness, and it achieved its intended purpose. Now, we are transitioning to focus more on the middle and bottom of the funnel while still driving traffic across all stages of the funnel. We are also putting in a lot of effort to master GA4, the new Google Analytics tool, which has proven to be more challenging than Google indicated, but we are making good progress. I believe we can achieve the growth Todd mentioned, with our advertising investment becoming a smaller percentage of sales. We intend to remain significant advertisers while aiming to enhance our efficiency.

Got it. Okay. Second question is just on the near-term outlook for the first quarter, good top-line growth against relative to each comparisons. Bottom line is still negative. And that's just because we're talking about absolute volumes on the top line being lower than they will be in the back half of the year.

Yes. I think there's a couple of factors in there. So Q1 is what is probably a seasonally low point for Purple for a variety of reasons. So, yes, that overall volume is lower than later in the year. And then we do or we're going to skew much heavier towards wholesale, which inherently has a lower gross margin percentage associated with it than our retail sales. So those two points put a little bit more pressure on the bottom line than what we would expect to see as we go throughout the year.

That's helpful. And then lastly, regarding the agreement with Tempur Sealy, just one point of clarification. If the FTC does not approve their deal, but it still goes through after litigation, will the agreement that you mentioned to be honored?

Yes. We expect this agreement means the FTC requires some adjustments for the deal to be finalized. This is based solely on the completion of the deal, without any conditions, terms, or timing involved. Therefore, it is a 12-month supply agreement that will commence the day the deal is completed, regardless of the deal's final structure.

Understood. Thank you very much.

Seth, the reason that's important, I'll go on to say, the reason that's important is that our existing agreement is an evergreen agreement, which this adds another 12 months of stability from any evaluation.

Understood. Thank you.

Thanks, Seth.

The next question comes from Jeremy Hamblin with Craig-Hallum Capital Group. Please go ahead.

Hi. Good afternoon and thank you for the question. I wanted to revisit the Q1 trends, which have definitely improved year-over-year, but there's been a noticeable decline compared to Q4 levels. Reflecting on this historically, the decrease seems to be a bit greater than what is typically seen and compared to your peers. I would like to understand more about what you are observing, as it seems you are encouraged by the progress. Is there any change in seasonality for Q1 related to your shift towards more wholesale business? Any insights you can provide on this would be appreciated.

I don't, Jeremy, first of all, thank you. I don't think channel mix has anything to do with the relative performance Q4 to Q3, excuse me, Q4 to Q1. I think what we heard while we were in Las Vegas is that January was kind of particularly soft. We will, I'm sure, end up reporting a positive trend year-on-year in January and February. But I think it's just the shape of the business coming out of relatively decent October, November, December and then a little bit softer in Q1. We're going to grow. And I think the guidance that Todd gave you is indicative of something that when the dust settles, I think we'll clearly show we're outperforming the market.

Got it. That's helpful. Let's discuss gross margin. It appears you've stabilized around 37% on an adjusted basis at a run rate of approximately $145 million in quarterly revenues. You recorded $140 million in Q3, and there has been a slight decline in your adjusted gross margin. I would like to understand what your quarterly revenue needs to be in order to achieve the 40% gross margin that you're aiming for. Additionally, what do you anticipate the ongoing mix of direct-to-consumer versus wholesale channels to be?

Yes, I'll take the first part of the question on what volume do we need to be at to get to that 40%. I would tell you, you're right in thinking about it that we are starting with 37% being that baseline that we're planning on growing from as we look forward into 2024. We do not necessarily need to get back to or be at the $140 million, $145 million of revenue to get up to approach that 40% range. We obviously, by the guidance that we gave, believe that we will head that direction. But we have a number of things that are underway this year that are helping out with gross margin rate. We've taken pricing increases in certain areas that Rob mentioned in his script. We also have a number of initiatives underway on the manufacturing and sourcing side to do what are some fairly fundamental improvements in the way that we source our products and the way that we manufacture our products that are going to fall to the bottom line for us. So as we look at that 40% run rate, we do view that as more something that comes with time as these initiatives gain traction than something that we need just top line to be able to leverage against.

Jeremy, on the second half of the question, I think we are aiming to and hanging around, if you will, a 60-40 split DTC. I think we are running the business internally to ensure that we can be profitable with a 50-50 split. So 60-40 is where we are and where we want to be, but I'm wanting to ensure that if our wholesale partners help us grow faster, we've got to make sure that we can be profitable without taking it away from them, which means finding efficiencies in the system and figuring out how to do business with them more efficiently, if you will.

Got it. And just following on to that. So at the high end of your FY'24 guidance range, you'd be roughly $140 million a quarter. Certainly, when taking into account the Q1 guide, you'd be at that $140 million to $145 million range per quarter on rev. So should we be interpreting that as though the gross margin rate is going to be after Q1 be approaching that kind of, let's say, roughly 40% range?

It will grow as we progress through the year because, particularly on the manufacturing and sourcing side, those initiatives are currently in progress and being implemented, but it takes some time before that impacts our cost of sales. So if you're planning it out, I would anticipate seeing steady gross margin improvement throughout the quarters as the year goes on.

And then with an exit rate around 40% or again just trying to square it up.

That is the plan, yes.

Bobby, it's more of the latter. I want to take myself out of the position of predicting the industry because that didn't go very well last year. We know that the new launch is taking solid hold right now. We're seeing share gains in the places we get market share or balance of share data. We're seeing improvements in e-comm and showrooms. So this is really us executing well and getting reasonably better than category growth. It is not assuming a category recovery of any kind. Yes, that's correct. Internally, we see it this way and I suggest everyone else does too. On an adjusted basis, we’ve maintained about 37% for the second, third, and fourth quarters, showing consistency. The fourth quarter will be the last time we disclose an adjusted gross margin, and 37% should be considered our baseline moving forward. I previously mentioned that the first quarter might face some pressure for a few reasons, including volume issues and the fact that we are still in the early stages of expanding areas like sourcing, manufacturing, and pricing, which will positively impact us. Throughout the year, I believe it's best to start with 37% as the base rate, keeping in mind that we are poised for growth opportunities beyond that.

Yes, I'll take the first part of the question on what volume do we need to be at to get to that 40%. I would tell you, you're right in thinking about it that we are starting with 37% being that baseline that we're planning on growing from as we look forward into 2024. We do not necessarily need to get back to or be at the $140 million, $145 million of revenue to get up to approach that 40% range. We obviously, by the guidance that we gave, believe that we will head that direction. But we have a number of things that are underway this year that are helping out with gross margin rate.

Thanks for taking the questions and good luck this year.

The final question comes from Michael Lasser with UBS. Please go ahead.

Hey, this is Dan Silverstein on for Michael. Just two quick questions, maybe more on the overall industry or competitive landscape. How much of a unit or sales benefit do you think Purple could see from the third round of anti-dumping duties being placed on 12 additional countries? And then secondly, thank you for the update on the Tempur/Mattress Firm agreement. Ashley Home acquired Resident Home recently, another example of M&A in the industry. Will this have an impact on the competitive landscape for Purple going forward? Thank you.

Dan, just to make sure I understand, I will take your question back. Will the Ashley/Resident tie-up impact the category? Is that the question?

Yes. Just wondering what you think it means for the competitive landscape, another second case of another vertical integration in the space.

Yes. I mean, I don't want to speak for Ashley or Todd Wanek, but it seems to me that he's got a relatively new factory they were looking to fill. Resident is, I think, more marketer than maker, and I don't mean that to imply anything other than they're a very good marketing company. And I think that marriage makes sense to me. I think it also fits the Ashley consumer quite well. I can tell you that our business with that retailer is growing nicely. And so I don't see it as changing the landscape that much. They tend to trade a little bit below us in retail price. We overlap on the bottom side of the category, not the top side. And the path to premium sleep is about becoming a premium challenger brand. So it's too early for me to say the impact, but I don't see anything that immediately jumps off as negative.

Great. Thanks. And then just the first part was on the antidumping.

Yes, I think it's beneficial for the category and the domestic industry. It doesn't negatively affect us since we don't import any mattresses. While we do import some components in certain categories, we primarily produce everything in-house or with local partners. Therefore, I believe this should be advantageous for the category in the short term. I'm not sure of the percentage of products coming from those 12 countries, so I can't comment on the extent of the impact, but it should help safeguard what is essentially a domestically produced category.

Thank you.

Thanks, Dan.

This concludes our question-and-answer session. I would like to turn the conference back over to Rob DeMartini for any closing remarks.

Yes, I'll keep it short. As we've said, as Todd and I have laid out here, we think the path to premium sleep is a winning strategy, number one. We acknowledge it took us longer than I would have liked to get it started and that created some pretty negative results in '23, but we've got the team assembled to make sure we execute this. And I want to thank our associates, our customers and the consumers that are getting great night's sleep on Purple beds. So thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.