Purple Innovation, Inc. Q2 FY2025 Earnings Call

Thank you for waiting. My name is Kate, and I will be your conference operator today. I would like to welcome everyone to Purple Innovation's Second Quarter Earnings for 2025. I will now turn the call over to Stacy Turnof from Investor Relations. Please go ahead.

Thank you for joining Purple Innovation's Second Quarter 2025 Earnings Call. A copy of our earnings press release is available on the Investor Relations section of Purple's website at www.purple.com. Before we begin, I'd like to remind you that certain statements made in this presentation are forward-looking statements. These statements reflect Purple Innovation's judgment and analysis as of today and are subject to a variety of risks and uncertainties that could cause actual results to differ materially from current expectations. You should not place undue reliance on these forward-looking statements. For more information, please refer to the risk factors outlined in our filings with the SEC. Additionally, today's presentation will reference non-GAAP financial measures such as adjusted operating expenses, adjusted EBITDA, adjusted net loss and adjusted net loss per share. A reconciliation of these measures to their most comparable GAAP measures can be found in the earnings release available on our website. With that, I'll turn the call over to Rob DeMartini, Purple Innovation's Chief Executive Officer.

Thank you, Stacy. Good afternoon, everyone, and thank you for joining us. With me on today's call is our Chief Financial Officer, Todd Vogensen. We're pleased to share our second quarter results, which exceeded our expectations and improved sequentially from the first quarter in both revenue and adjusted EBITDA. Our second quarter revenue reached $105 million, representing a 12.6% decrease from the prior year, but a slight increase compared to last quarter. Within the decline in revenue were two positive elements of note. First, demand for Rejuvenate 2.0 surpassed expectations and outpaced supply, particularly in showrooms. And second, the continued expansion of our Mattress Firm led us to ship inventory for the launch ahead of expectations. While these highlights were partially offset by weaker e-commerce results and the impact of last year's wholesale door exit, we remain encouraged by an improving demand picture and the emerging revenue growth observed this quarter. Additionally, we delivered strong profitability improvements with adjusted EBITDA increasing $1.8 million and 120 basis points versus last year. We are well on track to deliver positive adjusted EBITDA in the back half of the year with strong year-over-year revenue growth already taking shape this month. We expect acceleration in the second half to be driven by the significant rollout of new retail distribution for Mattress Firm, which is nearing completion and by the success of our Rejuvenate 2.0 launch, which is already increasing distribution and driving higher average selling prices. These initiatives are meaningfully expanding our reach and will support continued momentum in our path to premium sleep strategy. As we noted in our last earnings call, incremental tariffs created notable pressure on gross margin in the second quarter, along with costs associated with ramping up both the Mattress Firm rollout and the Rejuvenate 2.0 launch. With the previous four quarters all delivering results above 40%, the second quarter gross margin of 36% is a temporary setback. With mitigation plans in place to offset tariff headwinds and improvements in manufacturing efficiencies, we remain confident that we'll exit 2025 with a gross margin rate above 40%. We're entering the second half with significant momentum that is expected to continue building as the year progresses, with quarter-to-date revenues up in the mid-single-digit ranges versus the same period last year. We're seeing strong validation of our brand and innovation strategy through the success of the Rejuvenate 2.0 launch, which has sold more than twice as many units as our Rejuvenate 1.0 launch through our direct-to-consumer channels. The growing momentum behind our Mattress Firm expansion, which is already rolling out across the country and the deepening partnership with Costco as we prepare to launch in 450 clubs for their year-end furniture show and the strong interest from other traditional and nontraditional partners, which we expect will materialize within the coming weeks. Turning to our three strategic pillars. Our path to premium sleep strategy remains focused on our three pillars: pioneering new technologies to drive product leadership, promoting our differentiation to effectively communicate our unique product benefits to our consumers and prioritizing gross margin, driven by ongoing operational improvements. I'll now walk you through our recent progress against each of these strategic pillars. Innovation remains the cornerstone of our competitive advantage. As I mentioned earlier, we recently launched our Rejuvenate 2.0 mattress collection, a major milestone for Purple and the first product to incorporate our new DreamLayer gel grid technology layered on top of our core GelFlex grid. This combination of technology provides an incredible dream-like sleep experience with each grid playing a different part to elevate comfort while preserving the unique pressure relieving and cooling benefits our customers know and expect. Rejuvenate 2.0 is now available online and across all showroom locations. Since the launch, we've sold over 1,300 Rejuvenate 2.0 units at an average sales price of approximately $6,000 through our direct channels, with approximately 80% of those sales coming through our showrooms, our most effective channel. Slot commitments across wholesale remained strong with an increase in non-Mattress Firm slots of over 60%. In the second quarter, we also introduced our new Grid Cloud Pillow, a $149 offering designed to bring the benefits of our grid technology to a broader audience. This innovative pillow launch extended across online platforms, including Amazon, Walmart.com and our own website and is now available in over 1,200 Walmart stores featured alongside our ultra-premium Harmony Pillow. We're encouraged by the early positive consumer response to the Grid Cloud Pillow and look forward to continuing to deepen our relationship with Walmart and other nontraditional retailers. The strong consumer response to these latest launches reinforces our position as a leader in premium sleep technology and affirms the strength of our long-term path to premium sleep strategy. Looking ahead, our innovation pipeline remains robust with a mix of both incremental performance upgrades across our product portfolio and broader platform innovations that will continue to position us as the leader in the premium sleep category. While delivering better sleep through innovation is what sets Purple apart, how we communicate the benefits of our innovation is critical. Our refreshed messaging highlights the unique sleep benefits of our Gel Grid technology and focuses on what matters most, less pain and better sleep. As we look ahead, our new marketing will play an important role in accelerating consideration and conversion across all channels. Our marketing strategy continues to evolve and move beyond traditional category tactics centered on discounting. Our new brand campaign, less pain, better sleep, is resonating with consumers, which we've been validating through diligent testing. The campaign is designed to drive higher conversion on the website and stronger consumer engagement across all channels in the second half of the year. Now let me turn to how we're bringing our product differentiation to life across each of our channels. Our showrooms continue to play a key role in providing customers with a hands-on experience where our associates can engage and demonstrate the benefits of our products in a personalized setting. While channel performance in the quarter reflects the Rejuvenate 2.0 demand being primarily shipped in the third quarter, underlying sales orders for showrooms open for more than a year were strong at plus 5.5% growth versus the second quarter last year. This encouraging demand signal again drives confidence in our path to premium sleep strategy. The success of this launch has significantly grown the luxury share of showrooms product mix, now accounting for approximately 40% of order value. In fact, we've sold more than twice as many Rejuvenate 2.0 units during its launch as we sold during the launch of Rejuvenate 1.0, supported by the relaunch of our in-store selling model to further emphasize premium positioning and in-store education. Based on the early Rejuvenate 2.0 performance, we expect our showroom channel to become profitable in 2025. Similar to our marketing strategy, our e-commerce approach continues to evolve, shaped by a clear view of the consumer shopping journey and the specific role the website plays within it. In the past, our e-commerce was primarily focused on a more narrow segment of consumers who are willing to purchase a bed online in an industry where over 80% of consumers want to experience the mattress in person, particularly for premium-priced products. As part of our evolving strategy, our e-commerce focus is expanding to include reinforcing the strength of the brand, clearly communicating the less pain, better sleep benefits of our technology and supporting premium positioning across all channels. While the website will still support online consumers, we're optimizing it as an additional tool to drive engagement, education and conversion, particularly for products fulfilled through other channels. Alongside the new less pain, better sleep brand positioning, we implemented a series of meaningful website changes in the second quarter, including highlighting real-world product benefits like spinal alignment and cooling, simplifying the path to purchase and reducing friction at checkout. While still early, we're beginning to see encouraging signals, and we expect these changes to drive greater impact over the coming months. We've also been fine-tuning our data-driven targeting through a new engagement with an external partner to improve identification and targeting of our core audience. These insights are already informing media optimization across platforms like Google and Meta to drive ad spend efficiency and return on investment. Looking forward, we believe that our website enhancements, new less pain, better sleep brand positioning and targeted consumer strategies will drive conversion across our brick-and-mortar channels and renew e-commerce momentum over time. Wholesale revenue was down last year. However, we're encouraged by the meaningful sequential improvement from last quarter, especially against the difficult comparison of positive 7.2% comps last year. Additionally, wholesale revenue would have been slightly higher if Rejuvenate 2.0 orders had been fulfilled during the second quarter. As we work through the remaining backlog, we unlock the ability to launch Rejuvenate 2.0 into more of our key wholesale partners, which is expected to drive meaningful sales growth in the coming quarters. A key driver of our wholesale strategy is our expanded relationship with Mattress Firm. As I mentioned earlier, the momentum behind this expansion is strong, and Purple products will be in their full store network by mid-August. In parallel, we're developing an exclusive luxury mattress collection with Mattress Firm scheduled to launch early next year and increase our slot count to approximately 12,000, more than double our previous footprint. This is a meaningful step forward in our distribution strategy, and one that enhances Purple's national presence, expands our reach to premium consumers and includes us in their consideration set as they shop. Additionally, Mattress Firm's strong commitment to our product and brand is already driving increased interest from other partners. We've recently reached an agreement with one of the largest and fastest-growing mattress retailers in the country. We look forward to sharing more details in the upcoming months. Beyond mattresses, we're also expanding our pillow and accessory business across all Mattress Firm doors. Later this year, we'll be introducing our new DreamLayer pillow to sit alongside our high-performing Harmony Pillow, further reinforcing our position in premium comfort and wellness. We're also deepening our engagement with Costco through a key limited-time promotional holiday event later this year. Following strong performance during last year's event, we're returning at a larger scale in the fourth quarter, participating in 450 clubs, more than double the number of locations we participated in during the same event last year. This expanded footprint represents a meaningful step forward in our partnership and significantly broadens our reach with a highly engaged customer base. Our third strategic pillar, prioritizing gross margin expansion reflects the operational discipline we've built over the past year, which has consistently delivered results. While gross margin of 36% marked a temporary setback, our strong performance over the past four quarters gives us confidence in a rebound as cost actions take hold, tariff mitigation efforts take effect and manufacturing efficiencies improve as we complete our Rejuvenate 2.0 launch and Mattress Firm rollout. Excluding these impacts, we would have seen clear margin expansion driven by a more favorable product mix shift into our higher-priced mattress collection and $2.4 million in direct material cost savings during the second quarter with those benefits flowing through as planned. Our sourcing, manufacturing and consolidation efforts are delivering meaningful structural improvements and positioning us for sustained margin expansion. We continue to actively manage the impact of the recent tariff changes. While future changes in tariffs are difficult to predict, we currently expect our total cost exposure in 2025 to be less than our previous $10 million estimate, thanks to swift mitigation efforts and changes to the underlying tariff rates. We've begun shifting sourcing outside of China. And in July, we implemented a price increase on select products. Our price increases were designed to avoid our most price-sensitive product offerings while protecting gross profit dollars. As we look ahead, we're reaffirming our full-year revenue and adjusted EBITDA guidance. For fiscal 2025, we continue to expect revenue between $465 million and $485 million and adjusted EBITDA flat to up $10 million inclusive of continued tariff headwinds. Our outlook reflects a continued cautious consumer environment, but also the strength of our innovation engine, improved execution and a structurally stronger business than we had one year ago. We're entering the second half with meaningful momentum behind our newest product line, a major wholesale expansion underway and greater operational flexibility to support profitable growth. Todd will go into more detail later in the call. Before I close, a brief note on the Board's review of strategic alternatives. This process remains ongoing. We have engaged with multiple parties about a broad range of opportunities to maximize shareholder value, including, but not limited to, a merger, a sale or other strategic or financial transaction. We'll continue to evaluate a range of options and provide further information as appropriate. We will not be commenting further or taking questions on this topic during the Q&A portion of today's call. Now I'll turn the call over to Todd to discuss our financial performance in more detail.

Thank you, Rob, and good afternoon, everyone. As Rob touched on earlier, we're pleased with our performance this quarter, which reflects our continued ability to execute effectively against our strategic initiatives. I'll now walk you through the financial metrics for the quarter and highlight the areas where we saw progress as well as where we encountered headwinds. Starting with the top line. Net revenue for the three months ended June 30, 2025, came in at $105.1 million, which was down 12.6% versus $120.3 million in the prior year. As Rob indicated earlier, the decline was impacted by the timing of Rejuvenate 2.0 shipments, lapping reductions in wholesale door count from 2024 and softness in our e-commerce channel. By channel, direct-to-consumer net revenue for the quarter was $58.9 million. Within DTC, net revenue for showrooms decreased 13.3% compared to last year as demand for Rejuvenate 2.0 outstripped our ability to supply customers. E-commerce continued to see softness and was down 11.5% during the second quarter. We also experienced a decline in our wholesale segment, where net revenue of $46.2 million was down 13.4% versus last year as we continued to be impacted by door count reductions from 2024. Despite this decline, we're beginning to see encouraging signs of recovery in our wholesale channel, particularly as we approach the significant expansion of our business at Mattress Firm in the third quarter. Gross profit for the second quarter was $37.7 million compared to $48.9 million during the same period last year. Gross margin rate for the quarter was 35.9%, a decline of 480 basis points compared to last year. In the second quarter, our gross margin was negatively impacted by tariff-related costs and ramp-up costs related to the Rejuvenate 2.0 launch and Mattress Firm expansion, where rollout costs preceded revenue. As production continues to scale at our Georgia facility, we anticipate greater manufacturing efficiencies and direct material cost savings to drive gross margin improvement through the back half of the year. Now turning to operating expenses. Operating expenses were $51.9 million, down 18.2% versus $63.5 million last year. The improvement was largely driven by reduced advertising spend and benefits from restructuring and other cost savings initiatives that we've completed over the past few quarters. Excluding restructuring and impairment-related charges, adjusted operating expenses were $47.8 million, down 25% versus last year. Our adjusted net loss for the second quarter was $11.7 million, an improvement from a net loss of $13.8 million in the prior year. And second quarter adjusted loss per share was $0.11 compared to an adjusted loss per share of $0.13 last year. Adjusted EBITDA for the second quarter was a loss of $2.4 million, an improvement from the loss of $4.1 million last year, driven primarily by our disciplined cost management. Now turning to the balance sheet. At the end of June, we had cash and cash equivalents of $34.2 million compared with $29 million on December 31, 2024. Net inventories on June 30, 2025, were $60.9 million, down 12.6% compared to June 30, 2024, and up 7.1% compared to December 31, 2024. We were pleased to exit the quarter with cash over $30 million. As we move into the second half, which is traditionally a period of cash generation, we believe that we're well positioned from a liquidity perspective to drive expected growth from our Rejuvenate 2.0 launch and the Mattress Firm expansion. As Rob mentioned earlier, we are reaffirming our full-year guidance. We continue to project full-year revenue in the range of $465 million to $485 million, with adjusted EBITDA expected to land between breakeven and positive $10 million. We anticipate sequential growth in the second half of the year, primarily driven by our successful launch of Rejuvenate 2.0 and the Mattress Firm expansion, and we expect to return to positive EBITDA in the back half, bolstered by continued momentum from our restructuring initiatives and sourcing improvements. With that, I'll turn the call over to the operator for questions.

I was wondering, Rob, if you could talk a little bit about the cadence of sales in the quarter and how you're thinking about the acceleration in the business in the second half given some of the moving parts here?

Thanks for your question, Brad. The quarter started slowly, with April being the weakest month. Things improved modestly throughout the quarter. I mentioned that we didn't fully meet some demand, which could have brought us closer to $110 million instead of $105 million if we had shipped on schedule. This also might have made our showroom comparisons positive for the quarter. Our optimism comes from three main areas. Firstly, Q2 was impacted by tariffs and the launch of both Rejuvenate and the Mattress Firm business. As we move into July, we expect to catch up on the shipments that are behind demand for Rejuvenate in showrooms. We'll also increase the presence of Rejuvenate in wholesale. The Mattress Firm expansion, which will add about 3,800 slots in the quarter, should be completed by August 15. Given that the market is showing slight improvement and we anticipate strong sales from Rejuvenate and Mattress Firm, we expect stronger performance in the latter half of the year.

Yes. In terms of the gross margin and where we're being hit by tariffs and some of the ramp-up costs, really, we expect the ramp-up costs we're largely moving past at this point. Tariffs will continue to mitigate as we go forward. It's a little bit of an uncertain environment to say the least. So we're planning conservatively at this point. But we do expect to end the year well north of 40% gross margin rate. So that will be a gradual improvement from Q2 through the rest of the year and then starting off next year in a strong footing at that plus 40% rate.

I think you talked briefly about third quarter trends in demand to date. Rob, I think in your prepared remarks, maybe you said mid-single-digit growth in the aggregate, but I just want to make sure I heard that correctly. And then can you share if that's mostly coming from the wholesale load-in that you're getting with Mat Firm and Rejuvenate? Or is there also some growth in the DTC channel as well?

Matt, two parts to it. First of all, there is a little bit of the Mat Firm in there. But remember, the way floor samples ship, they don't really contribute wholly to revenue. So it's probably demand picture is most of that up mid-single-digits and catching up with Rejuvenate where we've been behind in showrooms. So there's positive momentum in DTC, positive momentum in wholesale and some encouraging early signs in e-comm that we think will get stronger.

Yes. So as we see improvements in revenue that grow sequentially and the same in gross margin, that will flow through to our EBITDA results. So really, we expect to see gradual improvement on the EBITDA side of things, probably a little bit more Q4 weighted just based on the fact that we'll have a full quarter of Mattress Firm and Rejuvenate 2.0, and we'll have the high side of our margin improvements. So we're not really guiding to the individual quarters, but to think about it in terms of a slope upward towards Q4 is probably the right way to think about it.

Because of the timing of it, there will be a modest positive impact in Q3 and Q4, probably in Q4, still working out the details, but it will be a nice chunk of business in '26 for sure. But there should be a little bit of upside in the back half.

This is Bobby from Raymond James. Congrats on the early momentum in 3Q. So I guess, Rob, first, just a clarification, the temporary ability to fulfill, is that now corrected? And how is the capacity with obviously, the Mattress Firm account coming on, and you mentioned maybe another decent-sized retailer later this year. Like how is the fulfillment capacity and all that going forward looking?

Yes. I think there are probably two parts to my answer, Bobby. Thanks for the question. The first is the most encouraging part is demand in showrooms. We projected it to improve, but we started selling it, and I'm going to forget the exact timing, but kind of halfway through the quarter, if I remember right. And the unit sales are about two times its predecessor. So that's the good news. The bad news is we planned a little too much of a swimmer's turn and didn't have much flexibility to catch that and left the quarter with about $4 million to $5 million of normal demand that should have been fulfilled. We are catching that up by the end of this month, and today is the 29th, so I get we're at the end of the month. We should be cutting those lead times about in half. And by mid-August, we'll have them back to normal delivery times. At the same time, the demand in showrooms has encouraged our wholesale partners and those slots commitments continue to grow modestly. And so we're going to have to make sure we don't launch ahead of supply, but get that wholesale footprint fully deployed as fast as we can in Q3.

That's helpful. Regarding the tariffs, can you remind us about the mitigation efforts? Have you made any adjustments to pricing due to the tariffs? I believe we've gathered some confirmations on that. Also, what observations have you made about the demand elasticity related to these tariffs? Specifically, what have you noticed regarding the unit velocity for SKUs that you have adjusted?

Yes. We announced around 60 to 80 days ago that we could have implemented price increases earlier, but we realized from past experience that pricing should not be adjusted before the wholesale lead times, as it creates an arbitrage issue. We have increased prices on selected products, but we don't have much feedback yet. The customers have not expressed significant concern; the pricing increase was slightly under 2%. We avoided raising prices on items that were highly sensitive to price changes. Therefore, we do not anticipate a strong consumer backlash. In the past week or so, we noticed that the response on our website regarding pillows has been positive, and we have not observed any negative feedback. I believe we will not face significant consequences for this pricing change. The trade seems to understand and appreciate the advance notice we provided, despite not receiving such notification from the tariff framework. Overall, we do not expect a major negative response to the pricing adjustments.

Yes. So you're heading down the path that we have been thinking quite a bit about it. As the business is generating this momentum, we think it does set us up really nicely from a cash perspective as we go into next year. Priorities, we are going to be looking at our store footprint as showrooms are continuing to show great results for us, looking at how we get back into the game of actually growing our store footprint and looking at how we're deploying capital internally. We think that's the best use of cash. Beyond that, yes, no specific plans. We want to make sure that we have built up an appropriate cash cushion for ourselves and that we're investing the cash back in the business and the things that we think will continue to generate the best returns for ourselves.

Maybe the first one, do you still expect the additional Mattress Firm distribution to be around, call it, $70 million in revenues next year? And then for this year, for that contribution, should we kind of assume like a pro rata amount? Just trying to get a better picture of comparable like-for-like trends today.

Yes. I mean the distribution should be in place by August 15, so it will start generating volume in the back half of the coming month and then through the rest of the year. And then by next year, as I said in my remarks, we are working on a premium luxury line with Mattress Firm and expect that to be in place. Timing still TBD, but around the end of the first quarter, beginning of the second. So we'll end up with a footprint that is 12,000 slots on a year-ago base that was sub-6,000. So we're pretty optimistic about what that should produce. In the wholesale channel, our main goal is to ensure that our furniture and mattress retailers are adequately stocked, supplied, and supported to facilitate product movement, which is the core focus of our business. However, as we continue to grow, we recognize the potential in alternative channels like Walmart, Costco, HomeGoods, and QVC. When approached correctly, these channels can enhance our brand and margins without harming our traditional wholesale customers, providing significant business opportunities ahead of us. For instance, with Costco, we were present in 170 clubs last year and saw a solid performance. We're expanding to 450 clubs, which demonstrates meaningful and profitable growth for our brand when managed properly without disrupting existing customer channels.

So my first question is about the gross margin for the quarter. I understand there were mostly one-time pressures impacting it, so could you provide more detail on what those were and their magnitude? Additionally, as we look ahead to Q3 and Q4, how quickly can we expect these one-time pressures to ease? Another way to frame the question is, how should we approach the gross margin expectations for Q3 and Q4?

Yes. So if you look back, we had greater than 40% margin for the last four quarters. So we've kind of demonstrated that, that is a level that we can operate at. As we got into this quarter, as you mentioned, tariffs were new. Now we do have plans in place to start mitigating that to a degree; we obviously won't be able to mitigate all of it, but that was probably a little bit more than half of the reduction in margin that we saw this quarter. So you'll see that mitigation come through across the course of the rest of the year. The other bit about ramp-up costs, that is really something that we believe we've addressed at this point. So a lot of that will come back to us even as we get into Q3. So as you look at margin across the rest of the year, and then in addition to that, I should mention, there's ongoing efficiency projects that we're working on that are really bearing fruit. There's a lot of projects along the mode of direct material savings and sourcing savings that kind of ramp up as we get through the rest of the year. So there's a lot of tailwinds behind us on the gross margin front. They really do build as we go through. So as you look at it, we'll be north of 40% as we exit the year in Q4 and then ramping up towards that as we get through the third quarter.

I don't know if I'd say it's disconnected because a chunk of it was start-up cost, but it was amplified in Q2 because we got all the start-up costs and not the replacement benefit by getting all that Rejuvenate shipped as it should have. So I think the tariffs, we believe will mitigate a majority of that, as we said in the remarks. Direct material savings continue, and we got the benefit of all of the start-up costs and very little of the replacement benefit coming. So again, we're confident we'll have a back half that certainly exits above 40%. First, I'd like to just say thank you for joining us on today's call. We remain focused on disciplined execution, our innovation schedule and building a premium, sustainable and profitable brand for the long term. I'd like to extend my sincere thanks to our associates for their hard work through some pretty difficult times and our customers for their continued loyalty. Thank you.

Ladies and gentlemen, that concludes today's call. You can disconnect. Thank you, and have a great day.