Purple Innovation, Inc. Q3 FY2025 Earnings Call

Good day, and welcome, everyone, to the Purple Innovation Third Quarter Earnings 2025. Today's conference is being recorded. At this time, I would like to turn the conference over to Stacy Turnof. Please go ahead.

Thank you for joining Purple Innovation's Third 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 gross margin, 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 our 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. The third quarter unfolded largely as we anticipated, reflecting the continued execution of our strategic priorities. We delivered revenue of $118.8 million, up slightly compared to last year, marking an important inflection point following consecutive periods of year-over-year declines. We also achieved positive adjusted EBITDA, consistent with what we anticipated. Our results demonstrate ongoing progress towards strengthening the business and building a foundation for sustainable growth. As we move into the final months of the year, we're encouraged by the early traction we are seeing across our core initiatives and remain focused on driving improved operational performance and long-term profitability. Gross margin improved nearly 700 basis points sequentially to approximately 43%, even with tariff-related headwinds. Importantly, we remain on track to deliver positive adjusted EBITDA for the year. These results reflect solid execution across each of our strategic priorities. Our Mattress Firm rollout is progressing well with Purple products now being represented in nearly 9,200 slots today, keeping us on pace for 12,000 slots in 2026. Our Rejuvenate mattress collection, Rejuvenate 2.0, also continues to outperform our initial expectations. As we continue to catch up with second quarter backlog, sell-through remained strong and drove 6.5% showroom sales gains, marking an acceleration from the prior quarter. Meanwhile, wholesale revenue grew 8% during the quarter, supported by the ongoing expansion of our Mattress Firm partnership. E-commerce was down 10%, but showed early signs of improvement following our site refresh and growing traction with Amazon. It's been just over a year since we initiated the restructuring program in August of 2024, and it's important to reflect on how far we've come. At this time last year, we made the difficult but necessary decisions to consolidate our manufacturing footprint, to streamline our corporate structure and to realign our distribution network. These changes were not easy, but they were essential to strengthen the durability of our business for the future. Importantly, we accomplished this transformation while maintaining uninterrupted customer service levels. The early results are clear. We have reduced our fixed costs and expect to deliver $25 million to $30 million in savings annually. We're on track to achieve positive adjusted EBITDA and our gross margins have improved from the low 30s to more than 40% today. We're improving our operating efficiency and creating a business model that can deliver more consistent performance even during difficult market conditions. As we look forward, this leaner and more agile Purple is allowing us to redirect resources back into what matters most: innovation, marketing and our strategic partnerships. That's what's fueling the Rejuvenate 2.0 and the expansion with Mattress Firm, Costco, and others, and we see new opportunities to continue expanding our presence with new retail partners. Having made significant progress in stabilizing the business and improving the underlying profitability, we're increasingly focused on positioning our business for future growth. With a strong foundation firmly in place, our next chapter is centered on accelerating innovation and marketing investments. While there's still work to do, I am confident that Purple is on the right path. Now let me turn to our three strategic pillars and update you on our progress during the third quarter. Innovation remains at the heart of Purple's competitive advantage and continues to define our leadership in comfort technology. In the second quarter, we launched Rejuvenate 2.0, one of the most successful product introductions in our history, featuring our new DreamLayer gel grid technology. In our showrooms, Rejuvenate 2.0 has sold more than twice the number of units, doubling net revenue compared to Rejuvenate 1.0. Through our direct channels, we've sold more than 3,000 units at an average sales price of approximately $5,800, underscoring the strength of our premium positioning. We're also encouraged by the early performance of our GridC Pillow, which is outperforming expectations and demonstrates the versatility of our proprietary grid technology across new comfort categories. Our focus on differentiation continues to resonate with our customers across each of our channels and reinforces Purple's position as the leader in premium comfort. Starting with our showrooms. We delivered strong performance in the quarter. Net revenue grew 6.5% to $22 million, reflecting the strength of our premium positioning even in a softer traffic environment. Our showrooms remain a key driver of brand experience and sales conversion across all channels. Our new selling model has empowered our teams to more effectively communicate Purple's technology and value proposition, driving 12% comparable sales growth in the quarter. These results demonstrate the value of the showroom as both a brand experience and a growth engine. Showroom four-wall profitability reached an all-time high with record mattress order values of about $4,500, further validating the success of our path to premium sleep strategy. Momentum within our luxury mattress assortment also remains strong. Rejuvenate mattress sales nearly doubled year-over-year, and 76% of showrooms are now profitable year-to-date versus 56% last year. E-commerce business is central to the shopping journey, and our website is often the first stop. It plays a critical role in building consumer confidence and guiding them towards the right products. While revenue in the channel remains pressured, we're encouraged by the recent signs of improvement. During the quarter, we enhanced our digital experience to reinforce Purple's premium positioning and highlight the less-paying, better sleep benefits of our GelFlex and DreamLayer technologies. Our refreshed website with simplified navigation and richer video content has helped shift demand towards higher-priced mattresses. We also saw promising results in our Amazon channel as a growing share of sales moved to fulfilled by Amazon, improving both conversion and delivery speed. While there's still work ahead, we're pleased with the sequential improvement and positive consumer response to these initiatives. The wholesale channel grew 8%, driven by the rollout of Rejuvenate 2.0, and our expanding partnership with Mattress Firm. Momentum accelerated through the quarter and trends we are seeing early in Q4 point to sustained growth with our key wholesale partners. Today, Purple products are now in Mattress Firm's full store network, representing approximately 9,200 slots today, and we are on pace to reach 12,000 slots by March of '26. This expansion represents roughly $20 million in incremental revenue this year, and we anticipate approximately $70 million next year. We're working hard to unlock benefits for both partners through continued collaboration and execution. Beyond Mattress Firm, we're expanding with other partners as well. We're testing our entry into the Florida market with Mattress Warehouse, building on our existing 140-store footprint and broadening our reach through partners like Costco and QVC. Our Costco partnership is performing exceptionally well. We are currently in 54 Northwest stores and later this year, we'll participate in Costco's Q4 Furniture event in a minimum of 450 clubs, nearly double last year's footprint. And on October 2, we tested our first Purple Mattress program on QVC, offering another opportunity to share our technology with a wider audience in a live interactive format. For the new Rejuvenate mattresses, our non-Mattress Firm slot placement has now increased by 68% compared to last year, also highlighting Purple's growing relevance across the channel. Finally, turning to marketing. Our Less Pain Better Sleep campaign launched in the third quarter continues to perform well and has been expanded across digital and social media platforms. The message is simple but powerful, and it focuses on real sleep benefits and connects directly to our GelFlex Grid technology story. We also leaned into our expanded Mattress Firm partnership through joint campaigns, including their recent Sleep Easy promotion, which exceeded expectations and contributed to a strong Labor Day sales period. Across every touchpoint, from our showrooms to our website, to our retail partners, we're driving consistency and message, look and feel. Our differentiation has always been rooted in innovation, but how we communicate it is what turns that innovation into brand preference. We're confident this focus on differentiation will drive stronger engagement, higher conversion, and sustained growth across our channels in the quarters ahead. Turning to our third strategic pillar, prioritizing gross margins. Our margin discipline remains firmly intact. Gross margins recovered to approximately 43% in the third quarter from 36% in the second quarter. This improvement reflects direct material cost savings, the completion of the restructuring plan, and continued progress in warranty and scrap reduction initiatives. Tariffs only impacted us by roughly $2 million this quarter as mitigation efforts continue to pay off. While April and May were challenging as the new rates took effect, our sourcing shifts and pricing actions have meaningfully reduced the overall impact compared to initial expectations. Looking ahead, we expect fourth quarter gross margins will remain at roughly 40%, albeit lower than the strong third quarter result, and we continue to be confident that we'll end the year above the 40% level. This progress highlights the operational discipline we've built into the business and the structural improvements that position Purple for sustained profitable growth moving forward, supported by our full Mattress Firm rollout and the sustained momentum of Rejuvenate 2.0 and anticipated holiday momentum. We are reiterating our full year 2025 guidance, expecting revenue in the range of $465 million to $485 million and adjusted EBITDA between breakeven and $10 million positive. Looking forward into 2026, we see a clear path to positive cash generation. Our capital priorities will focus on reinvesting in showroom expansion and innovation while maintaining flexibility to reduce debt as appropriate. Before I close, I'd like to briefly address 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 will 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'd like to turn it over to CFO, Todd Vogensen.

Thank you, Rob, and good afternoon, everyone. As Rob discussed earlier, we're pleased with our performance this quarter, which demonstrated our continued ability to deliver against our strategic initiatives. I'll now walk you through the financial metrics for the third quarter, starting with the top line. Net revenue for the 3 months ended September 30, 2025, was $118.8 million, up slightly versus $118.6 million last year, driven by the timing of Rejuvenate 2.0 shipments and the expansion of our Mattress Firm relationship. We saw strength in both showroom and wholesale that was partially offset by softness in e-commerce. By channel, direct-to-consumer net revenue for the quarter was $67.2 million, down 5.1% versus last year. Within DTC, net revenue for showrooms in the third quarter was $22 million, up 6.5% compared to last year despite 4 fewer stores opened this year. Last quarter, we experienced timing issues related to Rejuvenate 2.0 launch as demand for Rejuvenate 2.0 has significantly outstripped our ability to supply customers. Those issues have since been resolved. Our delivery schedule has normalized, and we've seen continued momentum in showroom sales trends. E-commerce continued to see softness and was down 9.8% during the third quarter, but was a sequential improvement from the prior quarter. We also experienced a notable increase in our wholesale segment, where net revenue of $51.5 million was up 7.9% versus last year, driven by strength in our Rejuvenate 2.0 launch and our expansion with Mattress Firm. As we look toward the fourth quarter, we're encouraged that the sales trends should continue to improve even further. Gross profit for the third quarter increased to $50.9 million or 42.8%, compared to $35.2 million or 29.7% in the prior year period. Adjusted gross margin, which excludes restructuring and related charges, expanded to 42.8% in the quarter compared to 40.5% last year. With the restructuring now complete, we also benefited as we delivered greater manufacturing efficiencies and direct material cost savings in addition to improved warranty trends. While we expect some of those short-term benefits to moderate as we move into the fourth quarter over time, we do expect to continue realizing sustainable structural improvements as production continues to scale at our Georgia facility, and we also see greater manufacturing efficiencies and direct material cost savings opportunities in the future. Now turning to operating expenses. Operating expenses were $63 million, down 23.2% versus $82 million last year. The improvement was largely driven by a reduction in restructuring and impairment costs in the current year in addition to benefits from the 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 $57.7 million, down 8.6% versus last year. Our adjusted net loss for the third quarter was $8.6 million compared to an adjusted net loss of $13.8 million in the prior year. And third quarter adjusted loss per share was $0.08 compared to an adjusted loss per share of $0.13 last year. Adjusted EBITDA for the third quarter was a gain of $200,000, an improvement from the loss of $6.4 million last year, driven primarily by our gross margin expansion and disciplined cost management. Now turning to the balance sheet. We ended September with cash and cash equivalents of $32.4 million compared with $29 million on December 31, 2024. Net inventories on September 30, 2025, were $65.8 million, up 9.8% compared to September 30, 2024, and up 15.7% compared to December 31, 2024. We were pleased to exit the quarter with cash over $30 million again as we move into the fourth quarter, 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. Finally, guidance. As Rob discussed earlier, we are reiterating our full year outlook. We continue to expect full year revenue in the range of $465 million to $485 million and adjusted EBITDA between breakeven and $10 million. As we move into Q4, we anticipate continued top line growth driven by the seasonal lift in direct-to-consumer sales during the Black Friday, Cyber Monday holiday, an expansion of business at Costco, as Rob described earlier, our Mattress Firm expansion and sustained momentum of our Rejuvenate 2.0. In addition, we expect a sequential acceleration in EBITDA that is fueled by our revenue expansion and the continued momentum from our restructuring initiatives and sourcing improvements. With that, I'll turn the call over to the operator for questions.

We'll take our first question from Bradley Thomas at KeyBanc Capital Markets.

Congrats on the improvement in the business that you all are driving here. Rob, that's actually where I wanted to start off with my first question. Just as you see the acceleration in sales in the business, I guess, could you speak to what, if anything, are encouraging green shoots that we might be seeing in terms of the industry overall versus how much this is coming from the multitude of initiatives that you all have underway right now?

Thanks, Brad. And hard to put my finger exactly on it. I think most of the people in the category, ourselves included, in Labor Day thought the market was starting to show signs of improvement and then the back half of September was pretty mixed and soft. I think we're the first reporting company in the category, but I'm expecting kind of flattish overall category results. So I think we own both the parts of our business that are working well and then the parts that still need a little bit of work. But wholesale is clearly growing behind expanded distribution. And I'd point out that we're encouraged on our performance because we've had a pretty significant expansion of slots and slot productivity has remained about the same. It's down a little bit in Q1 or Q3 because of all the flooring that we did. But since then, we're seeing it pick back up. So that's the first point. The second is the showroom performance: 6.5% up, 12% comps. I think 12% comp is going to stand up against any retailer, and we're encouraged by that. And even in e-com, as Todd talked about, we were down about 10% in the quarter. But during the quarter, each month got a little bit better, and we're starting to see the new marketing show some real early signs of success. Too early to declare anything, but we're encouraged on the direction. Finally, on the market, it doesn't feel like it's getting a lot better. It also doesn't feel like it's getting worse. So I think we're probably at the bottom, and we're certainly well positioned to capitalize if the market gets better in Q4 and early 2026.

Maybe I could ask a question just on the margin front or the business front financially more broadly. Clearly, a number of the revenue initiatives that you have underway are going to wrap into 2026 and be a nice boost through the first half of the year. Can you talk to how you think about flow-through to the bottom line and any other margin opportunities for you as we think to 2026?

Sure. So as we look at gross margin, we really are starting to see all of those benefits from the plant consolidation and our restructuring efforts. As we look at it, we've been hitting that 40% gross margin level pretty consistently. And with the 42.8% this quarter, I think we've shown that we've been able to capture those efficiencies and would expect to be at around that 40% level going forward. From a breakeven perspective, we used to talk about the business needing to be at $55 million to $60-plus million a month in revenue. We're down to the point where basically at $40 million or even a little under that per month, we're able to break even and then scale from there to generate profitability very rapidly. The cash just flows through the bottom line very quickly with the model we've developed at this point.

We'll go next to Matt Koranda at ROTH Capital Partners.

It's Joseph on for Matt. I just wanted to see if you guys can kind of bridge us on your adjusted EBITDA guide here. Implied EBITDA in the 4Q is roughly high single digits. Can you bridge us as we exit 3Q on a flattish margin?

Sure. So a big part of what we're looking at in Q4 is the continued revenue acceleration from all the factors that we talked about, moving into what is traditionally our highest revenue quarter of the year. We are on the backs of continuing our expansion in Mattress Firm, the Rejuvenate 2.0 launch, and continuing to pick up steam. We also have strong plans as we go into Black Friday and Cyber Monday from our direct-to-consumer channel. So a lot of things really pushing towards the positive on the top line. And while we do that, we're still able to maintain that 40%-ish level of gross margin and strong cost control. So that incremental revenue flows through very quickly.

As we approach the 12,000 mark in your Mattress Firm slots, how should we think about this going into the fourth quarter? You mentioned that this 12,000 target should be reached by March 2026. Should it be an even distribution, or should we increase most of those slots in early first quarter 2026?

No. I think just to be clear, we're working on a specific collection of Rejuvenate, which is a product already performing well in the market. I believe that the additional 2,800 slots or something in that range will be established by the end of the first quarter.

We'll move next to Bobby Griffin at Raymond James.

Rob, can you quickly explain how the quarter turned out? When we last spoke, we had expected mid-single digits in revenue, but we ended up flat. Was this primarily due to softness in the last few weeks, or did the timing of some rollouts change, causing some anticipated revenue to shift into the fourth quarter?

No, we were pursuing Rejuvenate throughout the second quarter and into the third. However, the first half of the quarter seemed to show stronger development. After Labor Day, the market was particularly soft for us. Discussions I've had with others indicated it was mixed at best, so I don't think we were alone in that. Fortunately, we saw a return to the expected strength in October, but that came after Labor Day.

I wanted to clarify the gross margin. You reported 42.8% for the third quarter. It seems like you expect it to decrease sequentially and show a significant decline year-over-year. Can you explain what is causing this? Is it related to the shift towards more wholesale with these product launches? You mentioned 42.8% and then referred to 40% as a rough estimate. I'd like to get a clearer picture of what the gross margins are expected to be in the fourth quarter and what a sustainable gross margin looks like given the changing customer base at Purple.

Yes. Let me come at that backwards and see if it gets you what you're looking for. I mean I think 40% and north is clearly sustainable. Period. We think that I don't want to pin a number to it yet, but we can get and stay north of that with our current wholesale mix because the mix hurt DTC to wholesale is being offset by the premium positioning of the product and the way the mix is changing both in wholesale and in e-commerce and showrooms towards the premium product. So I think that's the mix. The down in Q4, what we're planning is a pretty competitive environment, and you spend a lot of the quarter on promotion. And I think that's the biggest drain to that gross margin.

It appears that the wholesale business is growing in some accounts, and there is a positive comparison in the showrooms. However, there is still improvement needed in showroom profitability. I'm interested in understanding more about the stores that are not generating EBITDA profit, as I believe you mentioned some statistics about this on the call, but I missed them. Additionally, as the business evolves, two segments are expanding while e-commerce is facing challenges. What are your thoughts on the long-term e-commerce opportunity for Purple? Has this perspective changed now that you've seen success in wholesale and some momentum in the showrooms? I'm curious to hear your thoughts on this, Rob.

Yes, Bobby, we are still very optimistic about e-commerce, and we believe there was a slight communication issue when we updated the website at the end of September and early October. Early signs indicate that we are heading in the right direction, and while the growth in e-commerce is not as fast as in showrooms, it is improving. We are committed to e-commerce and understand that as we expand our distribution, e-commerce will need to work harder to generate sales, but we are not pulling back. Regarding your first question on showroom profitability, I mentioned that 76% of our showrooms were profitable in Q3, up from 56% last year. This channel will be profitable, and we have made significant progress. We may always have about 5% to 10% of stores that aren’t performing as expected or have structural challenges due to high rent, but we see this as a vibrant channel that we plan to invest in again in the future, and we are encouraged by the current profitability.

Very good. Well, I appreciate the details and congrats on some of those moving parts, especially the showroom comp and getting the launch going. So best of luck here in fourth quarter.

We'll move next to Daniel Silverstein at UBS.

Maybe just to start, if we want to unpack the third quarter a bit, how much of the improvement in the wholesale segment was driven by the additional Mattress Firm slots? And maybe a different way of asking is just how is productivity in other retail partners trending today?

Thanks, Dan. I want to share some updates about our Costco business, which continues to experience strong growth. We've been extensively online with them for nearly two years, and we're now in in-aisle distribution at 54 locations. Additionally, the year-end furniture modifications will be in 450 stores, which represents a significant growth opportunity. Regarding mattress productivity, the launch with Mattress Firm temporarily impacts productivity as we introduce various floor samples. However, we've noticed that overall productivity has remained stable, with a marked increase in slots, which is encouraging. We also have several other customers performing well, although there are a couple that are not meeting our expectations. Overall, while there's some variance in performance across our wholesale network, the situation is better than just a mixed bag.

Then just one follow-up. So to your point, it seems like there's some pretty good visibility into the sales building blocks next year. Specific to the $70 million from Mattress Firm, what's in your control to drive that number potentially higher? And then if the mix skews a bit more to wholesale next year, how might that impact profitability from a margin standpoint?

All right, Dan. I think the wholesale growth doesn't concern me on a margin basis. I think the performance of the premium business will continue to be able to offset that degradation. And the Mattress Firm forecast is built on us performing at levels we've been at. We have not assumed improved slot productivity, but we have held it. So you could build an argument that there's a little bit of risk in that. But we've got to work with them to make sure we're getting the most. And we also have to compete to perform in those slots that we're in. So we're spending more money at retail with them. We're spending more money on marketing and demand creation. And we have a lot of excitement behind the Rejuvenate product that they'll put in the first quarter. So it's a difficult environment. They're a challenging partner, but all for the good. We've got to perform and make sure we grow their business. If we do that, ours will develop as we outlined.

That concludes our Q&A session. I will now turn the conference back over to Rob DeMartini for closing remarks.

I'd just like to close by saying thank you to the Purple employees all across the country that have worked so hard to stabilize this business and get it more durable. And I think we're incredibly well positioned as the market eventually improves. And I want to say thank you to our partners who have stayed with us and showed faith in our efforts. So with that, I'll close the call, and thank everybody for attending.

This concludes today's conference call. Thank you for your participation. You may now disconnect.