Purple Innovation, Inc. Q2 FY2024 earnings call

• While volume remained challenged in Q2, overall performance was encouraged with strides towards cash flow positivity and improved profitability in a challenging market. • Focused on managing costs, investing in innovation and marketing, and ensuring a durable business model. • Second quarter total sales up 2% with new products and brand messaging gaining traction. • Variation in performance by channel: showroom revenues up 10.6% driven by price adjustments and mix shift to Luxe collection; e-commerce revenue down 5.7% due to longer-than-expected personalization and website streamlining efforts; wholesale channel net revenue up 7.2% due to partnerships and top account growth. • Five key initiatives: prioritize productivity in existing wholesale and showroom doors; improve marketing effectiveness; drive e-commerce conversions; bring new products and innovation; drive gross margin improvement through manufacturing and supply chain optimization. • In showroom channel, focused on increasing productivity/profitability, new selling environment, consumer financing partnership, and operating cost optimization. • In marketing, enhanced creative with premium branding outperforming previous, and improved media efficiency through understanding customer behavior and directing spend. • In e-commerce, focused on conversion improvements through personalization and website streamlining. • Committed to new product launches to grow the category and drive innovation. • Operations team drove gross margin improvement through supplier diversification, efficiency gains, scrap/yield results, and outbound freight program, with ongoing work to further optimize costs and inventory management.

For the three months ended June 30, 2024, net revenue was $120.3 million, an increase of 2% compared to the same period last year. By channel, wholesale net revenue increased 7.2% in the period. Direct-to-consumer net revenue was down 1.8% in the second quarter with e-commerce declines of 5.7%, being offset by a 10.6% increase in showroom net revenue. Gross profit was $48.9 million during the second quarter compared to $35.5 million during the same period in 2023, with gross margin at 40.7% versus 30.1% last year. When adjusting for launch costs in the prior year period, the gross margin still expanded by 350 basis points. On a sequential basis, gross profit improved $7.2 million or 17% and gross margin rate improved 590 basis points.

• Lowered full year 2024 net revenue outlook from $540 million to $560 million range to $490 million to $510 million due to industry demand slowing further. • Reaffirmed adjusted EBITDA to be between negative $20 million and negative $10 million for the full year, including expectation to achieve adjusted EBITDA profitability in the fourth quarter. • Anticipated third quarter profit impacted by deleverage from lower-than-expected volumes, offset by cost savings in fourth quarter.

• Industry trends恶化 led to second quarter revenue shortfall. • Headwinds such as inbound freight from overseas suppliers and freight mode mix on some outbound delivery costs, but expected to be manageable.

Q: Good afternoon, everybody. Thanks for taking my question and congrats to the team on the nice improvement in gross margins. I want to start, could you maybe just talk a little bit about the progression of the quarter and kind of what you saw throughout the quarter from a demand perspective? Did it get better as we move through the quarter and into July and early August? And then kind of as a second part to that, I know we only have – I know we rolled out the new financing tool at the end of May, so we only have two months. But have you seen anything noteworthy in those two months post that new financing offering within the showrooms?

A: Yes. Bobby, let me answer both of those, and I'll answer them in reverse order. I think the financing is clearly driving trade-up and attachment in our showrooms. ASP for mattresses is up 8% across the business and up a staggering 32% in showrooms quarter versus a year ago. Now be careful with that 32% because that was when we were liquidating, getting ready for the launch, but at least half of that is absolute trade-up in dollars. That's being driven by financing. It's not working as well for us in e-commerce, and we're still trying to figure out what that is where we still offer two different partners, so that's on us and executional. But yes, we do believe that it will drive – it will help enable the path to premium sleep strategy because that's built on trade-out and it will improve attachment, and in showrooms where we have the most control of it, it is working. And the first part of your question was on the shape of the quarter. And it was relatively steady through the quarter. It got a little softer as the quarter went on and more volume concentrated around the holidays, which has been a continuation of what we have seen. Our e-commerce business was weak in volume, but strong in margin. And I think we've got – we're just sharing that concern in the year to go on the top line.

Q: Hi. Good afternoon. And that's a good segue to talking about the wonderful gross margins in the quarter. I was hoping maybe we could talk a little bit about how you're thinking about gross margin playing out in the back half of the year. And how, if at all different to think about the long-term opportunity here for gross margin?

A: Thanks Brad. This is Eric. I'll take the – basically how we think we're going to deliver it and the long-term prognosis. As we talked, we've got the four levers that we're pulling on, which is our material cost by diversifying suppliers, efficiencies in our plants, eliminating scrap, and optimizing our freight. And we haven't run out of ideas there. So we've got more that's dropping, particularly in Q4, and we have expectations that we'll continue to have areas to optimize that going forward. And how does it play out for the year, what that will mean for us is we are going to see a little bit of headwind on margin in Q3 just due to deleverage as we're adjusting our production volumes to be more in line with our revenue guidance that we gave today. But that is more than offset by some of the opportunities that we have, especially around supplier diversification, operational efficiencies as we get into Q4. So that puts us in a place where that 40% plus is very much a sustainable rate for us that we can grow from over the long term.

Q: Hi guys. Just maybe wanted to get a finer point on the third quarter commentary that you gave there, Todd. So you mentioned it sounded like volume down potentially year-over-year. Any finer point on just the revenue split that we should assume for the third and fourth quarter? And then you said deleverage on gross margin in the third quarter, I would assume you mean sequentially on the deleverage commentary. Any commentary around the magnitude of that deleverage that we should expect in the third quarter and then what we have to make up for in the fourth quarter to hit that profitability number?

A: Yes. So first, you are correct. It was meant to be a sequential comment. So we were at 40.7% in Q2. The deleverage should be fairly modest from that, so I would expect to see a little bit lower gross margin rate as we go into Q3, but then more than offset as we go into Q4. And to put a finer point on the volume, it's really production volume that we're talking about. The sales volume should actually be sequentially up in Q3 versus Q2. But what flows through the P&L, obviously, is the value that we're producing against, which we've adjusted to reflect that lower revenue guidance relative to what we had originally been expecting as were planning out our production for the year. So that's the dynamic that's playing out as we go into Q3 and that kind of rights itself as we go into Q4.

Q: Thanks a lot, and good afternoon. My first question is a follow-up on marketing. So if you could just give us some more color on the new co-op marketing program that you're doing? What's different about them? Are you adding more funds? Are you getting more discretion to how those funds are being spent? That would be helpful.

A: Yes. Both of those things, Seth, we put more money available to invest, trying to harness what our customers do. They spend a lot of money and our advertising can't fit into theirs, and we've seen good progress to that. So it's both of those. It's putting more money out there at that point. In fairness, it's the same dollar being moved closer to the point of consumption, and then having more latitude with how they use it. If we get a positive return for both of those, then we want to keep investing in it. I think it's clear that our transactions trade up the category. Our advertising swings the doors for our partners. And ultimately, there's no substitution if a consumer wants Purple, right? And I think part of what we've got to do is build our way out of being positioned as a bed-in-the-box category or in that niche and being seen like the category leader is as a category builder, and we're working hard to make sure we do that.

Q: Thanks for taking the question. I wanted to come back to the revenue guidance cut. And if you look at the $50 million change, I wanted to get a sense of how much of that is coming out of what you previously expected wholesale to be versus DTC.

A: Jeremy, I don’t think we’ve broken it that way, but we can get close for you. I mean $8 million of that $50 million already happened in Q2. So that’s about $42 million at the back half. And it is – we’re seeing nice progress in showrooms. It’s split mostly between e-com and wholesale in about equal. Does that seem right, Todd? It's about from what our forecasts were.

Q: Thanks for taking the question. You had talked earlier about the reduction in marketing. It was about $4 million. Can you talk about what are you looking at for marketing spend in the second half of the year versus prior year?

A: Versus prior year I think that is what that reduction is, right? It’s $4 million on the half. Yes, it will be a little bit more centered around Q3. We had a fair amount of marketing that was very top of funnel that came with the launch last year. And so a lot of that we won’t be wrapping around on because it frankly wasn’t as productive as what we’d like to see. But generally, if you’re looking at about that $4 million to $6 million range for the back half, that is right in there.

Q: Good afternoon. This is Dan Silverstein on for Michael. Just two questions. Just firstly, what does the new financing agreement allow you to offer customers that you couldn’t provide before? And what can you flex in terms of promo offerings to drive incremental engagement?

A: Dan, I want to be clear on this. We think this doesn’t really put us in an advantageous position. It gets us to be competitive. And it allowed us to offer – it allow us to offer 0% at kind of a competitive level to what the market is at. It changes by price points. I’m not dodging the answer, it’s just a bit confusing. But it’s a fully competitive offer with kind of the mattress retailers that are out there that offer financing as part of their transaction. It’s not the longest I’ve read, but it’s right in the middle.