All right, guys, we're gonna try to keep the trains running on time here, stick to our, our timing. For those of you who don't know me, my name is Matt Koranda. I'm the senior research analyst and managing director covering consumer growth, for Roth MKM. Today, to present to us in a fireside chat format, we have Purple Innovation. So we have, Rob DeMartini immediately to my right, who's CEO, and Todd Vogensen, who's the CFO, who recently joined the company. We recently upgraded, Purple Innovation to a buy rating after their Q4, earnings results.
The basic case here for us was, you know, there's plenty of liquidity for the next 12-24 months for these guys to execute with the recent debt refinancing that they completed with their top equity investors. And then two, we're seeing signs of demand inflection with Purple outgrowing the mattress category pretty healthily in the Q4. And what's implied in the Q1 guidance is that they are also outgrowing the industry as a whole. So that suggests that there is some life to the category and at least very much some life to Purple and the new product strategy that they have. So we're gonna run through a quick overview with Rob and then we'll delve into Q&A.
So maybe just, Rob, if you could just get everybody level set here, maybe talk about Purple, and the background in terms of the origins of the, the product, the growth coming from early DTC days and the transition into omni-channel. And what differentiates your product versus sort of the other, you know, call it generic mattress product that other people might knee-jerk assume that is bed-in-a-box, you know, versus you guys.
It's on. Thank you. So we're a young company in a very competitive category, without a whole lot of differentiation, just in the category. Tempur-Pedic is certainly differentiated. Sleep Number's differentiated. I would argue Purple is equally differentiated due to technology that is different, visible, and very well IP protected. But we're still quite a young company. We're about a 6% market share of the category, and we came out of COVID very poorly positioned. We were betting that that demand that we saw was all us and not COVID influences, and you combine that with a consumer who's moving far less since COVID than they were prior because of interest rates, category's at very, very low consumption levels, 20-year lows. We had to fight our way through that.
We had to restructure ourselves quite a bit, but at the core of all this is product that creates fanatics. I mean, people buy our product, they love it. We have something like a 96% report that consumers would buy our product again. So we've just got a story we've got to get out and tell, and we've finally gotten ourselves positioned right to be able to tell it, and we've been taking share about, for about 5 months now. Category's still not doing well. You know, I say this all the time: everybody I know does still sleep on a mattress. I don't think the category is going away, but we've got to get them back in the market.
Okay, and maybe just in 2023, you guys underwent a pretty significant product relaunch. Maybe just speak to some of the benefits you've seen from the product relaunch that you implemented in the middle of 2023. Maybe a little postmortem on what was done right, maybe some things you could have done better. Just get us up to speed on that.
So, the key of our product is a gel that we invented historically and then have very well protected. We're the only gel, gel-based bed on the market right now. But we hadn't innovated in quite a while. We hadn't brought new products to market in over 3 years, and this is a category that needs news. It needs some regular update to keep, particularly in the wholesale channels, where you rely on other people's sales people to tell the story, and we were very flat-footed there. So we launched 9 new mattresses May 15th last year. It took us about 5 months to get all wholesale changed over. We hard converted our website and our DTC business, which is 60 stores and a nice chunk of e-commerce business.
The partners took a lot longer than we thought, so that was something we didn't fully, properly plan for. On top of that, we had some executional challenges with product availability during that launch. Finally, by October, we had everybody changed over, supplying at 98.5% or better, and that's when we saw the share starting to move positively our direction.
Okay, perfect segue into the next question, which is just talk about the share take that you saw in the Q4. You guys obviously put up a positive number in the Q4. Some of your peers have still been firmly in negative territory. Maybe just speak to what enables that. It's I would assume a big part of it is the new product launch, that you have some of the selling into wholesale, but maybe just disentangle that for us a little bit.
Yeah, it, it was... You know, some of it, as I just said, it was news. We needed new news in the market. We believe our new product tests better than our old product and still stands out very well versus competition, so that was the first step. The second was we had to reinvest in advertising at a slightly higher level to create traffic and buzz with not only our direct business, but also our wholesale partners. And, you know, we're finding as a small share in a big category, we still got a lot of people we need to educate. The bed looks and feels different than anything you've seen in a mattress before. So it really is something that's quite experiential, either digitally telling that story or more effectively getting them to touch and feel it.
Okay, and then the recent Q1 guide that you gave in terms of top line would suggest some significant share take, maybe accelerating relative to the rest of the industry. Where are we seeing that come from? Where do you think you're taking the most share in the category?
... It, you know, I grew up in the consumer products business, where I got weekly share data across the entire customer base. Mattress is a little less sophisticated, and so share numbers are tough to come by. We do get about 30% of our wholesale base report share, and that's where we've seen about a 15% month-on-month growth of that share. We don't handpick them; it just happens to be the ones that give us the data. So we feel pretty good that that's a good number. Where it's coming from, I can't tell you. I mean, there is a big player in the category who's relatively undifferentiated, and they've had some financial trouble lately, so my guess is them. It's coming from them. I know it's not coming from Tempur Sealy, who's the leader.
They continue to grow.
Okay.
...
SSB, Serta Simmons. I mean, that's my guess. I don't know where it's coming from. I know it's not coming from Tempur.
Then, we recently talked on the Q4 call about taking some pricing action. Maybe if you could just elaborate on sort of the strategy there, in terms of pricing, timing of when that was implemented, when do we see that kind of hit the P&L? Maybe, Todd, you could handle that one.
Sure thing. When we launched our new line in May last year, we had a couple of products that we had actually competitively gone down a little bit in pricing, found that we were not getting the benefit out of that that we would have expected to see. So for us, starting in January, in our direct channels, we were able to take pricing back to what I would consider a historically normal level. So you consider pricing going up $100-$200 in a lot of the lines. That went live for our direct channels in January, and then for our wholesale channels, everybody officially went live in March. So we are up and going on that.
Whenever you see a pricing increase, there's obviously an impact to volume, but net-net, we believe we're gonna be revenue positive and certainly gross margin positive on those changes.
Okay, and then, when we're delving into the Q1 as well, maybe just from a bottom-line perspective, I think the guidance for the Q1 might have been a little confusing to some. So I want to give you guys a chance to elaborate on sort of the thought process behind it, which is growth on the top line, but an EBITDA decline, so there's a little bit of a mismatch there. I know you guys mentioned a channel shift, so just wanted to see if you could elaborate a little bit for the benefit of folks who are around here so they can understand a little bit more about it.
Certainly. So the guide, to recap, was revenue of $100-125 million. That is up from $106 million last year, so pretty substantial growth, and especially what is a market that is stable to down. The bottom line, we're going from a loss of about $7 million last year, and we guided to a loss of $10-15 million this year. So the question is: What is driving that disparity? There's a couple of things built in there. First, this year, wholesale is wrapping around on a year where a lot of revenue, for a variety of reasons, had gotten pulled into the Q4 of 2022.
Q1 of 2023 was fairly light for wholesale, so we're going from a year where our wholesale volumes were a pretty light percentage of the mix to a pretty high percentage of the mix. And just inherently, when you're selling online, those tend to be a little bit lower margin lower margin mix than our direct channels, where we're selling at full MSRP minus normal discounts. So we are gonna see a little bit of pressure on the margin rate, and then from an operating expense perspective, we have invested in operating expense this year as we've gone through the year, not only from an advertising perspective, but from a development perspective, making sure that we're investing in the next products that are coming out for the company.
So you'll expect to see operating expenses to be relatively flat to where we were at in Q4, and the combination of those factors would lead us to operating income of that down $10 million to down $15 million, or -$10 million to -$15 million in the Q1. The good news is we have a lot of gross margin product, projects that are taking hold, have some sourcing initiatives where we're literally starting to see products hitting the floor for us now, and as they start selling through, we'll see the gross margin impact of that in the back half coming through the PNL, and would expect ourselves to be EBITDA positive by the time we get to the back half. So some mixed things impacting the Q1, but improving as our initiatives take effect as we go through the year.
Okay, great. I want to put a pin in the gross margin discussion for a second. Let's talk about the full year really quickly. Optically, it looks like a kind of high single-digit growth guide, but if you... maybe you can help us understand what were the launch costs last year that adjusted your revenue down? If we think about sort of the puts and takes in bridging to the $550 million of EBITDA, or sorry, $550 million of revenue that you've guided, like to get there for EBITDA. What are the assumptions that underlie that, you know, that growth rate that you're assuming for this year?
Sure thing. So, as Matt mentioned, whenever you launch mattresses into wholesalers, there's an industry-standard discount that takes place for the mattresses that are going out, so it's about a 50% discount. And so they will sell through those mattresses, and it creates a little bit of a hole where mattresses you might have been able to sell in at full price, now we're selling at half off. That created about a $15 million headwind for us last year. So if you think of last year's revenue actuals being $510, on a pro forma basis, they were probably closer to $525.
... So our guidance this year of $540-$560 has a little bit of growth over the 2023 levels, which we should get a lot of as we're wrapping around on that launch or annualizing it in the first half of this year. Then, we really have predicted pretty modest growth in the back half at this point, trying to set our expectations conservatively. We've planned around an industry that continues to bump around near the bottom, and planning to continue to take share, but wanting to set our expectations fairly conservatively as we do look across that back half.
Okay. And then just delving into the channels, and as we think about growth in 2024, DTC did have a nice growth inflection in the Q4, and I think you said showroom and e-com both were growing. I wanted to delve into showroom and understand sort of what needs to happen to improve productivity there. I think you've mentioned there's been some productivity challenges in your own showrooms. And, you know, some percentage of the showroom base is underperforming. What are the steps we've put into place to make sure that those are kinda back up to the efficiency level we should expect?
So, we're still a pretty young retailer. We've got 60 stores around the country, and we've been at it for about 3 years. They were built with a clear pro forma of about $1.8 million per store, and about a $500,000-600,000 cost to build. They've ended up with volume a little light of that and cost a little high of that. So I guess that's, you know, not totally unexpected, but we've got to adjust and figure out how much of that volume softness is brand momentum, or how much of it is this category depression that we're in and we will come out of. In Q4, about 60% of our stores comp positively.
That doesn't sound like a great number, though, but it's better than what the trend we had prior, and we gotta get that up higher. We know volume. We chose to put our showrooms in higher rent, high-end malls or middle and high-end malls, where most mattress stores are not in the mall. They're on the outside of the parking lot in B strip real estate, which is a lot cheaper, and I think we've got to decide, is that visit that doesn't convert strong enough to pay that rent premium? So I think about it kind of simplified that way. But before you can even do that, yeah, we gotta get to where 85% or more are comping positively and growing. So we're. You know, I look at it as a young part of the channel that we've got to figure out.
We've taken some aggressive cost controls on the stores themselves, and we're trying a couple of different sales incentive structures. They were really very much designed to be showrooms, and we wanna turn them into stores that sell stuff. So that sounds kind of basic, but that's not how they were founded.
Yeah. Okay, and then-
Can I ask what's so important? I mean, that... I think the latter for sure. I mean, mall traffic, as you know, has been down and has been coming back a little bit lately, but we're closing... There's so much mall traffic there, and I keep telling our showroom managers, "Everyone that walks by the store sleeps on a mattress." So they're here, we've just got to get better at converting them there or watching them, you know, ensuring they go to the website or to a partner to close the sale.
One of the other initiatives you guys mentioned on the Q4 call was third-party financing and the potential to sort of drive more penetration there.
Yeah.
So maybe just baseline us on where were you in the, you know, the last year or two in terms of attach rate for third-party finance, who's financing their mattresses, how often, and then where could we go, you know, over the next year or two years?
So Alicia in the front row is running this initiative, so if I say something wrong, she's gonna help me correct it. But we've been with Affirm , since founding, and they've been a great partner. We have typically been somewhere between 20% and 30% of our sales in showrooms financed. Most benchmarks I can find are somewhere between 40% and 50%. So we think that's a big chunk of money, and a chunk of revenue that's in between there. I don't know how far up there we'll get, but if we get halfway, we'll be significantly better. And it's just product offerings, how competitive our offerings were, and then how incented our stores were to use it as a tool.
Then maybe just turning to the e-com side of DTC. You mentioned last year, I think with the product launch, there was more brand spend and more top of funnel, you know, being spent to kind of raise awareness. And maybe this year we're seeing a bit more of a shift down funnel toward converting folks that are now aware of the Purple brand, know the new products are out there, and available. So maybe just talk about how we should think about an inflection in e-commerce in 2024, 2025, whatever it is. You don't necessarily have to choose timing, but is that inflection coming from leaning into that bottom of funnel marketing spend? Is it coming from just the comps get easier in the category, and at some point, we come up off the floor?
Maybe just help us understand the puts and takes there.
I think the, you know, again, I'm not gonna try to predict the category recovery, so if that gets behind us, great, but we're planning on being able to have all channels comp positively this year. Q4 was the first flat quarter we had in e-commerce in 12 quarters. So coming off of COVID and coming off of some of our own inflection, either steps or missteps, you guys can categorize them. We saw flat in Q3, and then up ever so slightly in Q4. I think that means that we're at the bottom. I don't think it's gonna get worse than that, but we still have to execute better, and the competition in the bed-in-a-box segment of our business, if you will, the lower-end stuff, there are some very capable marketers.
We're spending more on conversion, consideration and conversion, and a little bit less on awareness, and we're trying to get that mix right.
Okay. Touch on wholesale, and then we'll talk margins for Todd. But on the wholesale front, you guys haven't added that many doors in the last year, and I guess the focus has been, you know, let's focus on existing retail partners with the new product launch, get that squared away, and then build from there. But maybe just speak to the opportunity in terms of where you are, in terms of overall doors relative to kind of the industry penetration. And then efficiency is another opportunity for you guys, like-
Yeah
... that has waned quite a bit in the last couple of years. So maybe just speak to what we're doing on the efficiency front as well.
So we right now are in about 3,500 wholesale partner doors. It's hard to get your head around how many are there. Tempur, I think, quotes about 12,000 in the U.S., so there's still quite a bit there. But I would say of the best doors we can see, we're in 80% of them. So there is still some business out there. Quite a bit of it's under exclusive agreement with one supplier, so if that loosens up, there'll be some customers we can go into. What I've got that team really focused on is door productivity. So when we launched the new mattresses last year, we gained about 10% of new slots in existing customers.
That is a much better way to grow than by just adding doors, because the cost of adding the door, whether it's the slotting that goes into getting it started or the servicing of it, will make a lot more money if we can get more through the doors we have than add doors. Again, not closed adding doors, but that's not my first path for growth. We want door productivity. We're about 30% off our peak door productivity back when we had, you know, 1,200 doors, not 3,500.
Yeah. Okay. And then just maybe if you could touch on the Tempur Sealy settlement agreement that was out there, you put out in tandem with the Q4 release. Maybe just speak to what it means for you guys in terms of your ability to sell through your biggest customer on the wholesale front, how much breathing room that gives you and time, and anything else you want to touch on with the agreement.
Okay. So when we released last Tuesday, we also released simultaneously an agreement that we signed with Tempur Sealy that said, Our current agreement with Mattress Firm, the retailer they're trying to buy right now, is an evergreen agreement that's cancelable by either party with 60 days' notice. We signed an agreement with Tempur that neither of us would visit that for at least a year after the deal is consummated. So the way we look at it is it's just a little bit of stability. I can't say what their intentions are. I know that if we have a good, strong brand, I think Mattress Firm is better with us than without us, number one. Number two, I know our balance of share right now is the best it's ever been in our history with them.
And so, you know, we, we will have to deal with—if the FTC approves the deal, we'll have to deal with the, the reality of that, but we did get a 12-month standstill, if you will, to make sure that no changes happened during that first year. The second thing we were able to get in on a condition of signing that agreement was there was some IP litigation between the two companies. We've agreed to drop that. They've reinforced our intellectual property, and so we look at that as a pretty good outcome to the uncertainty that their acquisition is leading to in the marketplace.
Okay. And then let's touch gross margins for a second, Todd. I guess in terms of what's embedded in, in the guidance for 2024, it seems like, you guys strongly alluded to, to needing to be kind of approaching that 40% run rate, exiting the year. Maybe just help us understand the bridge to getting to the 40, the baseline being roughly 37% or so that we've been at, that there's 300 basis points in there, there's price, there's unit volume, you know, there's cost out, whatever other bucket you wanna provide us, but just kind of bridge us up to the 40.
Sure thing. So, adjusted gross margin last year was about 37%, and so that you can view as the starting point for the annual gross margin. We've kind of alluded to some of the benefits that will hit margin this year already. First is pricing. We have taken pricing for pillows and for our accessories, for cushions, and so forth. In Q4, for mattresses, we took pricing increases again for the direct channel in January, for wholesale in March, and so we'll be accruing the benefits of that to gross margins, starting really meaningfully in Q2. And then we have a number of sourcing initiatives that will be next on the list, where we're literally starting to get goods in right now.
So that's going out and doing basic work around RFP-ing the different products that we do purchase and make sure that we get the best price, that we're dual source wherever we can be. That will add a pretty significant amount to margin, and that'll really start hitting us in the Q3. So that's when we say we're getting to profitable EBITDA in the back half of the year, those are the things that lead us to it. And when we talk about exiting the year to 40%+ gross margin run rate, that's how we get there over the course of the year.
Okay, got it. We have time for one more really quickly, maybe just a longer-term one that we can discuss. In over the long run, what are the impediments to actually sort of getting your operating margins in line with the rest of the industry? Obviously, that, you know, some of the other players have scale, so there's a piece there, but any other impediments to kind of getting back to in line with your peers, over time?
So I think no impediments. I think our biggest opportunity is gonna be volume. So at this point, we have two factories, both of which are running at well less than 50% utilization. And so as we are able to utilize those factories better, there's obvious benefits that come with that leverage. There's benefits that come with figuring out also from a manufacturing perspective, how much we wanna have in-house versus outsourced, and making sure that we're getting the best leverage off of our manufacturing capabilities. And then there's continuing to take our sourcing to the next level. And so the combination of all of those things, I think, puts us in a good position to be able to grow, certainly towards a much healthier EBITDA percentage over the course of time.
Right now, we're focused on the near term, which is getting ourselves profitable in the back half, but for the long term, clearly, lots of upside.
Okay. That we're well out of time, so appreciate it. Thanks, Rob. Thanks, Todd.
All right. Thank you.