Well, good morning, everyone. Thank you very much for joining day one of our 24th annual Oppenheimer Consumer Growth and E-commerce Conference. So my name is Brian Nagel. I am a senior equity research analyst here at Oppenheimer, covering consumer growth and e-commerce. So I'm very pleased to have with us our next presenting company. It's Purple Innovation. And two of the company's executives, Todd Vogensen, who's CFO, and Alicia Foreman, Vice President of Corporate Strategy. So Purple, thank you very much for joining us. I appreciate it.
My pleasure. Good to be here.
So we're going to structure this as an informal fireside chat with me asking the Purple team questions and them answering. To the extent there are any questions from the audience, just send them through the chat, and I'll be happy to work them through the conversation. So with that, I think we can get started. So look, the way I'm starting all these presentations, it was just given the fluidity, I like the word, fluidity of the consumer backdrop. And just maybe let's just start from a high level before we jump into more specific questions about Purple. Just kind of what you're seeing from the consumer, what you're basically, what you're seeing in the consumer backdrop within the United States.
Sure. So overall, in our industry in particular, it's fair to say that demand is still weaker than last year. At least that's what we're hearing from all of our friends in the industry. Our focus really as a company has been about how we manage our own business to outgrow the industry and continue to take market share. It's just something that we've really been demonstrating over the last several quarters.
But from an overall industry perspective, yeah, as the housing market has been a little challenged, that has put pressure on a lot of higher ticket products for home-related goods, including the mattress industry. And so to be sure, it helps when the housing market's strong and interest rates are low. But we do believe that we can continue to take market share. We don't have to wait around for the market to recover to put ourselves in a good position.
That's a helpful story, Todd. I appreciate it. So now shifting over to Purple and basically following along some of the comments you just made. So I think having followed Purple obviously very closely, one of the, I think, the key aspects of the story right now is the new product line. So maybe just talk about how the new products you and your team have recently launched, the performance of those products, how different they are than what you had sold previously, and kind of competitively, where you're now positioned within the mattress market.
Sure. In May of last year, we launched a new line of premium and luxury mattresses, which has extended the company's overall mattress assortment to cover price ranges, going all the way from $1,000 up to $7,500. That comes with lots of benefits. Obviously, wider customer reach, improved profitability and margins, and a more complete ability to trade consumers up to higher price points within our own brand. From a consumer perspective, the widening reach kind of follows millennials who have been the core demographic for the company as they continue to mature into life stages where they have more disposable income or are willing to spend more on health and wellness. We're finding a segment of the population who is starting to understand that there is a good correlation between a good night's sleep and their mattress.
They're willing to spend a little bit to do that. Expanding our product reach and price points has helped with that. Also helps from a margin perspective internally. It's fair to say margins on a $7,500 mattress, the cost is not 7.5x the $1,000 mattress. There is some margin benefit there. We do think it's important to not only the wholesalers, but our own retail stores to be able to walk customers up their product purchase.
Be able to show them the benefits that come with higher price point mattresses and hopefully allow them to move up to higher average price points over time by having the broader product line. That's been serving us well. I also wanted to note that we have expanded our successful pillow lineup with the goal of driving more frequency of purchase, more accessible reasons for customers to come in and experience the Gel Grid technology. And that's been quite successful for us as well.
Is the new product line now built, or should we expect further additions to the product lineup?
No, we launched the full product lineup in May of last year, and so it is out there. My caveat's going to be we always have an R&D portfolio, and we're always planning on having a consistent, appropriate pace of new products coming in over time. You're not seeing a lot new in 2024 because we just launched everything new in 2023. But we will have an ongoing R&D pipeline that'll continue to provide new benefits to the mattresses, new mattress lineup, as well as new pillows, bases, and other accessories that help keep our product lineup fresh.
Now, just looking through the most recent results from Purple, you talked pretty extensively in that quarterly report that the underlying demand for these products has started to perk up. You're seeing definitely better sales. Maybe elaborate a bit on that. And I guess from an investment standpoint, what you're seeing recently, what you've reported recently, should we expect this to be a sustainable trend here?
Yeah. So Q1 was a strong quarter for us. Now, out of fairness, we mentioned we were wrapping around on some fairly soft numbers. So we were up 12.5% on the revenue line. We should not expect to grow 12.5% every quarter. That was kind of a remarkable number, and it was a little bit impacted by that compare. But that said, we are continuing to get strong feedback from our wholesale partners and continuing to see, oh, brand awareness growing as well as overall just acceptance for the product line. And so we do think we're in a position where we're going to continue to grow faster than the market. And that should enable a lot of positive things going forward for us.
Then talk to us a bit, Todd, about the market. I think you may have alluded to this already a bit. So now you have this new product lineup. I mean, one of the keys is it's higher end, higher price points. How is Purple adjusting its marketing to sort of say connect with consumers on these new products?
Yeah. So we've really broken our customer segments down into three segments that follow the three different categories of mattresses: Essentials, which is, call it $1,000-$2,000. The Restore line is our premium lineup that's $2,000-$4,000. And then the luxe Rejuvenate line goes all the way up to $7,500. Each of those has a distinct customer segment. All of them tend to be kind of within that Millennial Gen X age range with higher income, but maybe at different stages of their life or different stages of affluence. So we're really trying to break down how we're targeting each of those consumer segments, doing regional and localized as well as personalized marketing, and having some success with that very early in our ability to segment to that level, but I think really encouraged by what we're seeing.
I'd say also from a marketing perspective, we're also trying to deliver a message that is different than everybody else out there. We're in an industry that's filled with a lot of foam and springs. And we have a unique product with the Gel Grid technology that allows us to differentiate. So we want to make sure that we're communicating that message in a way that's very direct but clear. And so doing a lot of work around how we can continue to make that come true.
So as we watch Purple through the course of 2024, maybe into 2025, should we expect to see a kind of a new evolved marketing message take hold?
Yeah, most definitely. We're spending a lot of time going back and not only honing what it is that we're communicating now and who we're communicating it to, but we're also taking a long look at what we've done historically that was so successful for us. You've seen some of it recently with coming back to the egg drop commercial that was part of the viral ability for the company to grow initially. We were also going back and looking at how the company messaged initially. There was a lot of great ability to be very direct, clear, and succinct, and do it in a way that kind of cut above some of the noise. And so working a lot on that right now as well.
Just moving a bit to competition. Again, this is one of the questions I get a lot when I talk to our clients about Purple Innovation. So you mentioned just a moment ago the unique product you have, the Gel Grid, that competes a lot with foam and springs. So I guess the question I have is, how do you view competition? I mean, are there other companies out there in the mattress space that are doing something similar to Purple, or is Purple unique? And how do consumers look upon Purple against a lot of sameness within the mattress category?
Yeah, that's right. So there are no direct competitors to Purple. There's nobody else selling the Gel Grid, certainly at the volume that we're selling. There are some who have tried, but nobody who has gotten nearly the traction that we have. And I'd say also we've got our ability to do that is tied a lot to a patent portfolio that keeps our technology safe. And so because of that, we really do have unique technology with unique feel and benefits. And that's kind of the beauty of the company. That said, from a competitive perspective online, there's still a lot of bed-in-the-box competitors, though we do have more of a luxury offering than most of them.
So we're not direct competitors. But as people are searching, they'll come across those names. The primary benchmark for us is probably Tempur. Though our product has an entirely different feel. So we view ourselves maybe more as an alternative for the customer that's looking for a different experience to Tempur than a true direct competitor. They're more of a benchmark for us than I would say a true competitor. Those are probably the areas that we look at the most when we're talking about benchmarking and competitive sets.
Now, shifting a bit, one of the other unique aspects of Purple is just the way you go to market. So it's a combination of wholesale partnerships, e-commerce, and then increasingly company-operated stores and showrooms too. So maybe talk about the infrastructure. And then as we think about the components of that, how do you expect the consumer-based infrastructure to evolve over time? Is wholesale where it needs to be? How should we think about the store growth and then e-commerce?
Yeah. So really for us, we get the question quite a bit of, do you want to grow wholesale more? Do you want to grow online more? The truth is, each of those different channels is important to us. We want to be meeting the customer where they want to shop and not really prioritizing one channel over the other. There is profitable growth available to us in all channels.
And all channels are an accretive part of that long-term structure. So we have strategies that we can talk about within each of those that I think is differentiated and sets us up for growth so that we may have a little bit more mix towards wholesale over the longer term. But right now, we're at 45% wholesale, 55% DTC. As we see shifts, there should be more just adjustments around the edges than anything that's a massive sea change.
So focus a bit just on the company operating stores. There's a store I visit often in Roosevelt Field Mall, which I think it looks great. I mean, it really showcases the product well. It's a very laid-out store, very nicely laid-out store. So I mean, where are you now in the rollout of these stores? How are they helping to sort of say build the brand and really educate the consumer on the uniqueness, if you will, of the Purple product?
Yeah. No, I think you hit on it. That is absolutely the goal of those retail stores is not only driving sales and being profitable, but being that marketing vehicle that people can understand what the Purple product is, understand how we're differentiated. And we are seeing that there are a lot of good omni benefits of having those stores, both to e-commerce and wholesale, as well as to the four-wall profitability. So a little bit of multiplier benefits there. In terms of where we're at, our big year for growth was 2022. We added 27 stores, just about doubled the chain in that year. And since then, we've been really focused on what can we learn out of that growth. So now we have about 60 stores.
We took a pause on significant expansion this year to understand the operating models that work best for us before we commit a bunch more capital and other resources to those stores. And really, the near-term focus is on being profitable and making sure that we have a good profitable model that we can launch off on into the future. So good news is that even with the stores fairly new in their overall maturity, we have about half the fleet that's profitable on a four-wall basis, which is a big improvement over where we were at just a few quarters ago.
So we're seeing good signs, getting good traction. And based on the work the company did several years ago, we'd kind of set up the overall long-term goal for stores to be around, call it 200 doors in the U.S. We still believe that's an appropriate target over time. And we're seeing that we really do have that ability to get the showrooms not only profitable, but also to be that core marketing vehicle to drive sales for the whole company.
Recognizing you're still early in, frankly, testing the store model, but are there particular wins you want to call out? Are there areas you notice the stores work particularly well, maybe in certain type of malls, certain type of locations?
Yeah. So we do tend to do well in malls and enclosed malls that are A locations, where we can be driving maybe new eyeballs to the brand and be that outreach vehicle. And those can cut across the entire country. We tend to do very well in the West where the company started and are continuing to grow awareness in the East.
So within the stores, we're finding that we really have the ability, because we have people that are trained on the technology, to move people up the product categories and move them into the luxe mattresses, which have been successful in stores. So that increases our average selling price, increases our margins. We've also done a lot around the operation of the store and how we can make it more efficient, both from a payroll and just a plain operating perspective. So that's helped as well. Lots of good learnings there.
And so just to touch on the Omni-channel nature of this, as you launch a store, what happens then, or how do you see online sales pick up as well?
Yeah. So it's been a little bit tough with 60 stores. You can imagine measuring an MSA on one store going in is kind of a little bit tough to get correlations. But we've done a lot of consumer research that says when somebody goes into a store and leaves, but then wants to buy a mattress afterwards, in all likelihood, a good chunk of them go to e-commerce or go to wholesale. And we have seen pretty consistent response in that regard that does give us a good confidence that there is a multiplier effect on those stores.
Now, shifting a bit again, there has been a proposed merger, a rather major proposed merger within the sector with Tempur and Mattress Firm. Purple, you and your team have commented in the past. So I guess it's a question we get a lot. What's your latest thinking about assuming the merger goes through? How does that impact Purple potentially, both near and longer term?
Yeah. So you're right. We have commented on the past. And what we've said, just for those that may be newer to the story, is we do not think it's a good thing for consumer choice. We also don't think it's a good thing for innovation because we potentially lose one of our core sources for providing feedback on the new innovation that we do have in our pipeline. But we are prepared for it to happen. I think prepared in a few ways. A couple to point out. We do believe that we are a good viable option for customers that are looking for an alternative to Tempur's product feel. Tempur has been very successful with their lineup, but it is a very distinct product feel.
Having an alternative, if somebody is looking for something different, is important for companies like Mattress Firm as part of their selling experience. We want to continue to be that good alternative. We also think the strength of the brand and the differentiation is something that provides broader appeal beyond just Mattress Firm. Maybe due to the merger, maybe due to just our overall brand momentum, we continue to see new retailers coming forward and wanting Purple to be a part of their product mix. I think there's going to be opportunities for us, regardless of what happens with that merger, to continue our expansion into wholesale and to grow the number of doors and retailers that we're in over time.
And that's a perfect segue to the next question I had. So maybe just remind us, and to the extent you've given these numbers, within your wholesale mix now, what portion is sort of, say, controlled by Mattress Firm? And then secondarily, to follow on the point you were just making, I mean, are there other, and I don't expect you to mention them by names, but as you think about the wholesale landscape across the United States, I mean, how many additional targets could there be out there for Purple?
Yeah. So we are in about 3,500 doors. About a third of those are Mattress Firm doors. And then it gets very segmented from there as you go further into what are more both national and regional players, both in furniture stores as well as mattress-only retailers. As we look at it, we hear people talking about thousands and thousands of retailers that they're in. I think for us, being in 3,500 doors, we could see another, call it, 1,000+ doors that would be accretive and would be a good partner for us. There would be high-quality doors that we could get good volume out of. And we're continuing to—we have those folks on our target list, continuing to have conversations. But we want to be selective.
As we're looking at wholesale, we think our best path to continuing our growth there is really through managing the doors we're in and continuing to increase productivity. We have a lot of things that we're working on to get out and educate retail sales associates and continue to help them sell the Purple product better. It does take a little bit of a unique understanding of the product to sell. And so we're very focused on that, very focused on continuing to expand how Purple is presented.
We have a test that we're doing around some (we call them Purple Walls that we put in wholesalers) that continue to show good traction and show that we really have the ability to show off the Purple brand more within the retailers that we're in. I think really opportunity on both sides of the coin, from expanding retail doors to expanding productivity in the doors we're in.
Now, the guidance you have out there for 2024, your cost of sales of roughly $550 million kind of at the midpoint.
Right.
The question I have is, as you think about your operational infrastructure, I guess a lot of this would tie back to your manufacturing capacity. So you think about that $550 million, I mean, the capacity Purple has now, what sales could that support over time before we had to see some more significant investment in the manufacturing and sort of, say, distribution infrastructure of the company?
Oh, yeah. So as we look at our infrastructure capacity at the factories, we're currently at about 35%-40% capacity. We have two factories, one in Georgia, one in Utah. So there is meaningful upside that exists with the current infrastructure, with really fairly limited capital needed to be able to reflect that more maintenance CapEx or safety CapEx that's kind of nominal. I'd say that we do believe that we can improve our efficiency and effectiveness over time with some investment in the manufacturing plant.
But those are more geared towards margin expansion than pure capacity needs. There are ways that we could improve our margin through being maybe a little bit more vertically integrated or those types of things, which we'll look at over time. The core factories themselves, though, have lots of upside over the volume that we're at today.
And then just look from a longer-term profit potential. So clearly, Purple, your sector has been in a state of flux lately. But like we said at the start of this conversation, you are seeing some nice success with these new products. So I guess the question is, as investors looking at the company, how should we think about kind of a longer-term profit potential, longer-term algorithm for Purple?
Yeah. So we're in a position where we do expect to see sustained growth in both sales and profitability. And so what does that mean? On the sales side, we're continuing to gain traction and continuing to show that we can grow our sales above where the market is growing. So we would continue to expect ourselves to continue to be able to do that.
And then as the market recovers, that obviously just puts us in an even better position from a sales perspective. From a gross margin perspective, that is really the opportunity for us. Not only that, now that we're past the new product launch last year, that gets us to, well, even last year, our adjusted gross margin rate through the year was about 37%. So that gets us to a pretty good base.
Now, lay on top of it, we have a lot of opportunity around just improved sourcing of product. So doing RFPs, getting dual sourcing on product, all the kind of core sourcing things that are not maybe rocket science, but that are totally available to us. We also, now that we're further into the launch, have a much better ability to hone the efficiency with which we're manufacturing. And so that's providing a lot of gross margin opportunity, probably secondary to sourcing, but still opportunity in there. And then longer term, we said we were going to exit the year at around that 40% level for our gross margin.
We see a lot of upside beyond that, particularly as we look at getting into more vertical integration, where we're at an odd space at this point where we manufacture our grid and our gel grid, excuse me, and then really buy all the other parts that go into the bed to put them together. So are there things that we can do to even bring some of that manufacturing in-house and improve our margins? There definitely are.
One question I'm asking all my companies, just given the world in which we live, I mean, to what extent are you using artificial intelligence, AI, to either operate the business better or connect better with poor consumers?
Yeah, the truth is we're in pretty nascent stages right now. We're researching technologies really across the enterprise that could help both from a sales driving perspective and a cost management or efficiency perspective, but probably a little bit early to report on any specific initiative. That'll probably be a stay tuned for us.
Again, I know our time's wrapped up here. The final topic I wanted to address with you, Todd, is just the balance sheet. So I think the last number I had here was 35. I think you're in a Q1 with $35 million in cash and equivalents. So I guess the question I have is, how should we think about that? Is that enough? Is your cash balance enough to sort of say get you through this phase to the sustained profitability and cash generation?
Yeah. So the short answer is yes. So we refinanced our debt structure in January, which gave us an incremental $22 million in liquidity. And that really provided us the breathing room that we needed. We indicated in Q1 call that we expect to reach profitability in the second half. And consensus would say our EBITDA loss in Q2 would be relatively modest.
So we stay focused on cash flow and getting to that self-funding model as quickly as possible. And we're seeing all the signs out there that are very positive. We commented in Q1 that we're seeing all those gross margin initiatives we've been talking about really come into life through purchase orders and manufacturing efficiencies. So that helps get us to that profitability in the second half. The bottom line answer to your question is yes, we do believe we have ample liquidity, and we're really nearing that inflection point in Purple's ability to self-fund.
Was there anything that should be addressed that I didn't address in our questions here?
Oh, that was pretty comprehensive. No, I appreciate the thought that went into those questions. That was very, very good and covered all the core topics that we've been talking about with all of our friends.
Very good. Well, I appreciate very much, once again, your participation in our Oppenheimer Consumer Conference. Thank you. Best of luck here. Look forward to seeing the continued evolution of the strategy.