Q4 2019 Earnings Call
Greetings, ladies and gentlemen, welcome to Purple innovation fourth quarter 2019 earnings conference call. At this time, all participants are in listen only mode.
Our brief question and answer session will follow the formal presentation.
Any once you require operator assistance during the conference. Please press Star zero on your telephone keypad. There's now my pleasure to introduce your host Brendon Frey of I see our please go ahead.
Thank you for joining purple innovations fourth quarter 2019 earnings call.
A copy of today's press release is available on the Investor Relations section of People's website at Www Dot purple Dot com.
I would like to remind you that certain statements. We will make in this presentation are forward looking statements.
These forward looking statements reflect purple innovations judgment and analysis only as of today and actual results may differ materially from current expectation based on a number of factors affecting the company's business.
Accordingly, you should not place undue reliance on these forward looking statements.
For more thorough discussion of the risks and uncertainties associated with the forward looking statements to be made in this conference call and webcast. We refer you to the disclaimer regarding forward looking statements included in our fourth quarter 2019 earnings release, which was furnished to the FCC today on form 8-K, as well as our filings with the FCC referencing that disclaimer.
We do not undertake any obligation to update or alter any forward looking statements, whether as a result of new information future events or otherwise.
Today's presentation will include references to non-GAAP financial measures such as adjusted operating income EBITDA and adjusted EBITDA.
Reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures its available within the earnings release, which can be found on our website.
With that I'll turn the call over to joke makeup.
Thank you and good afternoon, everyone. We're joining you from our new headquarters and Lehigh, Utah with me on the call today as John lag, our Chief operating Officer, and Craig Phillips, Our Chief Financial Officer. Following our prepared remarks, we'll be happy to take your questions.
Fiscal year 2019 was a tremendous here for a company on many levels, we successfully executed our core strategies feeling strong momentum in the purple brand robust topline growth and a significant improvement in profitability. We made important infrastructure investments that expanded production and drove increased efficiencies.
And we strengthened our organization with a number of key hires a few that many key highlights from the past year include increasing net revenue, 50% to 428 million more than doubling our wholesale doors, adding over 800 toward dusk distribution network launching our company operated showroom strategy expanded gross margin by four.
170 basis points, improving operating income by 33.1 million and bringing our fifth Max machine manufacturing machine online and building out numbers six and seven Adam watching them in early 2020.
Finally, strengthening our balance sheet with a yearend cash balance of over 33 million.
We ended the successful year with a strong fourth quarter, providing us with great momentum into 2020 looking at our recent performance in more detail Q4 revenue increased 58% to 124 million. Thanks to our increased wholesale presence combined with meaningful improvements to our DTC capabilities as well is it has expanded awareness.
Our brand and differentiated product offering.
Channel, starting with wholesale and 2019, we added approximately 800, new doors to our wholesale footprint, including over 100 in the fourth quarter as we've stated in prior quarters. We believed that an omnichannel approach to retail I guess are central to our success and that includes providing a convenient way for customers to feel for themselves how different the purple corn.
It is and our innovative comfort technology as from the rest of the market with over 1700 wholesale doors today and an average of more than three pads on the floor per door. We have established a strong physical presence across the U.S. through our relationships with leading national retailers, such as mattress firm, Macy's Bloomingdales and bed Bath and beyond the as well.
Lets leading regional retailers, such as furniture ROE home Steinhoff walls, Mathis brothers, and Ray mourn Flanagan that allow us to reach a significant percentage of our target market on top of our expansion. We continue to experience solid sell through for our products in our existing doors.
Now to direct to consumer fourth quarter sales increased 29% year over year, a sharp acceleration from the 10% increase this business achieved in the third quarter throughout the year, we implemented a number of initiatives to reignite growth in this channel. These included testing more heavily into targeted promotions to drive both traffic and conversion, which has proven to be both.
Revenue and margin accretive as well as introducing bundles and improving our ability to cross sell products on the web site.
Our recent results underscore the initial success of these actions for example over the holiday season, our DTC sales exceeded expectations with Black Friday, and cyber Monday, being our highest and second highest days respectively in the company's history.
And exciting development from the past year and an important component of our DTC plans was the launch of our company on showroom strategy. The aim of our company showrooms to provide consumers primarily in major metropolitan locations physical access to engage with our brand in a setting that showcases the premium and technical benefits of the full purple assortment.
We ended 2019 with five primarily West coast locations. In addition to our factory outlet in Salt Lake City.
And there are currently we're currently evaluating additional sites, including on the East coast well, our showroom rollout is still in its early stages sales trends have been accelerating each month and we look forward to growing contributions from this channel and 2020.
Our strong overall performance this past year wouldn't have been possible without the substantial improvements to our manufacturing and fulfillment capabilities to review our progress in more detail and provide insight into our plans for 2020, I'm going to turn the call over to John.
Thanks, Joe and it's a pleasure to be addressing everyone again.
I'm very pleased with the progress our team made in 2019, improving product quality operational efficiency and timely fulfillment, helping to support the company's significant increase in revenue and gross margin compared with 2018.
We achieved record production numbers in the fourth quarter and for the full year importantly, we dramatically increased output without significantly increasing labor. Thanks to a fishing season, our production line from improved processes and increased automation.
This has allowed us to better control and reduce cost per units and further improve yield spoke on a year over year and sequential basis.
Our record production was also driven by the addition of our stress proprietary mattress match machine that went online in July.
Preparation for another strong Europe growth in 2020, we ever in the final stages of building out our six and seven Max machines and remain on schedule to bring these online in stages over the next couple of months. We're also close to finalizing the location for a new production facility in the eastern half of the United States that well.
Eventually how's mattress, Max eight and beyond as we work to stay ahead of the growing demand for our product portfolio.
Thousand 19 was also highlighted by meaningful cost savings realized through better sourcing tactics. These include a dual sourcing high volume purchasing of our direct materials and continuing to renegotiate Master service agreements with key vendors.
2020, we're focused on continuing again, continuing with the strategic direction and expanding out to include eastern U.S. operations and leveraging our increased volume opportunities.
After working through fulfillment challenges in 2018, we made great strides on this critical from throughout 2019, driven by several internal initiatives as well as the benefits from our new Threepl partnership, which has helped with accuracy timeliness and the cost of deliveries. Furthermore, we successfully launched a new.
New warehouse management system in late September, which contributed to the nearly 40% improvement in our delivery performance for the year.
I'm incredibly proud of the work we've done over the past 12 months evolving purple into a world class manufacturing organization. Our execution continues to provide significant benefit to the company and improve our overall supply chain position and I'm confident that we are well positioned to support the company's near and long term growth objectives I look forward to.
Updating you on our continued progress on future calls and I'll turn it back over to Joe.
Thanks, John looking ahead, we are committed to further strengthening our growth platforms and capabilities with continued focus on four key areas product innovation Omnichannel retailing organizational effectiveness and brand development. Let me provide an update on each of these starting with product innovation I'm thrilled to reiterate.
The JD power and purple, that's the highest ranking mattress and their new bad in a box segment of the JD power 2019 mapped the satisfaction report not to restaurant or laurels. We continued to have many technologies and products and the pipeline that we are excited about starting with the Newpark harmony Telo, which launched in the fourth quarter that we believe it's our best kilo, yet and the comfort entity.
Question on mass appeal, we tested more than 50 iterative prototypes over the past year and not only found the best pillow through this process, but have developed and applied for yet another completely new cushioning patent and found several manufacturing innovations that extend well beyond this product innovation is alive and well within purple and our customers.
As sales have both far exceeded our expectations and better yet are driving follow on mattress sales with mattresses, we implemented a re assortment strategy during the third quarter that simplifies and better articulated the benefits of our current models upgraded our original mattress with some of the benefits from the premium mattresses and are continuing to work on new mattress models coming.
Over the next year ranging from improvements driven from our years of listening to customer feedback to new inventions that we're very excited about beyond mattresses, we're leaning hard over the next year into our existing non mattress categories, such a seat cost trends as well as some all new categories that we will launch this year and 2020.
For Omnichannel retailing, we will continue our efforts to service the customer whenever wherever and however, they want including continuing to aggressively expand our retail partner doors significant improvements to our website and opening additional company owned showrooms with respect to wholesale on top of growing same door sales. Our current focus is on both deep.
Opening our relationship with our national players, while building relationships with strong regional players that will allow us to expand our physical reach in areas of the country not serviced by our existing partners. We continue to find opportunities with strong regional retailers such as our recently launched partnership with Raymond Flanagan and are currently in talks with several other retailers about news.
Distribution opportunities beginning this year, we have found a great symbiotic relationship between DTC and wholesale with each channel supporting the other as such we will continue to invest into development of our online and showroom capabilities. Our work on rebuilding purple Dot com is progressing and we anticipate launching the new website platform and design.
Later this year, we've already made some significant improvements to the existing site, including improvements to our financing modules cross selling up sell modules. The addition of bundled gift guides and have launched gift cards at the same time, we're selectively expanding our company on Sharon's at a modest pace in 2020.
With respect to organizational effectiveness, we felt several key roles in 2019, including our COO, John lag, whom you just heard from our CFO cracked Philips, our chief rate retail officer trace white and quite a few critical VP level positions significantly strengthening our manufacturing finance brand retail and E commerce.
Leadership with new teams built out the focus is adding additional resources and implementing best in class processes in order to continue improving execution across the board.
And finally for both Brandon DTC, we continue to collaborate with our several new agency relationships to better align our brand positioning and creative with the unique differentiated and premium benefits of our products, especially the purple Brad.
Strong fourth quarter and full year performance underscores the progress we are making executing our strategic initiatives, which has provided the business with great momentum as 2020 gets underway with a strong balance sheet, we are well positioned to invest in our brand channels and manufacturing while also pursuing new growth opportunities I'm confident that we have the right people in stride.
Studies in place to build on our recent accomplishments and drive long term profitable growth and sustained value creation for our shareholders.
I also want to address the current concerns regarding cobot 19.
We're continuing to monitor all potential areas of impact and remain in close contact with our suppliers and partners.
Fortunately the vast majority of our sourcing remains to mass spec and we have found multiple domestic alternatives for the components. We do import we continue to invest in the safety of our employees and have strengthened our operations given the current concerns as to sales impact we have seen research, indicating there may be benefits to stay at home DTC.
Isn't that says so all in we have not yet seen any impact and are hopeful any future impact will be minimal.
At this point, Craig will now review the financials and our guidance in more detail.
Thanks, Joe as Joe outlined there's a lot to celebrate from our 2019 performance, including a strong finish to the year.
For the three months ended December 31st 2019, net revenue was 124.3 million up 58.3% compared to 78.5 billion in the prior year period revenue increase was primarily due to strengthen the wholesale channel with more doors and stronger sell through the last year.
And strong growth in the DTC channel enabled by our web site improvements and the company outlet and showrooms opened during the second half of 2019.
Gross profit dollars were 59.2 million during fourth quarter of 2019 compared to 26.8 million during the same period in 2018.
Gross margin at 47.7% versus 34.2% in the fourth quarter of 2018, the significant year over year increase in gross margin was attributable to efficiencies that operations the logistics along with benefits from product mix, partially offset by changes in channel mix.
Wholesale channel revenue, which carries lower gross margins that are direct to consumer channel comprised approximately 36% of net revenue for the quarter compared with approximately 25% in the same quarter last year and 42% in the third quarter of 2019.
Operating expenses were 56.5 million in the fourth quarter of 2019 versus 32.0 million in the prior year period.
The increased operating expenses was mainly driven by incremental marketing and advertising, including approximately 4 million of discretionary spend that shifted to the fourth quarter from the third quarter as well as resources and infrastructure investments to drive sales growth.
Marketing and selling expenses as a percentage of net revenue increased 560 basis points to 38.6% from 33% in the fourth quarter of 2018, as we invested in marketing programs to drive Q4 demand as well as promotions in late December to fuel sales early in the new year.
During the fourth quarter, we reported operating income of 2.8 million compared to an operating loss of 5.2 million in the fourth quarter of 2018.
After adjusting for primarily legal fees intangible asset adjustment equity incentive compensation interim CFO costs, and severance and executive search costs. Adjusted operating income was 3.9 million compared to an adjusted operating loss of 4.3 million in the fourth quarter of 2018.
During the fourth quarter, we recorded expense of approximately 13.4 million from a change in the fair value of incremental loan warrants issued in conjunction with the amended and restated credit agreement, we announced in February 2019.
Inclusive of this noncash expense net loss for the quarter was 12.7 million compared to when that loss of 5.4 million in the year ago period.
EBITDA for the quarter was negative 9.3 million compared to negative EBITDA of 4.5 billion in the fourth quarter of 2018.
Adjusted EBITDA, which excludes the same nonrecurring cost I, just mentioned plus warrant liability was positive 5.8 million versus negative adjusted EBITDA of 3.7 million in the same quarter last year.
For the 12 months ended December 31, 2019, net revenue was 428.4 million up 49.9% compared to 285.8 million in the prior year period.
The revenue increase was primarily due to an increase in wholesale revenue driven by an increase of over 800 stores as compared to the same period last year as well as an increase in DTC revenue of approximately 19 million and additional revenue from our retail outlet in showrooms opened in the second half a year.
Gross profit dollars in 2019 increased 67.8% to 189 million compared to 112.6 million in 2018.
For the year gross margin improved 470 basis points to 44.1% from 39.4% driven by efficiencies operations and logistics at higher margins due to product mix, partially offset by increased sales with wholesale pricing.
Operating expenses were 172.8 million in 2019 versus $129.5 million in the prior year.
As a percent of net revenue operating expenses improved to 40.3% compared with 45.3% in 2018, driven by improved efficiencies in marketing initiatives, partially offset by an increase in noncash stock based compensation expense related to the conversion of class B shares held by current employees.
For 2019, marketing and sales expense as a percentage for that revenue improved to 33.1% compared to 36.3% last year for the year. We reported operating income of 16.2 million an improvement of 33.1 million compared to an operating loss of 16.9 million in 2018.
I mean.
After adjusting for primarily legal fees.
Well the incentive compensation interim CFO costs severance and executive search costs. Adjusted operating income was 29.1 million compared to an adjusted operating loss of 12.9 million in 2018.
2019 included a 6.3 million dollar noncash expense associated with the loss on extinguishment of debt a $16.8 million nine noncash loss associated with the change in fair value of warrant liabilities.
And a 10.1 million dollar noncash stock compensation expense.
Inclusive of these non cash expenses net loss for the year was 12.4 million compared to a net loss of 19.6 million in 2018.
EBITDA for 2019 was negative 3 million compared to negative EBITDA 14.7 million in 2018.
Adjusted EBITDA, which excludes nonrecurring costs and the noncash expenses I. Just mentioned was positive 33 point fourmillion versus negative adjusted EBITDA up 10.7 million last year.
Moving to our balance sheet.
As of December 31, 2019, the company had cash and cash equivalents of $33.5 million up from 12.2 million at December 31 2018.
Our cash position at the end of 2018 compared with the end of 2018 was primarily driven by the positive EBITDA results and an increase in payables and accruals that have an increase in receivables and inventory.
Net inventories totaled 47.6 million at December 31, 2019, compared with 22.9 million at December 31, 2018, the increase in inventory reflects the strong topline growth we experienced in 2019, particularly in our wholesale channel and the building inventory ahead of our recent presidents day sale.
Turning to our guidance for.
For 2020, we're currently forecasting full year revenue to be between 550, and 575 million representing growth of 29% to 34% over 2019.
This guidance considers DTC growth.
Additional company owned showrooms and estimated 900 more partner doors, resulting in faster wholesale growth and D to C. In 2020.
With respect to profitability, we are forecasting adjusted EBITDA in the range of 44 to 49 million compared to 33.4 million in 2019.
This guidance reflects the pressure on gross margins from channel mix in the first half of the year as wholesale sales are estimated to increase as a percentage of overall sales until our investments in brand D to C call Center and additional showrooms enable our owned retail channel sales growth to accelerate.
Our adjusted EBITDA guidance also includes approximately 3 million of incremental spending and costs associated with the new East coast manufacturing facility. We're investing in this year to support growth in 2021 and beyond.
The gross margin headwinds from channel mix and the carrying costs of the new facility will be partially offset by the operational improvements at higher product margins from new offerings being introduced in 2020.
Marketing and selling expenses as a percentage of revenue are expected to decrease in 2020 as a result of the increased proportion of wholesale sales in 2020 and improved marketing spend deficiencies.
Gionee costs as a percent of revenue were expected to remain relatively consistent with 2019 as we continue to tightly manage our administrative and headcount costs I'll now turn it back over to Joe for his closing comments.
Thanks, Craig I want to reiterate what Craig stayed at regarding our 2020 outlook. We believe our intrinsic ongoing business is continuing to strengthen we're choosing to invest 3 million of EBITDA into a facility that will allow us to double our capacity for 2021 and beyond and we expect to exit 2000.
20 with meaningful gross margin improvements as our mix between owned retail and wholesale gets back to more of a 60 40 split.
Now from a position of strength. This is an investment year in core manufacturing and other infrastructure investments to support sustained growth and helped drive the company towards our long term adjusted EBITDA margin targets of 12% to 15%.
This time a year ago, we had a lot of hard work ahead of us, but I was confident that with relentless focus on the fundamentals along with the resourcefulness and fortitude I've seen in our team we could achieve a remarkable amount with our more than 40 million dollar increase in EBITDA over 2018, I'm, even more confident with what our team.
Team of talented and dedicated people are capable of heading into 2020 to that point I'm very pleased with how Q1 is coming in we have a lot to celebrate and I'd like to extend a heartfelt. Thanks to all of our employees for all of their hard work and success with that operator, we're ready to take questions.
Thank you at this time, we will be conducting a question and answer session. If you would like to ask your question. Please press star one on your telephone keypad for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star Keith.
A confirmation Tony indicate your line is in the question Q.
You May press Star Q, if you would like to remove yourself from the Q1 moment. Please while we poll for questions.
Our first question has come from the line of Brian Nagel of Oppenheimer. Please proceed with your question.
Hi, good afternoon.
Thanks for taking my question.
Questions.
The first question I wanted to dig a little further into just the marketing and sales growth and really the strategic thinking behind it. So you are clear that you discussed in your prepared comments and we saw results.
Growth in that why not to celebrate here in the fourth quarter as we look at that growth was that more.
How should we think about that as a driver fourth quarter sales something more strategic in nature that really should help drive continue to drive the top wide into the future.
Sure Hi, Bryan Thanks.
Thanks for joining us here.
You're talking to me the expansion and marketing expense.
That's right.
Yeah, so well I mean, we [noise].
I think the most important thing as we continue to align our marketing expense with with expected sales.
We are our plan is for efficiencies to continue to improve so we're not buying topline by any means really what's happening is as a number of our initiatives continue to expand throughout the year. The DTC improvements that will you've already seen our.
We didn't talk much about Ed we're leaning heavily into our call center and driving a accretive business through human beings that are in support of the web sites. We've got our showrooms we continue to expand.
So.
I'd the the opportunities we have in terms of growing our business marketing comes alongside that so I really think thats the bulk of it it's just aligned with power, saying the.
The year play out.
Craig if you want to add anything I'm no just fourth data for specifically, our fourth quarter ever anticipated that we budgeted that would be higher than third quarter and we added typically deferred some into the fourth sorry, you were talking 2019.
Okay.
Our our into next year expansion, yes, sorry for 19, yes, yes, yes.
Yes that was just as planned.
I mean really it's been aligned with the full year for 19, we had some good guys in Q3 that we advance and that really deferred ended Q4.
But I mean Q4, we felt was particularly strong again some of the biggest days we've had online.
Back in to very solid Bakken, 29% growth in DTC.
And what's been amazing is our ability to lean into not only acquiring traffic, but with the promotional cadence we've had and leaning people into our more premium products, it's not only been topline accretive, but but EBITDA accretive. So overall it was as planned and we feel really worked well and we made some decisions to invest.
In some marketing cost late in the fourth quarter that with that we saw get some benefit in early January.
Got it that's really helpful. But the second follow up question I had recent announcements with a partner.
Great Warner Flanagan.
Clearly a leading player here in the northeast how do you think about.
That relationship as it relates to the relationship jury. Obviously this is this is this.
I guess, what really asking is the incrementality of the sales will happen at Bravepoint plant again versus a potentially shift from other from other retailers you already dealing with.
So we I mean, so far as best as we've been able to prove out there is still significantly more demand out there than that our capacity to produce that has been the a the the narrative and and the reality, we've seen that we've been a capacity constrained business and Thats why we are investing so.
Much into.
Nearly doubling our capacity this year.
So yes, certainly it I mean, there's there's a fairly large population in the northeast a part of our strategy has been defined regional players strong regional players and that's not just specific to the northeast Raymark just happens to be an example of one in the northeast.
They have been good partner so far.
We have strong partners, primarily with mattress firm also in the northeast as of right. Now we believe there I mean were overall work. If you look domestically were maybe call it 2.5% market share.
You know, we're still a relatively small player in the industry and we believe there's still significant opportunity for expansion in our nowhere near a point that were cannibalizing from any one channel to each other from anyone retailer to another.
Great. Thank you very much congrats on a good quarter good luck.
Thank you. Thank you.
Your next questions come from the line of Brad Thomas of Keybanc Capital markets. Please proceed with your question.
Hi, good afternoon, congratulations on great year.
Thank you. Thank you.
Wanted to ask about.
The wholesale opportunity as well and.
Maybe try and put it into context in a world where.
There is increasingly the potential that the consumer may be takes a pause here.
I think if I heard you guys correct. You said you thought that there was an opportunity to add 900 doors. This year can you talk a little bit more about what that pipeline looks like and how much maybe you could expand that.
Pipeline. If for example sales per retail partner and the DTC side hit some choppiness here.
Yes. It's obviously these are all options for us to take right now we as a part of the prior comments.
We Oh, we are still feeling more demand than we've been able to meet we have we have many more partners honestly. We're at a point right now is that when we speak with other a retail channel partners, it's not where it started years ago, which is hey, well fraud, and 10 stores and see how it goes if they want to work with.
Yes, they typically want to go fleet wide.
So it's really just making sure we've got the capacity to support a a major regional player as we look at that.
Again, right now we have some existing retailers like mattress firm that theres still plenty of opportunity for expansion and where were making sure that we are leveraging our existing players first.
But we see lots of opportunity if if I mean, the beauty as if if any one retailer to retailers same some softness we do have opportunity you extend elsewhere, but mostly since I guess since were pretty vertically integrated there are many levers we could paul here to manage our costs to the demand, we see and incur.
Fluting, who knows but there may be more.
More demand for DTC in general depending on how things play out and we're working on ways to area and it's frankly I'm glad we're doing all the investment we're doing on involving our DTC capabilities.
Yeah, we're working on making sure that we can be those customers needs in a variety of whereas depending on how this plays out.
Very helpful. Thank thank you Joe.
And and Craig if I could follow up on the.
Some of the expenses investments if you make here this year I just wanted to make sure I heard this right as we think about maybe the the income statement.
Is there way to think about what what size.
Investment you all are making this year to grow your manufacturing platform and how should we think about that playing out by quarter from a timing perspective.
Yes, so theres several several pieces to that as we mentioned Max six will come on here very soon.
Max seven right after it in the second quarter, we would likely open facility on the on the East coast sometime mid year and start building Max Eightnine, So it's going to be spread throughout the year, but from a capex standpoint.
So standpoint, we'll be opening.
Our retail showrooms throughout the year.
And then we are going to continue to make improvements in the existing facilities both and.
Greensville add into alpine so it's going to be spread probably throughout the year with the big big pieces coming.
Actually when these these large machines are put in place and opening up silly and hide show here I mean, Max X. I wish I was told this morning, but we will likely get our first tests shot out of it within the next 24 hours. So yeah. There is a bit of time to tune and tested before its into full scale production, but it is eminent and Mac seven will be.
Behind but consider with a lead times on these Max machines are new manufacturing facility on the east coast will be and were very far down the path looking at a number of locations, but we need to get into them relatively quickly in order to get the buildout and even on that.
John lags on the phone, but we're probably IMAX eight nine have spent close to 20% already on the the longest lead time components, which we've already received.
There is sitting here in Utah, but ready to be shipped out to our east coast facility. Once it's available. So we're already well down the path and it really it means this is a continuous full year investments and we're well down that path.
And quite honestly, it's going to go both ways as well so while we will have some of the margin pressure as we opened the new facility before we're able to start producing beds theres other investments like the retail showrooms and some of the equipment.
To the existing machines that we'll be adding in grand spill that will be margin positive fairly quickly.
Great Great and then just one more.
Clarification here around around the current virus headwinds.
As you will look at your supply chain and your sourcing are there any component.
It could end up being bottlenecks at all.
I don't think much but but anything.
It might hinder you from component standpoint.
So the vast majority of our revenue is mattress and we manufacture ourselves here domestically and most of the core raw materials and including the coil and foam as all sourced domestically.
We.
We do have some components like covers that right now are coming out of China.
John lag and his team has been a constant contact with our suppliers and we keep a pretty a pretty good inventory lead on those just just given the lead times to get stuff across the Arsone anyway.
So we've got pretty good inventory supply as we sit today on those components that said that they have been working on finding multiple onshore suppliers for nearly every single component, we have as well as the accessories, we sell on top of that so as of right now we don't see any critical bottlenecks of any kind of.
Yes, theres some risk that some domestic suppliers may have a little bit of margin pressure, but from a resiliency standpoint, we we think we're fine.
Very helpful. Thank you so much.
Our next questions come from the line of Bobby Griffin of Raymond James. Please proceed with your question.
Good afternoon, everybody I appreciate you, taking my questions and congrats on a good quarter and a good year.
Hi, Thanks, Bobby.
Yes, I guess the first question I want to make make sure I understood correctly. The 900 doors that are forecasted for 2020 that those are doors that have already been announced right wholesale partnerships that that have already been announced.
No Thats no. This is net new we're expecting.
Net new you're expecting okay. So I.
I guess with partners go ahead, I'm, sorry, Im sorry, it's not all new retail brands. This summer that is expansion within existing brands.
But but now we are expecting some significant growth in wholesale doors.
Okay, Yes, and then I guess the second part of that was just.
The product seems to continue to be doing very successful would you have the capacity if that number need if you had demand to take that higher or would like door growth over 900 have to wait until mattress Mac machines 789 were up in fully running.
Well, we again six and seven will be up eminent way, we said sex would be up by the end of Q1 and seven early Q2, and we're clearly on that path right now.
With six and seven which fully enables we're fully built out and our Ah you tell location then.
We have the capacity we need to meet our sales calls for the year.
With a nine coming online later in the air that's really both.
That's upside potential and we will sell every mattress, we make as we always have.
That's upside potential very late in the year, but Thats also building up the capacity, we need into the expected growth into 2021.
Okay. Okay. That's very helpful and I appreciate the details on that front of ours and expected impact on clearly a lot of focus on what potentially happens you as consumers understand you probably don't want to get into habits of quarter to date, but is there anything you can share with us about what you've heard from maybe some of your retail customers over the last three weeks, what you've seen your DTC business to.
Maybe give us a little flavor other consumer has been reacting over the last yet.
Yes, as I mentioned at the prepared remarks, so so far early signals for Q on our business momentum moving forward business as usual. So we have not seen any signs of softness as of today.
Similarly, our best visibility is into our own showrooms.
To which we have not seen anything negative or heard anything from any of our neighbors. In fact, we've had some very very strong weekends in the last couple of weekends and our own showrooms. Our wholesale sales are continue to come in.
With the momentum view that we've had so you again as of right now.
Where we were.
I'm pleased to that we haven't seen any direct impact, but obviously, we are preparing for many outcomes and are continuing to watch this closely.
Okay. That's very hopeful and then I guess lastly from me on on cash flow and Capex can you maybe tell us.
Out of the 40 million what portion of that is for the machines and then secondly on should we expect cash flow from operations to take.
A corresponding step up to cover the increase in capex or would there or there will be a little draw down on caf on the balance sheet and 2020 to pay the capex.
Yes, so we'll clearly need to use some of the cash.
To build out the capex.
But as it stands right now we are plan includes us being able to produce enough cash to do what we want to do.
Without taking out any additional debt.
And as far as the machines go.
The price is really the cost for us to build those really hasn't changed it's in the single digits. The return is pretty quick on those.
And we will not only be finishing six and seven and building eight and nine but also investing into machines 10 and future. So that those are up ready to go early in 21.
Perfect.
Appreciate all the details congrats again on a good entered the year and best of luck going forward.
Thanks, so much.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next questions come from the line of Seth Basham of Wedbush Securities. Please proceed with your question.
Hi.
We're not here in New York are there.
That could you check of your phones I'm you. Please.
Yes.
It's a seth.
Okay.
I'm sorry about that yet. So my question is as follows but first of all congratulations on a very strong quarter and a great year.
As we look at your business and how it developed over the course of the past year. You guys grew your wholesale channel revenues quite substantially now 62% sales I think you said that you plan to have a split about 60% wholesale 40% I'm sorry, 60%.
We see and 40%.
A wholesale going forward when is that goal likely to be achieved and do you expect to go past that goal in 2020.
Good.
Sorry, sorry go past, which fall I want to make sure I heard that right.
Tcs percentage of revenue would you expect that to be below 60% in 2020.
Yes, so for full year, where we are going to see some some a shift from DTC into wholesale primarily because we've just got wholesale demand in the first half of the year as where again, we in the back half of of 29 team began our revitalization DTC, which were saying.
Terrific progress on and we expect continued foreign momentum there we've got immediate access for door expansion on wholesale consumers consumers, who would like to buy our product and retail distribution opportunities to to get that product into their hands. So we are taking that.
Which which absolutely is shifting the mix.
Yeah mid year could be even as close to 50 50.
But again as our DTC continues to accelerate as we are back into growth and DTC is really fully owned retail. So it's it's a mix of DTC, it's a mix of our own showrooms. It's a mix of what we're doing in our call centers.
As that continues to grow we expected head back to 60 40 for now we're looking forward to be.
That we think Thats a good good ratio long term, we'll see.
But we still believe we've got ample opportunity to lean more as a majority direct to consumer player with a very strong wholesale base underneath that yes. If you think about a lot of its driven by.
Going to have an immediate jump in capacity by adding 40% more capacity by two more machines. So that will go to build the short term.
Wholesale doors as DTC continues to grow yep.
Got it Thats very helpful and we think about the margin implications of this.
Or likely see more pressure on gross margins earlier in the year given their revenue mix shift you're talking about well later in the year, a little bit less pressure.
Yeah, absolutely and as our DTC business has gotten stronger some of the benefits we had with wholesale which was we were mostly selling our our least expensive mattresses online while wholesale was leaning very heavily nor most expensive mattresses, we were getting a terrific margin benefit from that just as the brand has strong.
Lengthened and as we've been able to better educate our customer into our premium mattress as there has been a wider gap between the gross margin produced through wholesale which is not surprising.
And what we get to Iraq. So yes, absolutely we expect some gross margin pressure.
In the beginning of the year, which will carry through to our full year numbers, but again as I said in his prepared remarks from an intrinsic business point of view as we build out these capabilities and execute throughout the year, which I think we've proven a pretty decent track record on we expect to exit the year with a much.
Healthier gross margin position than we had in 2019.
Very helpful. As we look at the 800 ASO wholesale doors that you had open a year ago. So during the fourth quarter of 2018.
If you look at the average sales per store there in the fourth quarter of 2019.
Were they up so we can get a sense of how those comparable stores are doing.
So we've never we've never really disclosed.
Beds per door or anything like that what I will say as we actually just completed a pretty big deep dive on this with a cohort views and.
No matter, how we caught it we are continuing to see same store sales increase which is terrific.
And Q4 was no exception to that so our strength in the marketplace continues to grow that's great. My last question is looking at your quote unquote return rate if we take the delta between your gross and net revenues. This year they account to the equate to about 7.4% of gross revenue compared to 10.5% last year.
Significant improvement is this primarily driven by your revenue channel shift or is it by operational improvements how should we think about that number going forward.
Yes, it's Craig Craig So I think it's probably both we are expanding the wholesale side, which our return rate.
Is clearly lower there because.
Because theyre dealing with lot of those returns.
So we are also continuing to improve on the quality of the product as well as.
Expanding our call center.
Who handles all the returns for us so they're they're also contributing to a reducing that rate and going forward. We're always trying to continue to improve that rate.
And expected to continue to.
But this is this is an area of very deliberate focus we've had our incoming and this was a hot topic when I when I joined a.
Well good that's now a 5.5 quarters ago I guess.
We.
We did a lot of root cause analysis on the reasons for returns and the ability to call. It saved the sale and have found a significant levers that have worked.
And part of it is just working with the customer and and building out our call Center capability, which has has both helped us operationally from a cost point of view, but also as I've mentioned is becoming a heck of a revenue center for us as well.
We've just been able to find a lot of ways to make our customers happy with our product and have them keep the bed.
In ways that are a win win for both of US and it's it's working and continues to get better.
Clearly congratulations thanks again.
Thanks.
We have reached the end of the question and answer session I will now turn the call back over to management for any closing remarks.
Great. So thank you again to everyone on the call and add to the broader market I couldn't be more pleased with how my first complete year with this company turned out joining in late 2018, I knew we had amazing differentiated product and I knew we had a great marketing platform what was less certain.
Was how well we could execute at scale now at the right team now in place working incredibly well together I'm. So proud of what we were able to accomplish 2020 is really the next step in our evolution as we take this foundation, we have built and now invest into capacity expansion channel expansion product expansion and category expansion I right.
Main incredibly confident in our strategy and our team's ability to execute and as always I really want to thank the purple team for the passion and incredibly hard work that they bring every single day. Thanks again.
This concludes todays conference you may disconnect. Your lines at this time. Thank you for your participation have a great evening.