Q2 2020 Purple Innovation Inc Earnings Call
[music].
Greetings, ladies and gentlemen.
Welcome to Purple innovation second quarter 2020, <unk> earnings conference call.
At this time all participants are in listen only mode. A brief question and answer session will follow the formal presentation.
If anyone should acquire operator six cents during the conference. Please press star zero on your telephone keypad and have now my pleasure to introduce your host Mr. Brendon Frey CR. Please go ahead Sir.
Thank you for Jordan people innovation second quarter 2020 earnings call.
A copy of today's press release is available on the Investor Relations section.
Upside.
I would like to remind you that certain statements. We will make in this presentation are forward looking statements.
These forward looking statements reflect.
Operations 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.
More thorough discussion of the risks and uncertainties associated with the forward looking statements to be made in this conference call in wet gas.
We refer you did the disclaimer regarding forward looking statements included in our second quarter 2020 or.
Which was Fergus to the FTC today on form 8-K, as well as our filings with the FTC Brexit that disclaimer.
We do not undertake any obligation to update alter any forward looking statements whether at the results of new information future events or otherwise.
This presentation will include references to non-GAAP financial measures, such as EBITDA and adjusted EBITDA.
And so you should not be non-GAAP financial measures in the most comparable GAAP financial measures is available in the earnings release, which can be found on our website.
With that I'll turn the call over to joke.
Thank you and good afternoon, everyone with me on the call today, It's John lagged, our Chief operating Officer, Craig Phillips, Our Chief Financial Officer, following our prepared remarks, well be happy to take your questions.
The past few months.
At night, you can damage has driven dramatic changes in the retail industry and the economy.
Along with this we have seen consumer demand and behavior changes as well, most notably sharp acceleration of E commerce adoption, including home goods as it digitally native company with deep vertical integration and with differentiated products and multiple categories for the home this created an opportunity.
I'm extremely proud of how our organization was able to navigate a complex rapidly changing environment and very successfully execute.
Formats. During these unprecedented times underscores how far we common maturing our operations further highlights the growing awareness and desirability or premium product offerings.
As a quick recap following a nearly complete disruption to our wholesale business and a breach slow down in DTC demand in late March DTC sales quickly reaccelerated in early April one of the key advantages our operating model is our ability to quickly.
Response to marketplace shifts.
Significantly scaling back on manufacturing operations early in the pandemic as a proactive measure to preserve our cash we quickly ramped up our production on fulfillment capabilities and refocused our efforts on our direct to consumer core competencies to capture that significant acceleration in digital channel demand.
In addition to an overall increase an online retail shelter at home directives also fuel higher demand for many home related categories, including the bedroom at home office categories. So in addition to experience and get surging demand for mattresses.
Several of our other categories also grew triple digits led by our seat Christians pillows and sheets.
Overall, it was a record quarter. Despite the ongoing challenges from cobot 19, with net revenue growing 60% to 165.
And adjusted EBITDA, increasing by 29 million to 35 million from 6 million a year ago.
These results fueled the dramatic improvement in our top physicians, which stood at 95 million as of June Thirtyth up 185% under 2019 and up 262% compared with March 31st 2020.
Looking at our performance in more detail DTC revenue increased 128% to $145 million, but strong increases over the prior year period, each month of the corner.
We reported on our Q1 call a night April's DTC orders were up 170%. This was followed by 125% increasing by an 83% increase in June.
When considering orders as compared to net revenue.
It's important to note that there's a lag between when an order its received and when it is wholesale and book is revenue.
It's delta can vary due to several factors, including current inventory availability and how the product gets delivered fedex or our in home delivery partners. Because we had adjusted production schedules to match part demand at the start of the pandemic, we were capacity constraint for much of the second quarter, that's that man outpaced our expectations.
As a result immaterial amount of orders Wasnt shifted the Webber until the following month, which for June means the revenue associated with those orders wasn't recognized until July or third quarter.
With our seven fax machine coming online in early June we were able to work through our order backlog today DTC orders are typically shipping out within a week.
Another important variants as compared to net revenue that orders are before any cancellations or returns.
In terms of product performance across our DTC channel, we experienced a fantastic growth for mattresses demand, but strongest for a hybrid premier product line, which contributed to a 15% increase in our average selling price.
Most premium models tended to have higher Max when sold in wholesale channels. This further reinforces the shift in consumer demand, we've seen moved to online.
Meanwhile, our non mattress categories grew at an even faster case as consumers Saar premium products to enhance their home life.
We leaned heavily into this trend, notably for a seat questions as people working from home found themselves as Irene comfortable home offices, we quickly upgraded the merchandising ever see questions on purple dot com, including new content, you bundles, the marketing creative and new promotions, making it much easier for consumers to find and browse.
Line and determine the products that meet their needs in total we have seen the share of our business from non non mattress products nearly doubled since Q2 last year.
With the consumer demand shifting significantly online alongside declining channel marketing costs, we shifted our marketing strategy to better reach the consumer we pulled back on more expensive channels, such as Retargeting and focused on casting a much wider not with traditional pockets with this larger addressable market, we were able to.
See actually increased traffic to our site while me any healthy conversion rates. This drove significant growth with the added benefit marketing leverage alongside the margin benefit with the C. Orders. This dynamic led to significant operating expense leverage contributing to our record adjusted EBITDA performance.
Our exceptional BTC performance more than offset the decline in wholesale revenue, particularly early in the quarter as many of our partner doors were closed we're operating at reduced hours for the quarter wholesale revenue was down 49% compared to the same period last year. However, after a difficult start trends improved as the quarter progressed and more doors.
Reopened in store traffic improved for April we previously reported wholesale orders were down 43% improving to down less than two person in may and June orders were back into positive double digits as compared to the same parents last year. The approve it was driven in part by restocking of inventory levels, particularly header.
The Memorial day, agile whiteboard promotional periods, both of which were very successful with sellthrough well above last years levels.
Even more than occurs with DTC orders, there can be a revenue recognition.
Between went whole sorta orders are placed and when they're scheduled for delivery. The strong increase in June orders has translated into a good July for wholesale net revenue growth and we expect this momentum to continue.
Catch up on production, we're doing everything we can to support our wholesale partners with recent industry wide shortages on pocketed coils, we have seen even more demand at the hour pocket <unk> wrap the quality fabrics chosen specifically for our mattresses that are not experiencing shortages.
In addition to supporting our existing partners, we added several new wholesale partners, including city furniture, Big Sabby superstore, as well as a 38 or task with rooms to go.
All in we are in over 1800 doors as of the underground and we're pleased to report that all of them are now open to customers in some capacity.
Until our new production facility as operating we expect only modest growth in wholesale door count, although should we observe demand shifting back into brick and mortar we have the opportunity to easily pivot in support of our customer.
Our strong year to date performance, that's put us in a great concession to further in Boston routes. This includes purple south our new manufacturing facility, we were thrilled to finally announced last month.
At this point I want to turn the call over to John to discuss this major initiative in more detail.
Thanks, Joe we're very excited to be moving forward with this important investment.
Okay that approximately 30 miles a piece of it.
The 520000 square foot location will feature manufacturing Assembly warehousing inventory management and order fulfillment once fully operational.
Our plan is to fishing operations in the coming on <unk>, starting with warehouse and fulfillment followed by assembly and manufacturing.
Purple shops will be home to our next Max machines, and our first machines outside of Utah. We currently expect Max eight to be online by the end of 2020 Woodmac Snine operational early next year.
The addition of Max eight nine increase our production capacity by roughly 25% to 30% and our current thinking is to add another four machines and 2021 to support future due to see and wholesale channel growth.
On top of expanding mattress production, we will be installing six injection molding machines that purple shelf to increase our she cushion and pillow production capabilities.
These machines will double our current capacity, allowing us to better meet the growing demand for these two categories.
Facility based in the southeast, we'll be able to get product to consumers located in the eastern half of the U.S. faster and more efficiently, providing a better overall user experience and generating cost savings overtime.
There are also supply chain benefits associated with dislocation such as the large labor pool, which will allow us to better balanced labor with production planning across all of our facilities also several of our large suppliers are in close proximity to new plant.
We're very proud to be a U.S. manufacturer and during these challenging time should as especially rewarding to be able to invest in expanding our domestic footprint, creating many new jobs in the process with that I'll turn it back to Joe.
Thanks, John a terrific work.
In addition to expanding capacity. We're also moving ahead with investments in our four key initiatives product innovation, Omnichannel retailing organizational effectiveness and brand development, starting with product innovation, we have seen significant growth in our newly launched products from the end of last year, including our premium harmony Hello, our innovative New foundation.
And that almost magically expands with no tools required our operated platform base and our upgraded protector in early Q2, we updated our original purple Hello with boosters that finally make this unique hello height adjustable for any sleeping concession, which has measurably improved customer satisfaction.
We also launched our new premium soft spreadsheets, our softest, most durable reasonable sheets, yet and also expanded our color ways to six trend right options strategically we continue to find a premium assortment expansions create both an upsell opportunity and see very high attach rates with our premium hybrid mattresses, both of which are proving true.
Sop stretch sheets.
With people spending more time at home. We have also seen significant increase in demand for our innovative see questions. We created very successful bundles, especially a very well received combination of our lumbar supporting documents with our most popular office. He cushions. We continue to believe that RC cushions have enormous potential and the recent shifted behaviors have accelerated.
Mr demand and our focus on the category as John said, we're doubling our capacity and have many new offerings in the works.
Which brings us to omni channel retailing, we continue to lean into enhancements and improvements on our existing online platform, including new financing options with the introduction of split it improved bundle up sell flows and more relevant cross sell modules. The growing strength of the team was evidenced by how quickly they were able to tease out the demand signals for not just.
Please he Christians exhibit our site content tait structure and merchandising incredibly quickly, including building new bundles and offers.
It is a great example of how much more agile and Mitra, we are becoming.
The larger and they should have route of redesigning and fully Replatforming that site continues to be in progress and it's still planned for launch well before holiday period. This year.
For our own retail showrooms it was a tough quarter with mandatory shutdowns for three of our five current locations. Fortunately as I mentioned last quarter, we were able to pivot furloughed associates in the sales rolls on our newly launched sales chat capability in our contact center and those associate heatstroke more revenue than they were driving in their showroom.
Which is just amazing.
As of today, we have four of our showrooms open and sales performance is getting close to pre cobot 19 levels. We remain very optimistic on the channel and are currently exploring additional locations across the country. We will continue to conservatively pace ourselves and we hope to get back to our previously stated rate of about five new showrooms per quarter.
As to organizational effectiveness. This continues to be an important focus given our incredible growth. We ended Q2 with nearly 1200 employees and as of now have already cross 1300 employees as we continue to lean into production.
Hiring was challenging in Q2, as we found ourselves competing with attractive unemployment benefits. Fortunately our recruiting team continued to reinvent our approach and we're close to 90% of where we would like to date.
Despite the rapid growth, we continue to be laser focused on cost maintaining DNA as a percentage of revenue in the mid single digit range, we continue to improve processes and efficiencies as we mature. Most importantly, we have been able to continue to maintain productivity alongside doing everything we can provide safe clean working environments for those employees.
Can you to work in our manufacturing and warehousing facilities.
These new health and safety processes and standards are becoming normal for us, especially given our number of new hires that have no other point of reference.
I continue to be impressed with the dedication and fortitude to the team. They really are the heart of.
Finally with brand development, we have continued to mature and build out our capabilities and our brand.
Focus remains on the evolution of our brand in support of the premium nature of our products as well as our unique innovations with the purple bread and our hyper elastic polymer and the very real benefits. They provide a recent spots are indicative of this direction and have been very well received I'll now turn it over to Craig who will review the financials in more detail.
Thanks, Joe as Joe outlined we had a very strong second quarter, even with the continued challenges created by Cobot 19.
As you will hear later, we also had several significant non cash adjustments during the quarter related to the fair value of outstanding warrants driven by the increase in our stock price the removal of a reserve on our deferred tax assets and a corresponding tax receivable agree or liability.
For the three months ended June 30, 2020, net revenue was 165.1 billion.
60.3% compared to 103 million in prior year period.
Revenue increase was driven primarily by strong growth in mattresses at our DTC channel along with higher demand for pillows sheets and seek pressures.
This was partially offset by lower wholesale revenue due to the destruction in partner store operations, including temporary closures in response to grow but like GE.
For the quarter DTC channel that revenue increased 127.9% year over year, while wholesale channel that revenue declined 49.3%.
Earlier in the quarter, we announced order totals for April and May.
Customer orders for both DTC and wholesale do not take into account customer returns cancellations or timing of revenue recognition that is dependent on shipping and delivery dates.
Given our capacity limitations many orders placed during the quarter will not be recognized as revenue until the following quarter as we continue to expand capacity and reduce our backlog of orders.
Gross profit dollars were 81.6 million during the second quarter of 2020 compared to 42.8 million. During the same period in 2018 with gross margin at 49.4% versus 41.5% and the second quarter of 2019.
790 basis points, increasing gross margin year over year was primarily attributable to the higher proportion of DTC channel revenue, which carries higher gross margins that our wholesale channel.
You see revenues comprised approximately 88% net revenue for the quarter compared with approximately 62% in the same quarter last year at 66% in the first quarter of 2020.
But partner doors, continuing to reopen resuming more normalized store operations, we expect wholesale revenue to increase as a percentage of overall revenue during the second half is 2020 compared with the second quarter.
This expected channel shift back towards wholesale combined with investments in building capacity at our new manufacturing facility will likely result in gross margin rates closer to the first quarter. This year than what we saw in the second quarter.
Operating expenses were 49.7 million in the second quarter of 2020 versus 45.1 million in the prior year period.
Marketing and sales expense as a percentage of net revenue decreased to 23.9% compared with 34.9% last year due to efficiencies at our advertising spend created from enhanced marketing strategies and increased online shopping due to cope with.
Lower rates in certain marketing channels in which we advertise ended intentional reduction in AD spend in April as part of our previously announced cash preservation efforts.
We are expecting marketing and sales expense as a percentage of net revenue to return to our historical range. The low 30% during the second half of 2020.
For the second quarter, we reported operating income of 32 million compared to operating loss of 2.4 million in the second quarter of 29 gene and improvement of over $34 million.
During the second quarter, we recorded a non cash expense of approximately 39 million from a change in fair value of warrant liabilities compared with 3.7 billion for the same fair value adjustment in the year ago period.
In the second quarter of 2020, we also recorded a 32.8 million dollar noncash expense associated with our tax receivable agree about liability as well as approximately 8 million an income taxes on our current period income, which was more than offset by a $44 million income tax benefit.
Income tax benefit was primarily related to the release of a reserve for deferred tax assets created when paired be shareholders exchange their shares for class a shares creating an amortizable tax basis difference.
The income generated in the second quarter created a net three year cumulative pretax adjusted book income.
Effective this combined with our forecast for profitable growth has given the company the opportunity to at least a valuation allowance or roughly $100 million of deferred tax assets, resulting in the 44 million dollar income tax benefit I, just mentioned and an additional $56 million recorded through additional paid in capital.
As deferred tax assets were generated primarily from a step up in tax basis, when the class B paired securities for exchange for class a shares.
He is deferred tax assets will continue to increase that's class B paired securities or exchange for class a shares in the future.
Amortized for tax over 15 years after each exchange.
Concurrently as required in the tax receivable agreement. We have previously discussed we are required to record a liability to in a hold for 80% of the tax benefit received from the amortization of the deferred tax assets created from its exchanges.
GRA liabilities only paid when the company receives an actual cash tax benefit from the filing of its corporate income tax return.
The current period expense and the income statement relates primarily to these changes made in previous years, the impact of exchanges and 2020 [noise], primarily due to the secondary offering in may for charge two additional paid in capital.
Inclusive of these non cash expenses and tax benefits net loss for the quarter was 5.8 million compared to a net loss of seven point threemillion into your go period.
EBITDA for the quarter was negative 37.8 million compared to negative EBITDA of 5.2 million in the second quarter of 2019.
Adjusted EBITDA, which excludes noncash expenses associated with the change in fair value of warrant liabilities.
Non cash expense associated with loss on extinguishment of debt.
Tax receivable agreement expense noncash stock based compensation.
Legal fees interim CFO and consulting cost in a year ago period severance and cobot 19 related expenses. This year was 35.2 million versus adjusted EBITDA of 6.2 million in the same quarter last year.
Moving to our balance sheet that inventories totaled 39.8 million at June 30, 2020, compared with 47.6 million at December 31, 2019, and 42.1 million at March 31 2020.
As of June 30, 2020, the company had cash cash equivalents of 95.4 million compared with 33.5 million at December 31, 2019, an increase of 184.8%.
Compared with March 31, Twentytwenty cash cash equivalents increased by 261.7%.
Significantly increasing our cash position was driven primarily by the acceleration in DTC sales.
Cash preservation efforts early in the quarter, it's substantially all of our wholesale partners remain current throughout the quarter Inspite of the significant decline in wholesale orders.
With over $95 million in cash at the end of June and continued demand for our products. We feel we're well positioned to continue investing in our business, which includes our new manufacturing facility company operated showrooms and innovation initiatives.
Due to the continued uncertainty in the overall economy, we're continuing to refrain from providing guidance at this time.
Well, we are very pleased with our overall second quarter performance, particularly our 21.3% adjusted EBITDA margin I do want to point out that some of the dynamics our business benefited from in the second quarter or not likely to repeat to the same extends into second half of the year.
Namely the 88% penetration in our higher margin DTC channel as wholesale orders continue to grow as well as the significant leverage and advertising spend we saw in Q2 as we invest more dollars to support holiday promotions.
Additionally, as we opened a new facility in Atlanta, and it's expected that bill for at least the first year the operating at an efficiency rate well below the existing facilities in Utah and will put pressure on our current margin rates.
Further we furloughed a significant number of employees both manufacturing in corporate during the balance of April and May.
Establish a hiring freeze and eliminated all nonessential spending including travel as part of our cash preservation efforts now with available cash we have again started spending into infrastructure to support our planned growth.
However, these additional costs will also put pressure on gross and adjusted EBITDA margins.
Now I'll turn it back to Joe for his closing comments. Thanks Craig.
This has been an unusual quarter by every matter with some of our deepest lows as we furloughed a third of the company effectively shutting down production and then at some of our highest highs as we rallied pivoted and grew to a stronger larger and more productive organization than ever in our history.
Reiterate what I said last quarter I believe that building a world class team, having a solid strategy terrific execution and capturing some good market Tailwinds is a formula for success looking forward well caution that there is market uncertainty in the back half of the here and we expect a more balanced channel mix eventually regardless.
In Q2, our teams solid execution and our continued success winning share in the marketplace pretty substantial results, which have strengthened our balance sheet and are not supporting both investment into capacity expansion, while also providing a cushion to weather possible future market downturns that we believe it's the most important takeaway.
That our relentless focus on the fundamentals enables us to adopt uncertainty and find a way to keep growing and keep taking share.
We are an early innings in this regard and we believe we are demonstrating that we are set up for long term success.
That and I want to send a heartfelt thanks to all of our employees and partners for their hard work dedication and resiliency as we continue to navigate through this together.
At this time, we will be open for questions.
Thank you.
At this time, we will be conducting a question answer session if you'd like to ask a question. Please press star one on your telephone keypad.
A confirmation code NK. Your line is in the question Q you May press star to if you'd like to remove your question from the kit for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star Keith one moment. Please all we pull for questions.
Your first question comes from lineup, Brad Thomas with Keybanc Capital markets. Please proceed with your question.
Hi, Good afternoon, Joe Johnson, Craig and Thanks for taking my question Congrats on a strong quarter and execution here.
Wanted to first ask about the demand trends, you're seeing in the business and I was hoping you could give us a little bit more color on what you've been seen in the two different channels.
In July and thus far in August.
Sure. Thanks bragging great to hear from you demand I mean continues to be remarkably strong.
The story, we've had on Oh, I know just demand outpacing our ability to manufacture as a as continues to be more true than ever.
Yeah, we said coming out of cobot here that basically all of a unit demand that we had had it through brick and mortar on our wholesale partners shifted online, which remains largely true on top of that we really haven't seen any decline in demand online, but on top of that with wholesale coming back it's to strength.
And the total a market for our product we are saying healthy growth in wholesale we mentioned in the prepared remarks, all of our US retail partner doors are opening some capacity, which is terrific and we're seeing strength and the ordering coming and the reality is where we're throttling our business.
I mean, we've we've done everything we can to make sure. We're working you guys are demand we've had fewer days at promotions, we had less deep promotions, we actually raise prices over this period and out we've been working very carefully with our wholesale partners to ensure they are not leaning into a level that we can't provide mattresses for the the customer demand.
So overall very healthy demand really at this point continue to just be limited by around capacity, which clearly is where we're putting a lot of investment now and getting that dealt out.
That's that's very helpful and as we think about that that delay between the timing of orders and your ability to make deliveries how should we think about you know the backlog if you will or the order base that we're working with as you as you move into Q3 Q and potential.
Lee.
Yeah, the amount of tailwind or pick up that you may have going forward.
Yeah, we I mean, the good news is adding to that mix and match even coming on we've added a significant amount of capacity and John and his team have just done a terrific job on squeezing even more outside what we how can continue all operation in yield improvements the biggest limit or weed out.
And we mentioned that slightly in the prepared remarks system labor yet we're still only staffed at about 90% of what we are able to sustain which is really just the labor pool has done and depressed as fast as there has been healthy stimulus out there that has kept a a decent amount.
Really labor out of the workforce.
We've gotten very aggressive and try to attract about labor and I've done a terrific job on pulling them in but we continue to grow that as we've gotten into labor will opt and production up we are for all intents and purposes out of backlog now and basically manufacturing, what's what's being ordered day by day, we basically everything we makes going right out the door.
Sure.
What we're trying to do now as we continue to build up production is make sure we got a passing need and everyday in the back half year with we continue to get more yeah. We continue to get production level adopt I think right now we're at a very healthy Alice.
Again, we've got very strong demand and growing where alongside that increasing our capacity and get them. We all love when is actually get Max eight online later, this year and Atlanta and that into five Marmaxx machines quickly behind that is it where we really open this up.
Okay, Great really helpful. Joe. Thank you so much.
Your next question comes on line of Brian Nagel with Oppenheimer. Please proceed with your question.
Hi, guys good afternoon.
Your next quarter.
So I want to ask.
You know what it was mentioned Wadham in prepared comments just the the impact so to say if that delay.
From the orders to shipping so as we do so as we look at the revenue the sales of 165 million.
What would that have yet.
You have you had you not have that impacts delays.
Yeah.
I think just a quick Craig some of the details, but just to set it up it's not so much what would it have Dan I think what we're trying to map is we we had reported in April and May orders, which we haven't ever really talk Bob or and there's a pretty big delta with quarters, which are a great indicator of demand.
Study and why we were excited to share that.
With that revenue, which has a [noise].
As both timing considerations on revenue recognition as we don't recognize until receipt, which with a customer if it spreads downside white glove liberate can be a week or two after they order depending on on the network and deliveries in general across everything from Fedex and Youve, Yes, two for.
<unk> has been running slower than normal and with that.
As we've had significant orders coming in and recent wholesale.
Yes, they may order weeks in weeks, so we may get a purchase order.
Yes housing a beds some of which they're asking for receipt. Three weeks are now four weeks are now so until those beds are received we don't recognize that revenue. That's just normal business for us that's not any change from any prior period.
It's just a matching up to the the orders data that we quoted earlier, Craig I don't know if you're on out anymore color to that.
Yeah. It was all about transparency you know covert hit we want people to understand that yeah, we were not being impacted.
In a way that some might have bad or or that others were the another piece that is not included there. We did talk about plus the fact that the orders do not include returns or cancellations. So again it was more together velocity and so that people that understand worst.
So.
So.
Receiving active orders through wholesale and through DTC just to be transparent of where we were on business.
Okay got it and then second question also with risk on sales third.
I guess more forward booking more nuanced [laughter].
You talked about in your prepared comments in the response Brad's question to just the strain if you're in it strengthens the July no putting aside somebody's timing differences, but the strength in July but as you look at your business recognizing that you are still a situation, where youre sort of say catching up to strong Tibet manufacturing capacity, but how does how do you think about.
Just the sustainability of what we've seen lately.
Against this backdrop of covert which is clearly changed <unk> consumer behavior or their key or their key metrics, you're looking for to help you understand substantially reduced how do you think about the sustainability now if you think basis through the back half of your.
Yeah, I, if I, if I can I split sustainability into two aspects one is just general demand.
Are we going to continue to have significant growth in consumer demand and continue to have an opportunity to take it to gain share in the marketplace and in that regard. We are continuing to see acceleration. We are we are further building our brand presence, we're being further rewarded for the quality and customer satisfaction.
And our product drives it we continue despite our ever growing marketing expense.
Word of mouth continues to be the number one consumer reported results on on why how consumers learning here about hurdle, which speaks volumes to the satisfaction and quality of our products. So in that regard we see.
We seek terrific opportunity not slowing at all in the back half a year.
The question the other half of the question is really want to channel mix given that clearly in a predominantly DTC led business, we have very favorable economics.
It's both top line, we're driving more net revenue per units and then any capacity constrained business that obviously outflows right in.
Well as clearly we've got significant margin benefit which is flowing right through into adjusted EBITDA and clearly the cash so in that regard yeah. We we see the shift heading more back toward wholesale as you would expect to this as a category that has historically been 85% brick and mortar and 15.
Percentage or so online. So you would expect that as as stores open end consumers react or stores, you're going to see some pullback haven't we were basically 90% mine, 10% wholesale in the middle of all of that's that's that it's it's not it's not shifting back quickly. It's I think the stack rarely do.
So were continuing to see very strong online demand growing demand in general.
And I think the consumer behavior has a has changed likely permanently where I think there is going to be a larger addressable online audience at their the after that and we clearly are set up to capture that's so yes, I think back half will look.
Last last online as we saw on Q2 I think there were some external circumstances, there, but I think in terms of trends prior to poke at 19 that still looks very favorable for us for purple.
Hi, guys I appreciate the color congrats and thank you.
Thanks, so much thanks.
Your next question comes from mine on Seth Basham with Wedbush Securities. Please proceed with your question.
Thanks, a lot the that's now that's an outstanding results.
Thanks, Greg My first question not to beat it beat a dead horse here, but thinking about this revenue shift it sounds like this is a much bigger shift than you normally when it experienced in recent quarters and it I'm wondering whether or not part of it is simply not just because of the detached constraints, but also because of.
The cancellation and returns rate, where that is much higher than normal and know that simply a function of I, taking longer to delay a delivery or some other factor.
No I.
Yes, so cancellation of returns actually continue to get that are it was it was frankly, a significant challenge headwind for us.
When I joined.
Two years ago, now and we continue to improve that industry averages around in the high single digit percentage and we tend to be in that in that range.
Which is is a delta I'm looking at orders versus net revenue.
Yeah, we did get towards the end of the quarter. Some significant wholesale orders the vast majority of which are going to be realized in Q3. So again very strong demand and the orders came and but that revenue recognition won't happen and consider normally in a quarter. It it's not even so much on what's happened moving out but normally we.
I would have been receiving that getting the benefit of revenue in this quarter that came in.
Prior months and we just wholesale went dark so we weren't getting the recognition that from a prior orders, but we're not getting new orders that will show up in Q3.
So yes, so I I actually don't think there's anything out of the ordinary in terms of revenue recognition just bad we had this crazy quarter, where there was basically no wholesale.
And.
Now that wholesale is coming back, we're just not saying that flow through appropriately.
As it goes on Craig can you provide any more color.
Yeah, no. The only thing I was going to point out that was Ah. We actually had in addition to the DCC shift channel shift, we also seen a shift and or allocation between mattress a non mattress to some of the products that have a 30 day returned cycle not 100 day. So overall our return rate has.
Slightly improved due to that a that product mix shift, but now we've been watching the mattress return rates.
Very closely every week almost daily sense covert hit and.
We're we're ready if something did happen, but we did not see any material change because of <unk>.
Great. That's really helpful and second sounds like you guys are right and ask you tend to increase capacity and utilize that capacity as you look forward to labor day here, which is the biggest holiday of the year for mattress sales would you expect to revert to capacity constraints or for that period.
Yep.
We're we're right now managing very tightly I'd say one of.
I have mentioned the maturing of the organization quite a few times and the way the team has been able to come together a huge part of that is our predictability on manufacturing and.
A solid SLP process, where we really have incredible visibility into what we're making every day and what we expect to sell every day, we're getting very very good at that so we yeah. We feel very good about our ability to have the capacity we need for labor day, we are aware manufacturing into that right now and some of it is how deep.
Are we gonna have to go Promotionally and we've we've.
We don't let Steve now we don't have to we seldom atlas's either way that's great financially for the company. So yes, we think theres, obviously been a unplanned oh market conditions. This year at nearly around every corner and many of those have have been fortunate for us. So I mean, it's yeah, we never really.
Yeah can predict exactly what's going to happen on this holiday.
But but we feel very good that we've got the capacity we need we're continuing to staff up we expect to be fully staffed by then which increases our outside what continuing to get more you all the out of the machines.
And John seems just doing a terrific job there. So I I think we're set up for a very strong later today.
Wonderful Thanks, a lot and best of luck.
Thank you.
Your next question comes from minus Curtis Nagle with Bank of America. Please proceed with your question.
Good afternoon, thanks very much.
So Joe first one of the follow up on a pretty liberal in just about the.
A price increases.
So look I think anywhere from I don't know 50 that maybe 200 Bucks I'm just curious on the on the rationale I mean, it doesn't sound like it doesn't do would say no raw materials and you know more to do with the fact that I guess you guys have strong pricing power, obviously limited capacity.
Isn't anything else driving about.
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Well it's.
Some of it is getting the getting appropriately priced in the marketplace as we've looked at the competitive sat and competitive pricing and consumer demand.
And sort of value equation, we seem to consumers. We felt that we we have some opportunity to rightsize the pricing.
We we took a closer look down to that product level on individual margins and saw that we had some areas where.
We had net yeah, we have maybe have some nice cemetery and the pricing, but not necessarily anything further to the margin impact and there was some ups and clean up there.
As we've looked at our wholesale support and making sure that we've got the margin room to I guess, what we need out of wholesale partners create we continue to looking for ways to get healthier margin structure.
I mean, no matter, how we cut it seem like a good thing to do and we got the demand right now we treat this every time has passed and we see that we get a rights and how to consumers react and does this make sense and a remarkably.
It appears we did have some opportunity to raise prices, we saw almost zero change and demand and a you know are getting ourselves price, where we can get the margins that are appropriate and give us more opportunity to better work with our wholesale partners.
Terrific so great to hear and then just a halt for Craig I'm just I.
I just think about you know kind of your cash position capital spending about kind of thing because of UBS.
Quite a big war chest right now that it's great you can tell us that should be a best in the business, but just curious how we should think through that for the rest here.
Yes, so the way I would think about it is that we've announced Atlanta. So we are going to have a build out there to certain extent, we are going to as Joe mentioned in his prepared remarks start getting back into opening some of our.
Company owned stores, but also the shift interestingly shift to DTC and our wholesale partners staying current that was part of what drove our additional cash balance so as wholesale starts to come back and where we're selling product on terms again.
As we were before with wholesale that's going to that's going to use some of that's cash.
So I don't necessarily expect it to stay at the you know 90 95 level.
But.
What we have planned for wholesale.
I'm sorry for a for building out Atlanta building out the stores selling back into wholesale we have as much as we need to be able to do what our plans are but I don't expect him to stay where it is right now though.
Of course, okay understood that's very much and good luck in nursing here.
Thanks, so much thank you.
Your next question comes from line of Bobby Griffin with Raymond James. Please proceed with your question.
Good afternoon, everybody I hope everybody has their own staying healthy congrats on a good quarter I guess the my first question is just a follow up I guess on the build out of the machines I just want to make sure I understood. The numbers correctly. So we'll try to get to mattress eight or mattress Max eight by the end of 2020, and then add an incremental four in 2000.
21, so by the into 2021 to be around 12 is that correct.
Yeah, we close we actually have room for six more Max machines and the facility outside Atlanta <unk>. So we'll get one of those it'll be Max eight by the end of this year and another one fast following in early 2021.
We then we'll have four more which falls flesh out the full six machines out there by the end of 2021. So one more this year five more next year.
And I mean to the prior prior Craig's prior comments on capital allocation.
By the end of 2021, our new facility were just opening is already a capacity where already looking for our third large facility as a you know we with the lead times IMAX machines and getting these facilities negotiated and L. Band I mean, we're going to be well underway, but he had a 2021 and.
As a whole additional facility.
Okay. That's helpful. I guess, maybe to help connect the dots in our longer term views of it. It I know, it's tough to predict the mix between DTC and wholesale but you know assuming a.
Certain mix, whether it's 70 525, what is the average yield of one Matchers Max machine now for US to think about is at $80 million per machine or revenue can do or is it 90 or opus frame that up a little bit. Please.
Yes.
Hits a it so I mean, we didnt, we've had commentary out during the past, which we'd said is in the ballpark it yet with the fully loaded attached revenue to a Max machine up between 80, and a $100 million, but that was in pre coveted framing of things. So clearly there is more net revenue potential when we're selling.
A higher percentage online our non bedding.
Business continues to grow see cushions is on fire pillows, and and and sheets continue to grow very rapidly. So the revenue potential either on an attach basis or were actually just building. Some very healthy business is independent of our mattresses continues to grow.
So there's just there's very high dependency on what that mixes and and these other our business categories. So yeah I'd say the 80 to 100 is is still.
A good framing, but if things continue hives they have been it could be more than that.
Okay. So we can think of it once that other facility gets built out you'll have capacity in excess of over a million a billion dollar $1 billion in revenue.
Yeah, I, absolutely, we're getting into that range I mean keep in mind. The other thing is we we need access capacity. These these machines get older or we need.
They're they're often like diesel engines. They can run forever. If you take care of owned but we've got it but we've got to maintain and and properly serviced them when you're having to make every mattress every minute of every day and get it out the door. It it really creates pressure on on the network. So some of this is how do we build out to the point that we genuinely have sir.
Clos, we have the opportunity and flexibility to lean and at times of peak and a and how's the.
Yes, there at that business resiliency to allow machine to be taken offline without impacting anything.
So that's part of the goal as well just we cannot continue to run it the way we have but it's about it's building that capacity adds we absolutely.
Well a over the next couple of years beginning into that billion dollar run rate and.
And having the capacity we need to truly amount of surplus.
Okay perfect. That's very helpful. Appreciate the details and best of luck in Threeq you.
Thank you.
Your next question comes on line of Susan Anderson with B. Riley FBR. Please proceed with your question.
Hi, Good afternoon, and this is I like leg on for Susan. Thanks for taking your question on my first question is just related to pricing I believe you mentioned, 15% growth and ask Pete how much of that was through the product mix shift this quarter and to that higher dollar products I believe you move towards focus.
Moving on producing higher dollar mattresses, this quarter and should we anticipate that to be lower or stabilizing going forward.
Yeah, so well first of all in so that the 15% I mentioned was strictly mattress SP. So that the other product mix is outside of that that specific a.
Piece of data we.
Apps and the other important thing is we have seen our mattress ASP just continue to grow substantially quarter over quarter year over year ads, we have developed a a demands for a more premium product and our selling more of our premium mattresses online wholesale has always indexed to our more premium after says so.
During the time that we that wholesale was was much more shutdown, we saw significant increase into our hybrid premiers, which drove out to absolutely as you're suggesting that that ASP increase apps wholesale starts to open back up we are saying a little bit of mixed back toward normal.
But that that normal is still significantly better ASP than we saw at this time last year. So.
Yeah, I think it is going to kind of stabilized a little.
A little more toward where we were pretty co bed, but again it doesn't change the broader trend we continue to see SP go up.
Got it. Thank you and then just a follow up on just a modeling question how should we look at marketing expense for the remainder of the year and then also on customer acquisition costs have you seen that trending.
More beneficial as some of these online marketplaces like Facebook, losing a lot of advertising spend that you could provide some color on marketing and customer acquisition cost that would be helpful.
Yes. This was a terrific quarter from a marketing part of point of view, we saw our customer acquisition costs decline at double digit percentage and just our return on AD spend a rise in general with some of the strongest we've ever seen and yeah. That's considering the growth we had in direct to consumer it.
It's fairly remarkable to be able to go after a significantly larger addressable market online substantially grow traffic to the site, while holding conversion constant and growing ASP and to obey in general Yeah. It's a it's a combination that rarely all works together. So so we.
Actually got marketing leverage this quarter, while substantially growing our business and.
The good news as we continue to see depressed marketing costs I'm, sorry, you know there is still arbitrage opportunity right now.
From both a CAC and grow as point of view.
These these are shifts at some point marketing costs I suspect.
More demand will come into the marketplace and it all get back toward normal, but this is part of the maturity of the team and I am just thrilled with their ability to just day by day tease out where these opportunities our pivot our spend into the most opportunity areas cast a wider nat and capture this customer and do it with or without.
Better and better efficiencies, so still a lot of opportunity in front of us.
Perfect. Thank you best of luck next quarter.
Thank you so much.
Your final question comes from the line of Jeremy Hamblin with Craig Hallum. Please proceed with your question.
Yeah. Congrats on the strong results Guy I wanted to first start with a couple of clarifying questions on gross margin and Capex.
So you saw about 800 basis points of improvement obviously, a lot of that is due to the channel mix, but I wanted to get a sense if you could.
Quantify that a little bit more if you saw you're you're more traditional lets say 60, 40 or 65 35 mix.
How would those gross margins.
Have played out with in the 46% range or can you give us a sense of what that might about.
Yes, I'd say.
What we've said is that the.
Substantial change in gross margin has come from the channel mix shift so had we not seen any channel mix shifted slightly those margins would have stayed fairly close to where they were a first quarter.
If you dropping down to an EBITDA margin. There was also some substantial pick up there and the savings on the marketing and advertising costs.
We were in the low twentys versus what we typically are in the low thirtys.
So it is.
Biggest difference in the gross margin was channel mix shift.
Yeah, just just I do want to say, while they would have been similar to Q1, we [laughter].
We continue to improve this business quarter on quarter as we've been doing for the last couple of years I'm. So both as we mentioned in the prior question as as he continues to go up we get better margin. We continue to get lower product returns, we've continued to lower operating costs in general.
So yes, there there is.
We had already reported that we're working on ample opportunity to improve our margins at just this kind of substantial shaft is clearly driven in large part by the channel mix.
Great. Thanks, and then in terms of purple South.
The capex spend that you.
I would expect for that in 2020 would be what and then.
You know some big plans for 2021 on that can you just quantify.
Specific to just purple south for 2021 as well on the Capex for that.
Project facility.
Yeah, a lot of it depends on timing and what we can get done before the end of the year. If you look at our earnings release are starting to release our press release.
Well, we announced Atlanta, it's expected to be around $20 million over the term.
Well sorry, yeah between this year next year once we get up to flow operating efficiency. So.
How that splits out between end of this year next year is really based on timing.
Okay Fair enough and then last question I actually just wanted to ask deals had a lot of success.
With this brand and it's clearly captured a consumer attention.
And I'm sure your your retail partners as well.
There are there any plans at this point in time.
You know for potential brand extension into other areas outside of your traditional betting or see cushion.
Yeah, it's yeah.
Plans at this time is a little open ended.
Yes, strategically we have absolutely said that as part of our overall company strategy. The at our core we have remarkably innovated gels were very good at injection molding and extrusion and all of this we've got novel applications and an entire battery of underutilized happens in in Cushing.
And then comfort in general so right now we're focused on being the best Mattress company. There is out there and we are very early days, we were relatively small player today and market share and around 3% to 4% and we're looking to to gained meaningful share.
As we do that as as we're leaning into see cushions right. Now for example, we see multiple category opportunities both direct to on product as well as some OEM possibilities. That's been our stated strategy for sometime and.
Absolutely, we'll continue to be leading into that as we get more cash on the balance sheet and more strength as a brand.
Right got it thanks for taking the questions best wishes.
Great. Thank you so much.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr. Joseph Mega both for closing remarks.
Thank you so much I continue to be amazed with the growth and maturing in the purple team, which is clearly demonstrated with our continued positive momentum.
Well Cobot 19 has created very real challenges worldwide. Our team has been able to find opportunities to lean and mean ever growing demand. Our unique product is resonating with customers more than ever and we continue to win share in a very competitive marketplace. Our ongoing commitment to innovating real comfort solutions that meaningfully help everybody feel and live better.
<unk> has never seen more relevant than in our current environment and our vertical integration has given us proven adaptability to constant market shifts, we're especially excited about her new facility outside Atlanta, which grows manufacturing and warehousing over 1.2 million square feet in total and continues our commitment to domestic manufacturing and creating more jobs.
To all of our customers and partners as well as our employees stay healthy be safe and sleep well.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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