Q1 2021 Purple Innovation Inc Earnings Call
Good morning, ladies and gentlemen, welcome to the Purple innovation first quarter 2021 earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Now on my pleasure to introduce your host Brendon Frey of ICR.
Please go ahead.
Thank you for joining purple innovations first quarter 2021 earnings call a copy of our earnings press release is available on the Investor Relations section of purpose 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 expectations based on a number of factors affecting the companys business.
Accordingly, you should not place undue reliance on these forward looking statements.
On a 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 first quarter 2021 earnings release, which was furnished to the SEC today on form 8-K, as well as our filings with the SEC referenced in that disk.
Claimer.
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 EBITDA adjusted EBITDA adjusted net income and adjusted earnings per share a reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures is available within the earnings release, which can be found on our website with that.
I'll turn the call over to Joe Mega, though.
Thank you and good morning, everyone.
With me on the call today is John Legg, our Chief operating Officer, and Craig Phillips, Our Chief Financial Officer. Following our prepared remarks, we'll be happy to take your questions.
You saw from our earnings release issued earlier this morning, 2021 is off to a very good start.
First quarter revenue and adjusted EBITDA were up significantly on a year over year basis, and both meaningfully exceeded our expectations. Given our recent performance. We are pleased to be raising full year guidance, which Craig will walk through momentarily.
The year began with strong demand in our digital channel and as the quarter progressed, we experienced a sharp acceleration in our wholesale business the product and marketing strategies, we are executing which showcases the premium nature of the purple brand and our differentiated comfort technologies, along with our recent capacity expansion combined with improving.
Traffic at brick and mortar retail and the impact on consumer spending from government stimulus all contributed to our outperformance a.
A few of the financial highlights from Q1 include net revenue, increasing 52% to $186 million gross margins, improving 340 basis points on.
Operating income, increasing 125 per cent to $16 $9 million and adjusted EBITDA more than doubling to $22 $8 million.
Looking at our performance in more detail I'll begin with our DTC business DTC revenue increased 54 eight per cent to $125 million, we take the post holiday selling season off with a strong first week of January and carried that momentum into February before accelerating during the during an even stronger Presidents' day.
Momentum remained high through the rest of the quarter and we saw a peak when the March stimulus payments were received.
Our average order value with a mattress increased 6% year over year, driven by a combination of product mix and pricing increases.
Moving on to our Purple brand showrooms, they continue to grow in size and importance to the DTC business. We entered Q1 with nine showrooms compared with only four in the year ago period, we signed several new leases during the quarter three of which opened in April and we remain on track to add between 20 and 25 this year on.
On locations are performing very well with our older showrooms now exceeding pre pandemic sales volume and adds to our newest locations they have scaled faster than any of our original locations.
We recently introduced a new store design that looks amazing with elevated presentation and an opportunity to tell the full brand and technology story across our complete assortment.
Looking at our product performance, our innovative mattresses continue to lead our business and within mattress demand continues to be strongest for our hybrid premier product line underscoring. The progress we have made advancing the consumer recognition of the premium benefits at the purple products.
As to our non mattress products are disruptive pillows had a banner year and were up nearly double in Q1 over the same period last year helped in part by the success, we have experienced launching harmony with our wholesale partners seat cushions nearly doubled from the prior year as we capitalized on the momentum that started early in the pandemic and have continued to learn and improve.
Our product merchandising and marketing.
We launched a new adjustable base that we're really excited about and it's already seeing triple the attach rate that our previous model received reflecting the right mix of style functionality ease of shipment and price points are.
Our other bedding products also experienced substantial growth similar to pillows and seat cushions in the first quarter.
We are very pleased with our progress in driving non mattress products led with pillows and seat cushions as standalone products and continue to sell the majority to new to file purple customers, who have not yet purchased a mattress we remain bullish on the CRM opportunities. This is creating.
And as to engaging new customers on April 1st we launched the purple squishy, our miniature sample mattress and pillow as an actual purchase of whole product each one shipped in its own adorable Matchbox container and in unit volume, we are selling at similar levels as pillows or seat cushions not surprising to our brand we have.
Seen fan videos with more than 10 million views on total featuring the new squishy.
Which brings us to marketing our brand evolution continues to make progress as we continue to focus on the differentiation of our product with clear benefits at the center of the campaigns. We have also seen significant performance from both testimonial formats and a focus on made in USA, which is a genuine source of pride for us.
Although we are early in our capabilities, we are seeing meaningful improvement in CRM and repeat customers as we continue to increase the size of our database and find effective ways to directly engage led by both our maturing email capabilities and success with direct mailers. This has resulted in an increase of repeat orders of approximately 75.
5% versus the same period last year.
From a promotional activity perspective, we leaned heavily into President's day are typically large mattress holiday and also played on the aspect of sleep related to daylight savings both of which were successful campaigns.
Finally for product and marketing I'm thrilled to report on our recent announcement of our partnership with Doctor, Michael Bruce as our new Chief Sleep adviser and first Advisory Board member Dr. Bruce will be overseeing academic research regarding the efficacy of our products as well as assisting in research on new product development, we have underway.
As Dr. Bruce stated are hyper elastic polymer is like nothing he has seen in all of his years as a sleep researcher and clinician. We look forward to his help with formerly demonstrating and documenting what we and our customers have known for years.
Switching now to wholesale our wholesale revenue increased 48% to $62 million, our best performance to date and continued evidence of our ability to compete side by side with traditional players as I mentioned earlier the pace of wholesale sales picked up as we move through the quarter with sell through is strongest in Ma.
March our performance in existing doors same store sales has returned to pre pandemic levels consistent with Q1 last year with most growth then coming from new doors added also encouraging is that newer accounts, such as love and furniture have been meeting expectations and sleep country in Canada is starting to reopen with on.
On the 40% of locations closed as of this month.
In addition to our strong brand and product momentum are wholesale performance also benefited from some external factors specifically store traffic has continued to improve as more of the U S get vaccinated shifting a portion of the volume online game during the pandemic back of physical retail more stores are open compared with recent quarters, especially in <unk>.
Canada and similar to DTC, we've seen spikes in wholesale sell through correlated with government stimulus checks.
And as of mid March we are starting to see easier comparisons due to store closures last year.
Drawing momentum in wholesale has carried over into the second quarter. So far in Q2, we are seeing higher sell through at existing doors and anticipate that trend going forward as we lean into merchandising and advertising strategies and have therefore, adjusted the number of new doors, we plan to add in 2020. One we previously expected to add over 500 doors.
2021 however by refocusing our resources on maximizing existing door productivity first we now expect to open between 800 to 900 total doors in 2021, which both achieved our stated net revenue goals and create even more opportunity for the future.
Moving on to production as I stated last quarter, we anticipate 2021 being our first year, where we've deliberately built excess manufacturing capacity and we are well underway in this regard purple south and Macdonough, Georgia is in production, making purple grid assembling mattresses as well as making both seat cushions and pillows.
Max eight the first machine at Purple South has been in full production mode. Since February and May we brought Max nine online and Max Cannon. Max 11 are on schedule and will follow later this year.
These four machines are expected to increase our mattress output by over 65% by the end of 2021, which will further expand as we bring on Max 12, and 13 next year and with our current capacity, we are already producing record levels of mattresses in April.
We are also completing our work on our entirely new next generation Max machine, which is already able to make purple grid and limited capacity and which we anticipate coming online in purple South later this year as well.
We are very pleased with the start to our mattress pillow and seat cushion manufacturing assembly and fulfillment activities in Georgia in order to provide us with greater flexibility around our future plans for this location, which could include additional production for a cash growing pillow on T Krishnan business potential space for additional mattress, Max machines and regional expansion of our customer.
Our operations, we recently took the opportunity to amend our lease and increase the size of the facility by an additional approximately 300000 square feet. This expansion will allow us to take advantage of economies of scale as we increase our presence on the east coast, which along with our facilities in Utah provide us with a great foundation to meet the growing.
Demand for our branded products drive efficiencies in our cost structure and better serve our consumers and wholesale customers.
We also continue to invest in quality and operational improvements in all of our Max machines and assembly lines and have recently introduced significant advancements in semi autonomous raw materials feeds mattress assembly and fulfillment. These.
These efforts continue to lower our labor cost per unit and increase our overall capacity.
I'll now turn it over to Craig who will review the financials and our outlook in more detail.
Thanks, Joe as Joe outlined 2021 is off to a strong start from both a revenue and adjusted profitability standpoint for the three months ended March 31, 2021, net revenue was $186 4 million up 52, 3% compared to $122 4 million in the pre.
Our year period.
The revenue increase was driven by strong demand for our entire product portfolio across all channels for the quarter DTC channel net revenue increased 54, 8% year over year.
In wholesale channel net revenue grew 47 seven per cent.
Gross profit dollars were $87 5 million during the first quarter of 2021 compared to $53 2 million. During the same period in 2020 with gross margin at 46, 9% versus 43, 5% in the first quarter of 2020.
This gross margin increase of 340 basis points year over year can be attributed primarily to channel mix shift towards DTC and fixed cost leverage on higher revenue and production volume.
E T C. Net revenue comprised approximately 67 per cent of net revenue for the quarter compared with approximately 66% in the same quarter last year.
Operating expenses were 37, 9% of net revenue in the first quarter of 2021 versus 37, 3% in the prior year period.
The 60 basis point increase was driven primarily by additional administrative costs to support continued accelerated growth, partially offset by efficiencies in marketing and selling costs.
Our kitting and sales expense as a percentage of net revenue decreased to 29, 2% compared with 30% last year due to leverage on higher net revenue and more efficient marketing spend partially offset by additional marketing spend to increase brand awareness and the addition of company owned showrooms.
For the first quarter, we reported operating income of $16 9 million compared to $7 5 billion in the first quarter of 2020, an increase of $125 three per cent.
Net income for the quarter was $20 9 million compared to net income was 28 million in the year ago period.
As previously disclosed we recently determined on our outstanding warrants should be accounted for as liabilities and recorded at fair value on the day of the transaction and subsequently re measured the fair value at each reporting date for.
For the three months ended March 31, 2021, and 2020, we recognized non cash gains of $9 1 million and 21 6 million respectively associated with the change in fair value of warrant liabilities.
Excluding the impact of the company's tax receivable agreement and the change in fair value of the warrant liability items. Adjusted net income was $12 million or 17 cents per diluted share based on an adjusted weighted average diluted share count of $68 6 million compared to adjusted net income of $4 6 million or eight cents per diluted.
Share based on an adjusted weighted average diluted share count of $58 3 million.
Adjusted net income has been adjusted to reflect an estimated effective income tax rate of $26 four per cent for the current year period, and 25 four per cent for the comparable prior year period.
EBITDA for the quarter was $27 8 million compared to $30 8 million in the first quarter of 2020.
Adjusted EBITDA, which excludes certain noncash and other items that we do not considered in the evaluation of our ongoing performance as detailed in today's earnings release was $22 8 million compared to $10 6 million in the same quarter last year.
An increase of 115%.
Moving to our balance sheet.
As of March 31, 2021, the company had cash and cash equivalents of $103 8 million compared to 123 million at December 31 2020.
The decrease was driven primarily by capital expenditures of $12 3 million, primarily related to manufacturing capacity expansion and showroom expansion and net cash used in operating activities of $9 4 million.
Net inventories totaled $63 3 million at March 31, 2021, compared with $65 7 million at December 31, 2020.
Turning to our guidance based on.
First quarter results, we are raising our 2021 outlook.
Now expect full year 2021, net revenue to be between $860 million and $900 million up from its previous range of $840 million $880 million.
The new range represents an increase of 33% to 39 per cent over 'twenty 'twenty results.
Considering our first quarter results adjusted EBITDA is now expected to be between $95 million on a 105 billion up from its previous range of 90 million to 100.
This includes consideration for recent trends, indicating an even greater channel mix shift towards wholesale in the second quarter, which could put additional pressure on core current margin rates.
The second quarter of 2021, we expect net revenue to be between 200 million to $210 million and adjusted EBITDA between $21 million and $25 million.
We continue to expect capital expenditures for 2021 to be in the range of $45 million to $50 million, consisting primarily of approximately $20 million from the continued build out on the Georgia manufacturing facility and $19 million related to the acceleration of showroom expansion as well as expansion of wholesale displays and additional equipment from production and innovation facility.
Yes.
I'll now turn it back to Joe for his closing comments.
Thanks, Craig How'd, you can hear we remain very optimistic about 'twenty 'twenty. One I previously stated that this would be an investment year and I'm very pleased with the significant progress we've made and anticipate continued investment in building out the team investment in manufacturing and supply chain capacity investment in the E Commerce.
Platform investment in contact center capabilities investment and showroom expansion and investment in innovation with not only a focus on product innovation, but renewed focus on manufacturing and materials innovations as well it's worth reminding that the overwhelming majority of our revenue comes from manufacturing equipment of our own design.
Using materials of our own invention.
We are very excited about what all of that will bring over the next few years as to the balance of 'twenty 'twenty. One as Craig stated, we have raised our full year guidance, reflecting the over performance in Q1.
We have learned to adapt to a seemingly endless run of unpredictable events and I've continued confidence in our team's ability to successfully react and where possible arbitrage opportunity.
With that in mind, we remain confident in the balance of the year as originally planned.
The one change we see possible would be mix shift from DTC to wholesale if we find additional wholesale opportunity that our growing capacity can support and which could create gross margin pressure. We would still view this positively toward our long term strategy of taking share which has significant long term benefits and long term is what gets us most excited.
With our many anticipated innovative premium product expansions geographic and channel expansions and strengthening brand all of which remain at the core of our growth strategy.
In support of this we anticipate hosting a virtual investor day by the end of June to discuss our multi year strategy and operating goals.
At this time, we will open up the call to questions.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is on the question Q.
You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys. We also ask for each participant to limit themselves to only one question and one follow up question to allow us a chance to ask that question.
One moment, please while we pull for questions.
Our first question is from a tube munis, where we with UBS. Please proceed with your question.
Good morning, Thanks, a lot for taking my question you did not call out supply chain and home issues impacting you in the first quarter. So eight was that an issue at all and did you leave some sales on the table because of those issues and if it wasn't an issue how were you able to sidestep some of those special points that others in the industry called out.
Yeah, Hi, thanks, Thanks for the question.
Certainly no one in the industry has been completely immune from some of the supply chain challenges.
One advantage we have is our dependence on film is it's less than I suspect some other manufacturers or are sellers are.
As some of our best selling in a majority of our units are coil based cores with with hard.
Great on top which is no problem at all.
So some of it is just the design of our mattress our dependency on Tom it's been less and that has helped.
We are I'd say, we have been working with multiple suppliers and have been really leaning hard into a a dual or multi source strategy to augment our traditional suppliers.
You know it's been touch on go I think we've been right at the raisers edge, but so far we've been able to to stay just slightly ahead of our needs.
Got it that's helpful and then as my follow up on your expectation now, adding on the eight to 900 wholesale doors, where since 1500 plus earlier.
Does that add more risk to your guidance given your reliance on smaller number of doors from Cindy our revenue expectations. So what is the thought process behind it I'm, assuming the contribution margin on on on these stores and it's got to be higher but I'd love to get your thoughts on that thank you.
Yeah. It's.
And so what we said this last quarter as well.
Theres nothing magical in our minds on a specific number of score of stores really it's it's about hitting the revenue goals that we anticipate around wholesale and in meeting that consumer demand.
The most efficient opportunity we have is to sell everything we can in the doors, we have and we've been recently emboldened by our ability to increase same store sales and see growth in the doors. We have which also then increases the value of every door on every future door that we would go on too.
So really it's just a matter of with with the resources, we have maximizing what we can get out of our existing stores.
First you know and then augmenting that with growth on newer stores it's <unk>.
Recognizing it's more expensive to open additional doors and there is a ramp and debt.
There is more of a delay in getting the full value and opening new doors, which is just the nature of going into anything new so it's going to be a balance mix of both is this we had started the year with sort of a preconceived notion of what every individual door can contribute and then you build out from there we're discovering we actually do.
Have more opportunity on the doors, we're in and that's very exciting.
Got it and if I can squeeze in one last one on the gross margin.
You called out DDC makes as a tailwind, but really a direct to consumer was largely in line with the first quarter of last year and then you probably also have some costs associated with the new kind of facility. So maybe can you provide some more details on what drove.
The gross margin expansion in the first quarter on how much of that is.
Sustainable versus one time, thank you.
Sure Craig do you want to take that.
Yes, there were there were a couple of factors, we actually when we compare it to the prior year. Our some of our freight costs were actually improved as a percentage of revenue.
The fact that we were we exceeded what our expectations were and what we plan for revenue.
Because of the additional volume we were able to leverage a lot of our fixed costs. So.
Primarily what drove our better margins.
Okay.
And our next quite frankly is from.
So I'm sorry, our next question is from Keith Hughes with Truth Police force.
With your question.
Thank you.
Give us any sort of feel in terms of growth differences.
Between our price points on the quarter or was it.
And more to the higher at a lower end of your offering.
Sure you you're talking about mix shift that we've had on a mixture I'll start proper on.
Yes.
Yeah, we are.
Yes, so we are increasing and this has been a multi quarter trend really a multi year trend to go up markets. So more and more of our overall share is our hybrids and we're continuing to grow, especially with our hybrid from errors.
So yeah, I'd say, we're becoming public last survey from core mattress company on the mattress side and we continue to lean on upward.
And that to the the door openings, you've talked about earlier lower number. This year is that due to some customers you thought you're going to get you didnt or slower offerings.
Or fewer doors that have existing customers that you're on new customers, who are opening up.
Yeah, and again customer here I assume you mean as wholesale partners versus and customers and we're not saying any.
Any waning of demand.
Whatsoever. So theres nothing were slowing here, it's really just a shift in focus we have a finite.
Finite number of resources and it's a matter of where we invest our energies. So there there is still an enormous amount of demand for our product out there there's still an enormous amount of demand from the retailers that are out there.
Spinning up a large retail arrangement takes many many months on a lot of work and typically involves piloting in a few stores proving it out getting the training done and then and then ramping up as we prove our are what were very big believers in share of earning our keep proving our ability to execute on them.
Floor, which we always do so we're not slowing that down at all it's just again, we're recognizing we were leaving money on the table that we can go after now in the doors, we were in and we are investing their first as it's the most efficient way for us to expand our wholesale revenue.
And again as I said in our prior prior questions.
Increases the overall value of every individual door, which is Uh huh.
Very great place to day.
Okay. Thank you.
And our next question is from Matt Koranda with Roth Capital Partners. Please proceed with your question.
Hey, guys. Thanks.
Just on the DTC side in the quarter and going forward I just wanted to see if you could maybe discuss a little bit more about your own showroom contribution to revenue on the DTC channel this quarter.
I wanted to get a sense for how you see that playing out as you add doors over the rest of the year remind us again, I think I caught it in the commentary still about 25 doors expected to be added to the cadence of that would be helpful. As well for the rest of the year.
Yeah. So I mean, we're too worried about 11 doors right now and as we said on the prepared remarks, then the new design and the newer doors are outpacing the the original doors, both in terms of their trend as well as debt or sort of ramp speed, how how quickly they are they become fully productive.
So we're increasingly emboldened with.
With the success of our showrooms and our ability to execute on growth there.
Given the number of doors, we are anticipating opening balance of the year. Its obviously going to be a pace thats picking up I mean, where are you now.
On a b are likely call it.
On a month or two we'll be opening roughly a door a week to start just to hit those numbers by the end of the year and our pipeline on leases signed or leases.
Nearly ready to go.
Locations. We're looking at are fully on track with meeting those goals. So we feel very very good about that.
All in it's still a relatively small piece, yes single digit percentages of overall D. T C, which just given given the store accounts.
It's going to be a little while a few quarters before it starts becoming any meaningful amount.
But it is it is contributing and growing and I'd also we don't it tends to get forgotten in this but.
But in addition to our showroom doors and the D. T. C. We've also been continuing to invest substantially in our contact center. We are still believers of Cogs human assisted selling which you obviously get in a showroom setting where you can directly engage with our employees, but our ability.
To do that virtually through phone and chat. It continues to be one of the highest growth engine in this business and.
It's really going to be the second channel behind DTC way ahead of showrooms and our ability to grow and again, it's continuing to be our fastest growing channel.
Great. That's helpful. Joe and then just on the gross margins.
It seems like embedded in your outlook. We may expect gross margins have sort of peaked in Q1, but it looks like seasonally if we look at the historical patterns Q1 is relatively lower than the rest of the quarters and it sounds like you are alluding to just the mix shift as the main explanatory variable there in terms of why we're probably not going to.
See increased gross margins for the remainder of the year.
But maybe I just wanted to see if you could discuss that.
Enter play a little bit Craig that'd be helpful.
Yeah.
Yeah.
I would say that it's you're right that is what we were trying to convey is that.
As we continue to grow the wholesale side of the business there will be pressure on margin and we're absolutely on trend there.
Wholesale.
Continuing to improve.
On the first quarter typically is one of the lowest margin quarters for the year or so.
Yeah.
What you're saying is true.
That is the trend that we're seeing.
Okay.
Is that sorry go ahead, no I, just I want to be clear that we.
Our our positioning that we have a lot of opportunity for gross margin expansion remains I mentioned in the prepared remarks, our significant investment in operational improvements, where we're both driving more more volume out of the equipment, we have reducing labor cost per unit, reducing waste I mean, we had significant investment.
We continue to make in our operational efficiencies I would say we're in the mid innings there were still on early innings there.
Yeah.
So as you said certainly mix shift is a is a very big contributor to overall margin as wholesale margins are dramatically lower than that.
Our our own channels.
There is also the overhead of the investment I mean, we've taken on 300000 square feet more and outer.
Outside Atlanta, which we're continuing to build out.
So it's an investment year, but I, just I wanted to be clear that our opportunity to expand margins.
Is it still very real and under all of this investment we're seeing those benefits.
Yeah.
And our next question is from Bobby Griffin with Raymond James. Please proceed with your question.
Good morning, Buddy. Thank you for taking my questions Craig Joe I, just wanted to maybe touch briefly on raw materials on pricing and what you guys are kind of doing on the pricing side and what's embedded from pricing through the rest of this year 2021.
Yeah, Hey, Bobby.
So.
Yeah, I mean, if raw materials as as with everyone in the industry, we are seeing some inflation in pricing.
Which yes, we're certainly hoping is peaking out here again, we're finding ways also to and through our sourcing strategy.
As efficient as we can in our cost of goods.
We did just raise prices a couple of weeks ago on debt.
As we've gone through this in prior quarters recall that because of our wholesale contracts. It can take 30 to 60 days before we see the full benefit of those price changes flow through but we did raise prices again.
I believe this is the fourth time, we've done this now succeed.
Successfully so far early data shows that it's yielding the results we anticipated.
So we will continue to look at it if we.
We clearly have some opportunity to raise prices we've talked about we're going to continue to offer models that allow us to have higher price points intrinsically.
As the year progresses.
But I'd say, it's a it's fairly straightforward Craig anything you'd like to add.
I was going to say.
There.
The profit because of the raw materials, we're using a lot of the products.
We buy from vendors.
Excuse me.
We can we're trying to find other vendors, where we can potentially manage those costs a little better.
Expand our supplier base as well.
Okay.
And then Joe I also want to circle back on just kind of the better productivity you are seeing inside wholesale on a per door basis. I mean, I think I think the slowing down the door growth is actually a meaningful positive when you kind of dive into what it's implying youre getting now on your same store doors. So can you maybe touch on what youre hearing from retailers on why.
You're getting that acceleration better marketing any of the things you're doing to kind of push there is it a factor that you guys just had better supply because you werent relying on phones.
Thing there to help US understand you know what's driving this good new productivity or better productivity inside your same stores, because that's a very positive long term trend here.
Yeah, no you're right and I. Thank you for picking that up that that is the point, we're trying to make.
So we're.
This is a newer trend for us that we're leaning into hard right now so I mean, we're we're figuring it out as we go I'd say, it's a mix of a number of things. So first of all there was just the opportunity to expand coming out of COVID-19. We've had partners, who I don't think it fully realize the potential of of our product.
Ray Martin Flanagan had launched with us and in February of last year right before the pandemic hit.
Now that everything's coming back they've.
They've got renewed enthusiasm, we only had two beds on the floor, there's opportunity for us to get three or four and those kinds of things are happening similar with our early work with rooms to go where we have started with only a couple of beds on the floor, we're now getting to the eye.
We're earning the right to get more square footage on the floor and that translates into sales. So some of it is rounding out our our fleet and and making sure that we're getting the opportunity to sell the full assortment.
But we also.
Many of our stores are on display is from from multiple years ago. So reinvesting in our presentation I'd say, what we've learned through our own showroom strategy and how to present, our product better and.
And the sales techniques.
And as we have invested in building out our field sales team, which I've mentioned in prior quarters has been very very light relative to industry industry averages.
We are also learning how to be a better partner to our retailers and improve our selling on the floor and improve our presentation on the floor. So you just you put it all together and it means not surprisingly the young company we.
We by no means had achieved a maximum potential on the doors, we're in and we're continuing to find ways to do that.
Sorry, I forgot one other thing as accessories, we also rolled out our harmony pillow.
And.
Most of our wholesale partner doors now.
Leaning into accessories, and getting part of part of our strategy is our accessories are adjusted units to throw onto a mattress they really stand on their own and.
Having.
Unique bespoke product that actually stands on its own. It is it's kind of a new game for many of our wholesale partners, who haven't been as good with accessories.
And it's also opened up new possibilities to get brand penetration and engage with with customers in these retail settings.
Thank you that's helpful. And then I guess just one quick modeling question. The 2 million of our Georgia facility production cost that was kind of called out in the adjusted EBITDA walk.
Did that mostly hit gross margin or cost of goods sold and is that a decent run rate for us to use for the next couple of quarters.
Yes that is mostly in gross margin I believe.
Going forward.
I wouldn't continue used your name because we are now up and running.
Silly opened in the first quarter, so that will likely continue to decline.
Okay I appreciate it. Thank you Craig best of luck guys. Thank you so much.
Thanks, Thanks, Bobby.
And our next question is from Susan Anderson with B Riley FBR. Please proceed with your question.
Hi, good morning, nice job on the quarter.
I was wondering if you could talk about maybe the marketing spend I think you mentioned that you were more efficient with it in the first quarter and maybe if you can give some color around that was that just shifting to more digital and then also your expectations for the rest of the year I think first quarter you all said was higher year over year.
Yeah, where is that hi, Susan.
We are.
So marketing, yes, we got some leverage in Q1 and last year you know as we are.
We've reported many times, we have some incredible opportunity to arbitrage marketing I'd say marketing expenses are getting more marketing platforms are getting more expensive, there's more money coming in and it's getting more competitive and we're starting to see things climbed back up to levels pre pandemic.
And in some cases, even higher as as discretionary spend continues to open up.
So.
I'd say, we had opportunity in Q1, both to continue to arbitrage with without the investment in competition, we're seeing right now and let's not forget there was there was the the shot on the economy stimulus money that came in last quarter as well, we lean hard into that as we always do and that was very.
Productive for us, but that does mean when theres extra money out there to spend we work a little less hard overall to capture those customers. So.
The team continues to mature we continue to find ways to.
To expand our addressable market and gain leverage I've mentioned, many times, our increasing investment into lifetime value on CRM, which lowers our cost of acquisition at the transaction level, but it is getting more expensive out there and more competitive and that is going to create a headroom headwind that we're gonna have to deal with moving forward.
Got it okay. That's helpful.
And then I was wondering if you could talk about the performance and the non mattress products versus mattresses and then also any new products you have rolling out for the rest of the year.
And so and non non mattress continues to outpace mattress, which is terrific and I'll, just keep saying over and over because it's true.
And it's not just on the strength of our brand that's not just because we've got a purple tag. So on on I mean, these are amazing products that stand on their own and we could have a healthy business just selling these non mattress products. So they're great products that we continue to learn how to market merchandise on cell and.
Even more so than our mattress line had some real low hanging fruit opportunity for line extensions and new product expansions and new channels for that matter.
The channel opportunity in these non mattress are far greater than than where mattresses are sold which were already starting to lean into.
Our COVID-19 example, R. R C cushions.
We continue to expand in places where consumers would buy them.
Through a distribution partner, we are now in all of our love struck stops around the country and that's quickly become one of our our top retail locations for seat cushions, just amazing to see these kinds of opportunities bubble up.
As to new product.
We have hinted many times, we have some amazing new product in the labs that we are we are developing on working on products that are where.
We are emboldened by the success, we're making.
Theyre very real with some some significant advancements and what we have to offer.
With all things innovation.
To be ready when they're ready.
We expect some of this as we've been saying for a while to be launched by the end of the year end.
A lot more over the years to come.
Great that sounds great. Thanks, so much good luck the rest of year.
Thank you.
And our next question is from Brian Nagel with Oppenheimer. Please proceed with your question.
Hi, good morning.
First off good morning, Brian that's a nice start to the year great start.
So the question the first question I had.
With regard to <unk>.
Craig and Joe you, both mentioned stimulus senior debt.
If it's a stimulus and you're on your prepared comments.
A question I have is if I remember correctly you back on when the when the pandemic stimulus starting over a year ago, you would have thought.
What you would be at the point that you didn't really see the benefit direct benefit your business.
One question on it.
If I understand now you are you did see a benefit so that's one.
How should we think about.
Maybe what are you seeing with regard to sustainability of that so just because now you're you're essentially we're halfway through the second quarter. Obviously the guidance you laid out your employees are very much a continuation of the strong trends I mean, how much of that stimulus driven or if at all.
Long do you think this could last.
Yeah, no. It's so you're remembering correctly some of the conversation we had a mid year last year and I'd say really that was a question on correlation versus causation are.
We saw very high correlation.
We asked our customers and direct surveys did stimulus stimulus impact your decision to buy with us and we got a resounding no.
But the correlation nevertheless was very very tight.
What I'd say is it's been harder for us to continue to tease out.
<unk> core causation.
But nevertheless, we are seeing very very tight correlation that anytime there is an increase.
A sudden increase in discretionary spend we see equal and now predictable increases and what flows through so.
At some level you stop asking the question Hendi just recognize it is correlated and we do see flow through.
As to the year when we built our annual operating plan, we didn't have stimulus expectations in there and.
That's part of why we're saying that we got some benefit I mean, I think we executed very well on Q1, and I think our ability to lean into these moments in time and capture the customer that appears we continue to be good out.
But we're effectively saying we got some over performance in Q1 for a number of reasons stimulus being one of them.
We don't.
It's difficult for us to predict any of that moving forward. So we're basically saying lets put that over performance on the bank and we continue to remain very bullish on what was otherwise on aggressive plans for the balance of the year.
Got it that's really helpful.
And then the second question or the follow up question I had I guess with regards to new products or we talked about from the past, but any update there with the new particularly the higher end type products you planned to launch here.
Yeah.
When we we don't spend a lot of time talking about unreleased product is as you know I've been consistent on that.
Yes.
Had said we were going to launch some significant.
Addition to our line by the end of the year. We still believe that is that is in the realm of possibility.
As with any significant endeavor on the innovation side you are.
You learn as you go. These are these are multi year initiatives.
That debt or about invention of discovery and we're learning a lot and I as I said, we're very emboldened with how far we've come and what we've learned.
At this point again, I do anticipate we will be able to launch more premium product that represents.
The outcome of some significant investment of ours by the end of the year beyond that we have.
At this time.
Great I appreciate it rests again thank you.
Sure. Thank you.
And our next question is from Brad Thomas with Keybanc Capital markets. Please proceed with your question.
Hi, good morning, nice start to the year here.
I had a couple of follow ups on gross margin if I could.
Really impressive here.
Understanding that channel has been a really.
Important factor in how gross margin is played out in recent quarters I guess, putting that aside can you talk about some of the underlying puts and takes on how we should think about those going forward.
Yes, he didn't dwell on referring that.
Puts and takes as a result of channel.
I'm, saying, if we if we if we ignore channel and we just think about okay.
Manufacturing costs price things like that.
How to think about puts and takes on gross margin.
So some of the puts and takes well we've already talked about the raw materials. When it comes to fall on the coil price differences, we've been seeing recently.
That's one piece or another it is.
Freight out.
With as much traffic as there is in trades that can can vary sometimes.
Sometimes it widely.
Other others are as we continue to build out Atlanta.
Increase the production there we're going to start getting more leverage on those fixed costs in that facility.
Grants will as well.
Well as we continue to improve our manufacturing processes.
Getting efficiencies out of that those are those are certainly tailwind.
Okay, Alright, that's helpful. Craig and just just thinking about again I know that day in <unk>, you're up against the much tougher gross margin comparison with what happened to DTC, but on a sequential basis. It seems like maybe the quarter it could be sort of similar to what you just saw on <unk> from a mix standpoint.
How are you.
Revenue guidance, obviously point to even more.
Revenues net net and then what you just didnt <unk>. So how should we think about how that affects gross margin sequentially. I mean does it need to step down a lot from where it was or can it be in the range of where you just pushed it from <unk>.
Yeah.
I know you said, let's put put.
Channel mix aside I mean are what we've proven over the last couple of years is our ability to expand wholesale.
Quickly is it's much more fluid.
And then our ability to suddenly grow DTC.
DTC tends to be a curve you invest you get the flywheel going you grow what we had been doing pre pandemic and obviously on the pandemic. We had a sudden externality that drove massive increase in DTC seemingly overnight, but I mean that day.
Otherwise never happens.
How we had historically been doing it and you followed us for a while so you remember.
As we'd add some capacity, we'd immediately put all of that incremental capacity to work on wholesale as DTC would ramp up and as DTC would catch up by then we're adding more capacity and we would continue to have sort of this back and forth step function of taking advantage of capacity by significant wholesale expansion as as the DTC growth.
Happens more more on a traditional curve.
And I think youre going to I think we're going to be getting more back to that you know were John Laggan team have been.
Just relentlessly building out capacity you were tickled, how and where we haven't had many questions on this but I mean, we're we're tickled how on track we are and on top of not only the grid and iron expansion are more Max machines and more injection molding machines. The efficiency gains we're getting our remarkable I mean, we are putting.
So much into semi automation and efficiencies and it even gets into raw material costs, our ability to to feed raw materials and the machines with larger bulk buys from less human involvement and more consistency on last waste is driving quality and yield improvements.
So we're getting all those.
That's which means we're getting the capacity available, which means we have opportunity to lean harder into wholesale which we can move very quickly. So that that's the wildcard. If we really can get some significant movement on wholesale which we are seeing more and more opportunity for those we're going to have more immediate impact on gross margins in the short.
Term.
It's just balancing short term on long term here as we make sure we keep the overall ratio consistent over time.
But in any given quarter, we could have significant swings.
Got you that's really helpful context. Thank you if I could add one more follow up just around that that wholesale opportunity that seems.
So exciting and it seems like you're seeing some really encouraging data points from.
When you look across your your partner base and look at what the offering is the number of beds. They have per store how they sell the accessories are adjustable bases that they may be utilizing.
How far along are you in identifying sort of best practices.
Can you talk about the opportunity to speak more with those retail retail partners until end continue to point them towards how to maximize their purple volume.
Yes.
We're still.
You've been following us a while you remember we were I don't know how it'll I think the business terms, we were an awful partner or to our our early retailers. When we began this we just we didn't know what we were doing we didn't know what we didn't know and theres been a lot of learning and growth on all sides.
As we've learned to be a good supplier to our retail partners and learned how to do this better and better.
We're competing side by side with institutional players who've been doing this for decades and.
I assure you they are they are noticing us now so.
We're saying more increased direct competition.
Some of it has been fortifying the team and we've got some significant new hires that are coming on board as we bring in some some top shelf leadership out of industry to to help us navigate. These these contracts and the operations in the field and we're continuing to build out the team which is still a very very soon.
<unk> team right now.
With with experienced talented people. So I think theres a lot of opportunity in front of us by no means what I suggest that we have we're great at this <unk>.
And that's a very positive thing I mean that means there is still a lot of opportunity in front of us as we continue to learn and optimize.
And our next question is from Jeremy Hamblin with Craig Hallum. Please proceed with your question.
Thanks, and I'll add my congratulations on the strong execution and results.
I want to come back to wholesale doors per second.
I might have missed this but you know.
I think you said you ended last year at a little over 2200 wholesale doors, how many did you add in Q1.
You know roughly how many do you think you might add in Q2.
And then it kind of as a follow up to that.
The limiting factor on you know 800 to 900 wholesale doors added versus the.
2014, and 1500 debt you might've expected earlier this year is that capacity constraint or some other.
Reason why why you wouldn't add more doors now as the brand is growing.
Sure.
Yes, the numbers are noisy.
In large part because of like whats happened at sleep country, Canada.
We at the end of last year nearly.
Most of theirs.
Around I think 275 280 doors that they've got.
Yes, most of them had closed down by the end of the year assets.
As the latest waves of COVID-19 hit across Canada and on.
Ontario County, Ontario Province, excuse me.
Continues to be mostly closed down.
So from much of Q1, I think about 60% of the doors were closed I think at this point theyre down to about only.
40% of our closed as of now.
So despite adding doors the doors, we have have not been consistently performing and.
Many of them, especially with sleep country were shut down.
I believe last quarter, we added.
Call it less than 50.
So modest door count increase.
Again, some of the doors that we're close we're opening back up and we'll continue to see more of those doors open back up.
It has not been constrained by capacity or anything else.
Lot of the retailers have been.
Getting a getting themselves refocused as as business starts to come back.
And again these.
Opening these stores at this point and we turned on we're leaning towards sleep country type deals where these are full fleet hundreds of doors type contracts.
It takes time I mean, it's just these are these are long negotiations with these partners to get it right and then the training and rollout across thought about potentially hundreds of doors. So that's all in play and this is exactly what we had guided to it was one of the reasons, we were a little more back loaded in the year.
As we had said we did not anticipate significant opening in Q1, we were going to start to see some opening ramp up in Q2, and then really by Q3 is where we see the bulk of the door openings occur and its really just timed to business cycles.
And really nothing more than that.
So embedded within that response, then does that mean that 2022 could look like Thats also a year with fairly significant.
Door growth given that clearly the consumer is demanding purple products.
And I know, there's you know in terms of inventory turns it take some times to gain slots.
Especially for the first time, but then to add slots.
Which sounds like what's happening now.
Is this something where you could see 800 or 900 more doors added next year simply because the consumer is demanding it.
Yeah. It's the very last point you make is the the most important one this is how do we meet consumer demand and meet its addressable market that is still predominantly a brick and mortar category on a predominantly offline category. I think are we view ourselves first and foremost not as a as an <unk>.
Internet player DTC player, but as a manufacturer.
On disruptive premium differentiated mattresses, and we want to get those on the hands of as many consumers as we can.
So it really.
I don't believe that we're going to need to be deeply penetrated in wholesale because we are showing the ability to sell direct through a combination of of our online capability, our own showrooms and increasingly our contact center.
So.
And we've said what we're looking for is more of that 70 30 split of owned retail and wholesale.
There is headroom there so yes, I think the idea that there could be hundreds of doors more into next year is absolutely in the realm of possibility, but ultimately I do think we're going to hit a point of equilibrium and I think that does that start to decay as we get to maybe that debt 2500, or 3000 door count or somewhere around there were a.
To meet consumer demand, regardless of their purchase preference.
But still manage on a great owned relationship as well.
Okay, and then just as a follow up on the gross margins.
So mix was 34% in Q1 last year it was 33%.
Wholesale this year.
Craig called out a couple of million dollars in.
Startup investment costs that had drag on your gross margins and yet you still delivered 47% gross margin. It would seem like that's almost like your baseline on a go forward basis.
Understanding, but but is there something we're missing in terms of like what's the maximum percentage of revenues that you could see wholesale accounting for it in any of the quarters like you have headquarters where it was above.
40%, but for the most part it sounds like you are calling out 70 30 split maybe it's 65 35, some quarters will the mix get much higher than where it is now.
Well and again.
Yeah.
We're going to leverage all the capacity we have in lean as hard as we can into whatever we can grow.
Ida flashback to the days before we ever knew the pandemic was going to happen. Our original plan that we were guiding to call. It.
Nearly five quarters ago now into 2020 actually was built around some substantial wholesale expansion, where we were talking about wholesale getting back into that mid to high 40% of total net revenue.
As the capacity, we were building out, especially with our new facility on purple South in Georgia.
That was the fastest path to growth the fastest path to consumer penetration.
As again DTC buildup that it turned out the opposite happened wholesale.
Fell down ads.
As everything closed down last year, and we were presented with the unexpected and unprecedented opportunity to substantially grow DTC, but I think we're getting back into the world. We were on pre pandemic, where there is a lot of addressable markets Theres a lot of consumer demand that we can go after efficiently and quickly.
<unk>.
Through wholesale that we anticipate going after and that could mean cannot over the long haul, but on a quarter by quarter basis. It is possible that we could.
Find ourselves in the Forty's again on percentage of total net revenue.
Depending on the timing and how quickly the ramp goes with some of the wholesale expansion we're anticipating.
And our next question is from Seth Basham with Wedbush Securities. Please proceed with your question.
Yes.
Thanks, a lot.
My question is around the performance within the mattress category at existing doors on your largest and oldest wholesale customers could you give us some color on how you're performing there if youre still gaining share.
Yeah and good morning.
We are.
Share shares harder for us to to calculate as some of our largest and oldest customers.
They are not public companies and we don't always get perfect information.
What I can say is we are still seeing growth.
And recently meaningful growth.
And that's encouraging.
Whether our growth is faster or slower than their growth.
It's harder for us to tease out I.
I think we're probably close to a growing comparably.
So I'm not sure we're actually gaining share right now, but I again I do think we are helping to support the overall growth in the business.
So yeah, I would say it is healthy and we continue to see opportunity to expand and we are.
We are we intend to continue to expand.
Got it and then if you add in accessories, including pillows.
The product set do you think debt year more meaningfully growing share within your largest and oldest customers.
Yeah Yeah.
So some of our earliest customers, we're very focused on mattress not unaccepted reads and they view that as an opportunity for themselves as well. So our early success, especially with our harmony pillow has been very positive and yes, I think that gives us opportunity to increase share.
And and I think our early performance has exceeded everyone's expectations.
It's too early for us to.
Project too far out with that yet, but we're very pleased with the early performance and we see tremendous opportunity there.
As it relates to your production capacity being up 65 per cent at year end on a projected basis. When you build out the additional 300000 square feet that you recently signed a lease for where where you'll production capacity be up to by the end of $2 from 'twenty two.
Yes, we havent fully built that out build out the plan for that yet.
We had an opportunity to take contiguous space at the facility. We are already at that and we have as we had said last quarter. We were already searching for our next location our third location and as we started to do the math, we realized there were opportunities for economies of scale on the manufacturing side.
Side that we can take advantage of by co locating additional expansion, where we already were in Georgia.
We had other needs as well are we are growing contact center, which again is a significant percentage of our overall DTC business.
We're out of space in our facilities in Utah, and we're looking for something on the East coast anyway. So this created opportunities for a number of benefits as we anticipate co locating a fairly sizable sizable owned contact center at this facility as well.
So we're still building out the plan and as to the mix of Max machines versus injection molding machines versus fulfillment and distribution versus things like contact centers.
We just you know.
On a gift of a of a significant amount of square footage that we can appropriately lean into.
But right now it's more more opportunity than it has been defined outcomes.
And our last question is from Curtis Nagle with Bank of America. Please proceed with your question.
Good morning, Thanks for taking my question.
Yeah, maybe just if you could talk could we talk a little bit more about.
Productivity run rates that sort of thing in terms of.
Your own stores.
Existing versus new I think Joe on the past sort of friend.
Annual revenue contribution that it's something over 1 billion per store.
So, yes could we dive a little bit more into kind of where it's at.
Uh huh.
Yes for your stores.
Yeah, our showrooms.
It's it's well north of that number.
We anticipate.
Some significant expansion.
And in the four wall productivity.
As I said in the prepared remarks, we're very pleased with the performance. The newer stores are outperforming the original stores than the original stores are back to pre pandemic levels actually higher than pre pandemic levels.
They are there they are modest capital investment to build out.
Call It mid six figures and we anticipate a true rois.
Maybe call it a year or a little longer so I mean really efficient.
Really really good economics.
Pleased with the performance of those.
And you know well north of a million per store is as you said.
And we see a lot of growth potential there.
Got it and just to clarify I think you just said debt.
Return on invested capital is roughly a year and if that's the case that is pretty good.
Your little longer depending on the door, but yeah, it's call it give or take it closer to the year mark on that than anything else.
Terrific.
Well good luck on the rest of your interest thanks very much.
Thank you.
And we have reached the end of the question and answer session and I'll now turn the call over to Joseph Abboud.
For closing remarks.
Great. Thank you. So much we are off to a terrific start this year, we are executing as planned and intend to continue to invest in our growth and capabilities throughout the balance of the year looking forward, we remain very optimistic both near term and even more so as we look out over the next few years, our investments in new products and capabilities.
Continue to go very well and we look forward to sharing more of the strategy soon I want to personally. Thank our nearly 700 employees for their relentless commitment and unwavering belief in our mission on goals to all of our customers employees and partners stay healthy be safe and sleep well.
This concludes today's conference and you may disconnect. Your line at this time. Thank you for your participation.
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Yes.
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