Q3 2021 Purple Innovation Inc Earnings Call
[music].
Good afternoon, ladies and gentlemen, welcome to Purple innovation third 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. As a reminder, today's conference is being recorded it is now my pleasure to introduce your host code even collapsed out of ICR. Please go a height.
Yeah.
Thank you for joining purple innovations third quarter 2021 earnings call.
Copy of our earnings press release is available on the Investor Relations section of Purples 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 innovation 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.
For a more thorough discussion of the risks and uncertainties associated with the forward looking statements made in this conference call and webcast. We refer you to the disclaimer regarding forward looking statements.
<unk> and our third quarter 2021 earnings release, which was furnished to the SEC today on form 8-K, as well as our filing with the SEC referenced in that disclaimer.
We do not undertake any obligation to update or alter any forward looking statements, whether as a result of new information future events or otherwise.
Today's presentation will include reference 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 will turn the call over to Joe <unk>.
Thank you and good evening, everyone with me on the call today has been at news from our interim Chief Financial Officer. After our prepared remarks, we will be happy to take your questions first my apologies for the last minute change of schedule for this call as we disclosed in our earnings release within the last hour we are pleased.
We announced that we have entered into a new agreement with mattress firm that create significant new mutually beneficial opportunities to sell our full assortment of sleep products with mattress firm, while also allowing for new opportunities beyond mattress firm. This new agreement has been months in the making and we just closed late last night and needed today to tie up all the <unk>.
Natural details before our call I will speak more about our partnership later during the call.
I would also like to thank Ben for joining as our interim CFO. We continue to actively search for a full time CFO, but in the meantime, Ben It has truly joined the team, bringing a wealth of relevant experience and is helping to build a strong foundation for a full time CFO once he or she joins.
Moving to the business the third quarter was one of the most challenging periods. The company has experienced as a result of the hard work and resiliency shown by our teams as we address the production challenges that severely constrained our manufacturing capacity for over two months along with another month of backlog as we caught up during <unk>.
This period, given our inventory issues, we significantly reduced our marketing spend by more than $10 million from the same quarter last year, which materially impacted our DTC business for the quarter with this disruption behind US we had hoped to quickly reaccelerate back to prior sales velocity, but the pace of recovery proved slower than anticipated. We are now ramping back up.
Our marketing spend taking pricing opportunities and are proactively managing our cost of goods sold.
I'm going to spend a few minutes reviewing the drivers of our third quarter performance and our expectations for the remainder of this year, then I will spend time discussing our initial thoughts on 2022 and the key building blocks for achieving our financial objectives over the next three to five years, after which <unk> will review the financials in detail and outline our updated outlook our priority in the third.
<unk> with returning our production capacity to pre incident levels. After completing these critical tasks, we quickly ramped up production and exited our backlog position by the end of August as planned.
Lack of inventory for much of the third quarter combined with the tough year over year comparisons led to net sales being down 9% to 100 $771 million compared to Q3 2020 by channel wholesale revenue increased 10% compared with Q3 2020, continuing the positive trends we experienced.
First in our existing and new wholesale partner doors. During the first half of the year. This was offset by a 16% decline in DTC revenue, primarily driven by our intentional 25% year over year reduction in advertising spend for the quarter due to our capacity constraints constraints as previously mentioned.
Also our digital business was up against an almost triple digit increase in the year ago period and as communicated in prior calls we expected the DTC wholesale mix to normalize as consumers continued to returned to stores post pandemic and we are beginning to see that.
Compared with the more normalized third quarter of 2019, DTC revenue was up 66% underscoring our multiyear progress expanding our industry, leading position online and contributions from our accelerated showroom rollout.
During the third quarter, we opened seven additional showrooms and all 23 of our current locations are performing ahead of our internal expectations I will speak more to our showroom strategy shortly but it is quickly becoming another key differentiator for purple and an important high margin growth vehicle.
From when we exited backlog through today, we have been busy expanding our market presence in brick and mortar retail. Unfortunately, it has taken us months longer than anticipated to get back to expansion and growth with wholesale both wholesale and DTC excuse me, both wholesale and DTC demand were adversely impacted by the production issues, we experienced in the <unk>.
And third quarters of 2021 is our ability to manufacture and deliver our products was interrupted in addition in response to production delays, we temporarily reduced our marketing spending which also impacted demand, particularly in the DTC channel.
While delayed we are making meaningful progress now over the past two months, we opened 270, new wholesale doors and have another 210 doors contractually committed to open in Q4.
What has been particularly promising as more than 80% of these new doors are taking all five of our mattress models on the floor with our new elevated displays that we first presented at Las Vegas market last August the new accounts include over 200, Ashley furniture locations 27 living spaces and <unk>.
<unk> furniture marks among others. We are very pleased with our early partnership and results with Ashley and anticipate expanding meaningfully into their fleet of home stores.
As I mentioned at the start of the call. We have also entered into a new agreement with mattress firm our largest wholesale partner.
Our original agreement from September of 2018, we signed just before I arrived and predates much of the current leadership team at mattress firm. When we originally signed we were a young company new to wholesale with a much less certain future over the last three years <unk> has grown substantially and mattress firm's national scale and reach has helped.
Tribute to that as we look forward together, we realized that our initial contract can be improved and after many months of working through the details. We now have a contract that create significant additional mutually beneficial opportunity to expand sales of purples full assortment of sleep products within mattress firm and eliminates prior restrictions on purples growth outs.
Side of mattress firm, which allows us to pursue our strategic growth plans. We are pleased to continue our relationship and grow both our businesses.
For our DTC business in hindsight, we waited a little too long to start reinvesting and growing traffic again, which coupled with significantly higher media rates versus last year has resulted in DTC real re acceleration slower than anticipated with that being said, we remain confident in our ability to continue to grow our direct to consumer.
Channel and under the leadership of our new CMO Patrice Barney we have identified actionable opportunity to increase our brand awareness and expand reach through a new advertising campaign and more top of funnel reach for.
For the last 18 months, we have concentrated our resources on lower funnel performance marketing. We are now starting to lean more heavily and increased spend in our brand campaigns aimed at reaching a wider audience and educating consumers on the numerous benefits of our comfort technologies. We are confident the additional investment in top of funnel excuse me.
Confident that the additional investment in top of funnel programs will provide the business good momentum heading into 2022 and improve the efficiency of our bottom funnel spend going forward. Although this investment will likely create some EBITDA headwinds in Q4, as we need to rebuild momentum from our Q3 cut back and the response curve from top of funnel advertising.
Just takes longer.
As to costs consistent with the inflationary supply chain and labor issues that are prevalent across most industries. Today. We have also been impacted our overall cogs, including direct materials freight and labor have increased more than 25% since the beginning of the year, which has substantially outpaced the price increases we have taken throughout the year.
It's the production challenges, we met several opportunities to better manage against rising costs, including further opportunities to increase prices, we anticipate increasing prices again early in the first quarter of 2022 to help offset those cost increases all combined with online spending moderating, particularly for home related categories following record growth.
During the height of the pandemic combined with the impact on our trends from the slower than anticipated recovery. During the third quarter. We are adopting a more conservative top line view for 2021, we now expect full year revenue to increase approximately 13% over 2020 within a range of $720 million to $740 million, which include.
The impact from what we estimate estimate to be no less than $60 million in lost sales due to the isolated production challenges we faced as a result of the incident and follow on actions. We took subsequent to that excluding that full year growth would be closer to 22%.
Our outlook for adjusted EBITDA is now in the range of 15% to $25 million, reflecting the reduction in sales the planned increase in fourth quarter marketing plus pressure on gross margins from inflationary pressures throughout the supply chain and projected channel mix. We believe the additional marketing investments are important for the long term health of the brand and the business.
While the second half of 2021 has proven to be more challenging than we anticipated with demand trends improving this month and anticipated next month, we remain very optimistic for 2022 and expect to have growth across all of our major channels digital showroom in wholesale we have made important advancements throughout our organization improving our foundation.
For growth, we'll end this year in a stronger position to support the three big moves across expanded distribution product and increased margins that will drive sales to $2 billion to $2 5 billion and adjusted EBITDA margins to the mid teen range within the next three to five years, starting with the first big move expanded distribution I will begin with our high margin.
To consumer business, we have built the leading premium digital mattress brand in the industry in less than six years and we built this off of the Kickstarter campaign, and a basic shopify E Commerce implementation.
Just over a month ago, we finally launched our new e-commerce platform, including our all new proprietary promotions at Gen and just over a week ago, we completed 100% cutover to the new platform with the new platform, we have a new content capability and will be significantly advancing the content and usability through the beginning of 2022.
After the explosive growth in digital sales, we experienced in 2020 driven in part by the change in consumer buying behavior. During the pandemic the expected shift back to physical shopping this year, followed by the impact from the recent production challenges have masked the underlying strength of this business DTC revenue is projected to reach $475 million for 2020.
One about flat to 2020, and an increase of 79% compared to 2019.
Even as we left a meaningful amount of sales on the table. This year due to the temporary shortage of inventory and reduced marketing spend.
Also we expect to be able to drive more revenue per marketing dollars as we take advantage of upsell and cross sell opportunities given the launches of our new adjustable base and complete set of bedding accessories, including our category leading harmony pillows.
At the same time, we are forging enhanced direct to consumer customer engagement through our purple showrooms are new store designs continue to look amazing the elevated presentation and ability to tell the full brand and technology story across our complete assortment is resonating with consumers. The concept is proving to be highly successful and highly profitable.
<unk> with unit economics that are tracking above our stated plan average sales per door of approximately $2 million and a payback period of less than 15 months on a $600000 initial investment we remain on track to end 2021, with 28 locations and plan to accelerate expansion by adding more than 30 additional locations in 2022.
Establishing a strong purple showroom presence in key markets is a meaningful enabler toward achieving our long term strategic plan.
While we are intently focused on accelerating DTC growth, increasing our wholesale presence remains a key component of our distribution strategy. Our primary objective in 2021 with servicing our more than 2300 existing partner doors, where demand continues to be strong now that we are in our backlog. We have started adding new doors with a focus on retailers the best support the premium nature of.
The purple brand and are committed to showcasing our full lineup of mattresses. We have line of sight to meet our target of 400 to 500 incremental doors by the end of 2021, bringing our total to nearly 2800 doors by year end based on our current plans. We anticipate will reach our stated goal of approximately 3500 wholesale doors by the end of next year.
Moving to the second big move product as I stated earlier for the first time in <unk> history. We have successfully expanded our manufacturing capacity ahead of current demand and are well positioned to meet the increasing demand for our products, which we have been working toward for years. This is partly due to our next generation Max machine, the H, Max which is fully <unk>.
Operational it purple south in Georgia, <unk>, one has output that is more than 50% higher than our first generation Max machines with about half the labor and robotic extraction. We are already in construction of <unk>, two which will come online next year. In addition, we have Max eight and nine fully operational at Purple, South and Max 10 will be.
Online next week <unk> 11 is coming along nicely and will be online in Q1 of 2022 with Max 12% and 13 coming later in 2022.
We are also making progress with the design and build out of our new Purple labs facility, which will house, our expanded R&D capabilities specific to R&D. We continue to build out the team and are actively investing in new research prototyping and testing equipment and capabilities.
In August we launched our new purple plus mattress, our fifth mattress model in the U S. It fits between our entry level purple mattress, and our hybrid and enabled new price points and overall assortment expansion. It has successfully traded entry level buyers up with almost no cannibalization down from the hybrid despite raising hybrid prices.
We also launched the harmony pillow and extended sizes, specifically, the king size and tall standard and low heights, we continue to be impressed with the incredible high customer satisfaction of this innovative pillow and we were honored with the good housekeeping as 2021 Best Abetting Award for the harmony.
We continue our efforts on a new higher priced mattress models and look forward to speaking more about them during the first half of next year.
Moving onto our third big move improved margins as I stated last quarter one of the most beneficial things we've learned from working through these manufacturing challenges. This year is how much opportunity we have to meaningfully increase yield and reduce labor dependencies and with the higher cost of goods sold up more than 25% our focus on margin improvement is even more urgent.
We are working with a top shelf consultancy and have identified significant near and midterm opportunities to reduce labor costs improve yield and lower our supply chain costs. We are beginning to execute on some of these findings and will realize most of the benefit in 2022. In addition, we continue to rollout autonomous and semi autonomous improvements in raw material feeds.
Mattress Assembly and fulfillment.
Also with increased production in our Georgia facility, we are now able to fulfill nearly all mattress models out of the East Coast. In addition to purple Western Utah, which is improving our SLA and is helping to offset increases in freight costs.
Finally, with all of the high growth and corresponding change of purple, we have been very focused on talent and organizational capability.
To support these efforts in addition to our CMO announcement on our last call. We recently hired Jack Roddie as our new Chief people Officer reporting directly to me Jack brings a ton of organizational enablement and transformation experience and we are privileged to have him join the team and help us be more successful on our high growth mission.
There is a lot to be optimistic about as we head into 2022 will provide a more detailed view of our expectations for next year on our Q4 call likely in March, but we are confident that with the production challenges and inventory constraints behind us we'll be back on the annual growth trajectory. We outlined in June I will now turn it over to Bennett news from our interim.
CFO, who will review the financials and our outlook in more detail.
Thanks, Joe since joining purple as interim CFO, a little over two months ago.
<unk> been very impressed by the energy and dedication displayed throughout the organization, especially in the face of some challenging circumstances.
Echoing Joe's comments I believe the company is on stronger footing, having successfully navigated. The recent production issues and is now able to focus entirely on executing our long term strategic plan.
Turning to our results with the third quarter of 2020, providing context due to the extraordinary impact COVID-19 had on consumer behavior.
Im going to provide certain comparisons to third quarter two years ago.
For the first three months ended September 32021, net revenue was $178 million down eight.
7% compared to $187 $1 million in the prior year period.
Reflecting the difficult year over year comparison.
Revenues were adversely affected by the production issues, we experienced in the second and third quarters of 2021.
Our ability to manufacture and deliver our products to both DTC and wholesale customers was interrupted.
Compared to the more normal 2019 period net revenue was up by 45, 5% from $117 4 million.
By channel wholesale net revenue grew nine 6%.
There are wholesale business was favorably impacted by.
Wholesale partner expansion combined with the reopening of wholesale partner doors.
We offset by a slower than expected reacceleration of demand from our wholesale customers.
DTC revenue declined 15, 9% year over year is there.
Potential pullback in advertising spend disproportionately impacted digital demand.
We offset by increased contribution from our purple showrooms.
On a two year basis wholesale revenue increased 17, 1% and DTC revenue increased by 66, 1%.
Gross profit dollars were $61 1 million during the third quarter of 2021 compared to $88 $3 million during the same period in 2021.
Gross margin at 35, 8% versus 47, 2% in the third quarter of 2020, and 45% through the third quarter of 2019.
The decrease in gross margin over the prior year can be attributed primarily to our recent manufacturing issues rising shipping raw material and labor costs.
Your proportion of wholesale channel revenue, which carries a lower <unk>.
Carries lower gross margins than the DTC channel.
Wholesale net revenues comprised approximately 34% of net revenue for the quarter compared with approximately 28% in the same quarter last year and 42% in the same quarter two years ago.
Operating expenses were 39, 6% of that revenue in the third quarter of 2021 versus 34, 2% in the prior period.
35, 7% in 2019.
The increase in operating expenses as a percent of net revenue compared with the prior year period.
Was driven primarily by lower revenue combined with an increase in legal and professional fees associated with the increased expenses for consulting professional staffing executive placement costs.
And an increase in personnel costs related to the planned growth.
Workforce.
Currently offset by a $10 $1 million decrease in advertising costs.
For the current quarter.
Current year quarter marketing and sales expense as a percentage of net revenue was 28, 6% compared to 27, 4% a year ago and 29 zero percent two years ago.
We did pull back on or is that for the third quarter, while inventories were constrained we exited backlog in late August and have begun to accelerate our it spend has jewelry efforts to support growing brand awareness and driving DTC demand.
In the third quarter, we reported an operating loss of $6 6 million.
Compared to operating income of $24 3 million in the third quarter of 2020, and operating income of $11 million in the third quarter of 2019.
Net income for the quarter was $2 $1 million.
Compared to a net loss of $87 $2 million in the year ago period, and net income of $11 million two years ago.
As disclosed early early this year based on the SEC statement dated April 12 of this year.
Regarding warrants issued by strengths, we determined that our outstanding warrants should be accounted for as liabilities and recorded a fair value of the day.
Of the transaction.
Subsequently re measured the fair value at each reporting date.
For the three months ended September 32021.
We recognized a noncash gain of $5 $4 million.
Associated with the change in fair value of warrant liabilities.
Well for the three months ended September 32020, we recognized a noncash loss of 104.0.
On an adjusted basis net loss in the third quarter of 2020.
It was $4 9 million or <unk> <unk> per diluted share based on an adjusted weighted average diluted share count of $67 $3 million.
Compared to adjusted net income of $17 2 million or 27 cents per diluted share based on an adjusted weighted average diluted share count of $64 4 million in the prior year period.
Adjusted net income for the third quarter of 2019 was $9 5 million or 17% 17 cents per diluted share.
On an adjusted weighted average share count of $55 8 million.
Adjusted net income has been adjusted to reflect the estimated effective income tax rate of 25, 4% for the current year period compared to 25, 6% for the comparable periods in 2020 in 2019.
EBITDA for the quarter was $2 $4 million compared to $83 $5 million loss in the third quarter of 2020 and.
On an EBITDA of $9 $3 million in the third quarter of 2019, adjusted EBIDTA, which excludes certain noncash and other items, we do not consider the evaluation of our ongoing performance as detailed in today's earnings release.
Expect 2021 net revenue to be between 720, and $740 million, representing an increase of 11% to 14% over 2020 results an increase of 68% to 73% over 20th 19 results.
Based on a revised sales outlook additional pressure on gross margins from rising input costs and an even greater channel make shift toward wholesale or plan to increase in marketing investments during the fourth quarter adjusted EBITDA for the full year 2021 is now expected to be between 15 and $25 million.
Yeah.
We expect capital expenditures for 2021 to be in the range of $55 billion to $60 billion, as we invest and expanding production capabilities and the Georgia manufacturing facility and an additional shows.
You're in liquidity inclusive of availability under the company's existing line of credit is anticipated to be between 85 and $95 million.
I'll now turn it back to Joe for his closing comments.
Thanks Bennett this has been a very challenging quarter for us continuing into Q4 and I'm personally disappointed with the results. Fortunately underneath the challenges we are still executing on the necessary building blocks that enable our long term strategy presented last June and I'm pleased that we have been able to continue to make progress with release.
New products opening new showrooms wholesale door door expansion with partners, taking all of our mattress models and all new displays new brand work and then and an entirely rebuilt E. Commerce platform. In addition, we have successfully launched multiple initiatives to improve margins through fundamental improvements in manufacturing processes and Schwartz.
Strategies.
We are a values driven organization with deep focus on both our employees and our customers and improving the lives about it has therefore been legitimately hard to have unmet customer demand because of lack of inventory of our amazing mattresses and as we have come out of our inventory constraints. It has been equally hard to win back the confidence of our wholesale partners, which is.
Understandable after months of delayed or Miss fulfillment. Fortunately, we are seeing progress month to month, which gives us grounded confidence going into 2022 with our dedicated more than 2200 employees now who continue to be the backbone of our business. We remain very optimistic toward our strategic goals and will remain laser focused on the.
Product channel and margin opportunities, we presented at the drivers of our growth strategy with which we still have complete confidence.
At this time, we will open the call to questions.
[noise] operator or are you still there.
Okay. Thank you.
Ladies and gentlemen, if you would like to ask a question place signal by passing Star one on your telephone keypad, if you're using a speaker phone. Please make sure your mute function as standoff July Saint now to reach heavy equipment.
And I'll take her first question.
From Baltic briefing of Raymond James.
<unk> has been placed on the height.
Parsons.
Joe just first can you help me just connect the dots on the inventory constraints that you're referencing and kind of their impact because you know when you look on the balance sheet inventories up pretty meaningful year over year. So just trying to understand.
Where are the constraints came in and on how and how inventory was conferring with it being up you know 50, 57% year over year.
Oh, and hi, Bobbi, Thanks for joining sure let me, let me try to connect the dots Arris, Yeah. So you know we.
Through through the summer months. So in the end of May and to to June July we have significantly reduced.
Manufacturing capability and through the end of August.
And Ah and just a very tough backlog situation, which meant on our website. We were shy in four to six week delivery times. It man for our wholesale partners, we were significantly behind on P. O's and saw a significant reduction in orders as others.
There's not much confidence in ordering against inventory that you're already not getting the inventory from P. O has issued weeks before so you know there was a big halt in our business. We also at that same time reduced our marketing spend as we talk about in the prepared remarks, just to try to slow demand as again, when you're already not able to ship the mattresses.
Purchased weeks before driving incremental purchases on units you don't have <unk> is is tough so by the end of August. We we were finally back to a place that we were manufacturing more mattresses. Everyday then we needed to ship out the door. So you know that sort of the nature of coming out a backlog we.
The intent at that point it yeah, it a little bit of a bad but the intent at that point was let's see how quickly we can get our halsall partners throughout September to get back to pre empted of marbles sort of Okay. You can trust US now we've got the inventory we know it's been a rough three months, but we got the inventory.
<unk> and that's we spoke about this on the last earnings call and that was really what we spent the entirety of of the back half of September and October trying to engage on there's also included.
A large number of wholesale doors that we either had already contractually sin, but we couldn't open because we didn't have the inventory or wholesale doors. We had in the process of negotiating that we wanted to get going on right away, what actually happened and and throughout this process. We continue to build up our inventory stores there was no scenario.
That if everything went back to normal that we were going to suddenly find ourselves backlog again. So we we built as we've got more capacity than we'd ever had in the company and are able to produce more mattresses per day than we've ever been able to run a company, we build up quite a stockpile of inventory in anticipation of that of a rapid reacceleration what actually happened was a little.
A more conservative what actually happened is new store to opening said, we'd love to go but we're going to phase. It over the next couple of months or will kick things off for six weeks from now and existing doors instead of sort of the floodgates opening what we saw as sort of some testing periods, where they did slightly larger orders and saw that yes, we actually met or.
<unk> and in fact right now we are hearing back from a wholesale partners. After they've been testing into us we have with some of our partners. The highest SLA achievement of any of their suppliers right now we have inventory and that that's actually a unique asset we have especially going into holiday, we have apple inventory city.
Here domestically ready to go out the door. It just took longer to win back the confidence and get the order's going what you would expect to see in this situation, though is month by month improvement as we continue to exit this period and get back to the accelerated levels, we should be at and that's in fact, what we're saying it's just happening throughout.
Q for the intent is to exit Q4 at a much better rate as well and then hit 2022, where we should be and you will see as we exit cure for that inventory levels should come back down to appropriate levels as we burned down that inventory in a line with with now a cleaner line of sight on our growth rate.
Okay. That's helpful. I appreciate all the details and connecting that secondly, he called out the new Matthew from contract congrats on getting that done can.
Can you maybe put some context around that you know how many <unk>.
Stores do are you in with Matthew from today, what do you see the potential store count could be under this contract and some of the new things is this contract might have in there that's beneficial for both companies.
Yeah, It's I mean did so as as with most of these contracts. These are yes.
It's a contract that that is.
Confidential between the two of US However, what I will say is we we have set it up in ways that are genuinely mutually beneficial.
A lot of traffic, there's a lot of demand coming in we check us out with the right incentives and the right behaviors that this becomes a very attractive opportunity for both of us and some of it is is Dora expansion and as we go more national we would there are there are markets key markets that we have not yet entered with mattress.
And I would anticipate opportunities to do that but it also gets into driving more same store sales. We we've continued to to beat that from that this isn't just about a door account strategy, but how do we continue to demonstrate with new price points with new models with with expanding accessories that we can drive up both tick.
Price and and number of units per week or get number of units per swap per week, and that's a big part of our efforts as well as we've been fortifying our wholesale team a lot better presentation, a lot better presentation in a lot better representation in the field from our side. So so we see a lot of opportunity even an existing doors to expand our.
Sure.
Okay. Thank you Joe jump back into cute and turn it over to somebody else.
Thanks, Bobby.
Thank you then I'll take her next question from a tale of UBS line has happened. Please go ahead.
Good evening, Thanks, a lot for taking my questions Jew. So now that he have additional machines, you're you're gonna be ramping up marketing at the manufacturing issue seems to be behind you you have the inventory would you still be guiding too.
Klein and Dtc's sales for the fourth quarter, even with an easier compare.
Does it really mean that the channel is essentially getting saturated at least for purple perspective is that.
Is that a fair statement and if most of the growth going forward is really going to come from wholesale expansion, how does that impact your ability to get to meetings EBITDA margins, keeping the nor profitability of the channel.
Yeah and your question is more called long term call. It how do we get to where we have anticipated several years for now.
That and then just just even for the near to medium term. It freely most of the Coke is essentially coming from wholesale then how does that really impact your profitability.
Yeah. So we have not given guidance clearly for next year, yet, but we are clearly, indicating as we sat in there prepared remarks that we anticipate getting into a full 330 500 door count next year.
The short term opportunity as wholesale expansion and that is exactly what we laid out year by year.
Our in our Investor day that we had last June on our growth strategy. It was there is enormous opportunity for us to get national penetration build our brand and take share in brick and mortar to do that ourselves, which we are modest calls for with it with a couple of hundred doors over the next few years takes.
<unk> takes time.
We will.
Will end this year at 28 of our own showrooms will add about 30 little more than 30 next year. So I mean that takes time and our intent is to have a balanced channel strategy with wholesale and this is a predominantly brick and mortar category part of what that means and we will see that for next year margin expansion, how do we get more margin out of the products we have.
<unk> as well as new product offerings with more margin built in as well as more premium products that have more margin expansion. So that we can collect more we absolutely believe there is DTC headroom. It just has to be balanced in in Omnichannel way I mean, we have been very successful in D. C.
Depending on how you do the math you could argue that were upwards in premium mattress that were upwards of perhaps 20% share premium DTC sales right now, whereas arguably we're probably closer to 5% share in brick and mortar in wholesale.
And again, there's there aren't clean numbers I mean, so to call those as sort of a rough ratios but.
Likely directionally.
Relevant to each other so part of this is building where the bulk of the customer is I mean call at 80% of the addressable market as in brick and mortar we have to be there and that raises all types. The stronger we are an overall share the stronger we are in our penetration of brick and mortar the more <unk>.
Headroom that also creates for our DTC business, which he asks is higher margin alongside intrinsic margin expansion through both operational efficiencies and threw it through product refreshers.
And we see a lot of opportunity and again. This is very much in support of no change to what we laid out last June.
Okay got it that's helpful and there was no follow up questions. Joe There has been some recent announcements from one of <unk> major competitors that there will be entering the channel.
Betting spaced so just trying to better understand how easy or difficult is it for someone to jump in and start producing.
The best that you are there are comparable to what you are producing just so that we get a better understanding of the barriers to entry for this category.
Yeah. So I mean, what is easy as announcing product that doesn't exist with no clear price point strategy or or SKU count, which is what was announced what is hard is actually making what does the category leading disruptive technology. We have that we continue to believe is the next generation of of meanings.
Cold comfort support and sleep in other cushioning, we've been App S. For 25 years, we've been perfecting our manufacturing per multiple decades, we have trade secrets alumnus that are decades in the making that are probably worth more than our patents.
And it has it has taken us years and years and years of capital investments.
And experience to get to scale and it and it's not just the manufacturing process. It's our unique polymers are unique properties. The gels, we create and on each of our products are mattresses are pillows or seat cushions are all very different technologies very different geometries very different formulations, which is why we.
Got a rooms full of material scientists and chemists as well as innovation in industrial manufacturing and so forth. So will somebody do that someday of course, they will we don't believe we're the only people who can figure this out but it is hard to do it's really hard to do its scale and as of this moment on any quality product out.
There were the only ones who figured it out and we anticipate we're going to have a strong lead on that as the category leads here with the best technology around us for many many years to come.
Okay. Thank you for that and good luck with with Fourthquarter and and political Robert Thank you.
Hi, K if you find that your questions has been on set he may be minutes yourself from the queue by pressing star T. Thank you, ladies and gentlemen, kindly reminded that each one unlimited to have any one question and once in a lot. Thank.
Thank you and then I'll take our next question from set off but the scheme of taste. Your line is open. Please go ahead.
Thanks, a lot and good afternoon at Joe and then maybe if you could please give a little bit more color on the gross margin bridge year over year. The key drivers and then how we should think about it in the fourth quarter and into 2022, if you care to comment.
Yeah, I think for the quarter.
Primary driver was the increase in raw materials.
Surprisingly took to the fourth quarter.
Uhm further of the third quarter, we have the construction costs are trying to bring with Barclays Bank.
In July.
Lawyers.
Of course was lower production.
The overhead spread over fewer units. In addition, there as I'm sure you're aware Creek cause.
Brown.
<unk> as well as full truckload the risk retreat reach has extended.
Pretty dramatically so it's a combination of things.
Drove.
Morgan was period yeah.
Right and then so some of those things are changing the fourth quarter, you mentioned pricing. After one year production is back up too.
Three incident levels.
So should we see a huge snap back in gross margin here and how do we think about 2022.
Now are there are some things that aren't going to change in queue for I mean, Cogs, all and are still a lot more than 25% and that doesn't change we raise prices all and maybe 10%. So I mean that would be.
Cost increases have have grown faster than our price increases and I don't anticipate at this point any incremental price increases until early next year.
We're pretty much locked for the the balance of this year.
So there are some intrinsic calendars there I mean, we were operating.
Operating an organization that would really set up to be at a higher revenue level right. Now so there is overhead where karen that.
Being a vertically integrated manufacturers there are things, we can do to scale back.
But at this point, we don't have evidence that.
That intrinsic demand has slowed to the point that we should be running a smaller company, we're continuing to ramp up to the levels that we anticipate will be out next year, but.
But in carrying the slightly larger company, the increase Cogs and slower than plan ramp up.
Nearly halfway through the quarter this quarter.
Is.
Just creates headwinds on top of that there are investments in the next year. We're doing so we mentioned the increase in brand spend.
One of the one of the opportunities we've identified and Patrice farting. Some some terrific work on this is.
The.
When you have a very <unk> mid tunnel and bought a funnel our performance marketing driven strategy. You can you can attract the people you can reach and convert them, but it's much more difficult to acquire audiences that aren't already engaged correctly.
With with your business.
There is a lot of relevant addressable market that are advertising just wasn't Rachel.
And even on those we reach getting the Battle Ahmed funnels about final conversion is always the most expensive way to go so.
So we are investing quite a bit this quarter into higher funnel more more brand awareness building efforts that increase awareness consideration and trust with a much broader group of potential customers.
As there is addressable market, we're not we're just not reaching right now with our current marketing strategy and that opens up all sorts of possibilities. It's just as I said in the prepared remarks, that's a longer time cycle to realize the return on investment on that and we absolutely believe to set up for 2022. This is very good and strategic investment that's in.
The best interests of all stakeholders that we are holding firm on in Q4, and again that does creates in queue for headwinds on margin that.
That will get benefit into next year.
Got it thanks a lot.
Sure.
And I'll take our next question from Brian of Open Hi, Matt. Your line is open please kind of height.
Hi, good afternoon.
So the first question I wanted to ask just with respect to sales job.
You are all one very well thank you the.
You'll get the challenges that purples faced over the last few months several weeks whatever.
Obviously, we have the new guidance. The question I have is if you look at all of their step back I mean, what gives you confidence what can you tell us that should give us confidence that.
Underlying demand for the product remains strong.
The weaker sales. We've seen are are are indeed, a function of internal missteps.
Yeah. It's a fair question and I think part of this is what comps are you looking at over what period of time.
I think part of it is kind of looking under the Hood on where you really see demand. So I mean, there are qualitative things that are hard to dispute that we're seeing so the the pace at which we are getting interest in signing new contracts and expanding our wholesale doors and the fact that they are not testing us out with a bat or two on the floor, which is what.
What's happening in our heyday, a year and a half two years ago. They are taking every bad will give them, they're taking all five beds with elevated displays I mean, it's almost can some of these stores on a store within a store concepts. They are taking all five beds and committing all of that square footage to us.
It doesn't just happen unless there is intrinsic confidence they're seeing.
There is underlying demand that's out there the challenge has been in wholesale getting the wholesale expansion back out there or or in the case of some of our existing suppliers, but frankly.
Got a little bond with.
With demands that they could meet and shifted local interests elsewhere, but it doesn't change the fact that the demand is there so.
So it's it's getting that alignment inventory, we now have getting these wholesale doors open of which we've got thousands coming with incredible interest.
<unk> performing well part of the challenge is just how the approach has been I mean, we can as I was saying and the last question.
The marketing expenses are up year over year call it upwards of 50%, so even spending 50% more.
You are still describing similar traffic conversion rates are down in the last year, just because there's more brick and mortar opportunity that I mean that that's just kind of getting back to more normalised levels.
And.
Sort of a field day of of growth in the category is over we're getting back to more normal growth levels.
With the interesting if you don't model it out on a strictly sequential quarter basis or year basis. When we look at our business over the last six years. There is a very clear trend line that we have been hugging or sometimes a little above like we were last year a lot about last year other times.
We do have a little below but we've been hugging a really healthy growth rate quarter on quarter year on year as you as you look at it over the last six years and we are still on that trend line.
And.
If we were up a lot last year and that produced a lot of cash and a lot of profitability, but we basically normalised back to the tramline, we've been on and we are saying our growth rate continue against that free online and that that is is what gives us a lot of confidence.
That's all that's really helpful.
The second question I think it may be somewhat of a follow up.
Next question, if you look at the gross margin pressures.
Now would you tell got into the queue for your recognizing there's a lot of.
Unique aspects to the current consumer backdrop wildly but.
And and also understanding you haven't given guidance past 21.
Should we expect though that some of these gross margin pressures are likely to prove structural mean there it goes.
We'll stick around and basically changed the margin profile of the business over time.
Yeah, I think the question I'll stick around for how long I don't think many of these elevated costs are going away and three months and I think some of them are going to stick around for the next year.
<unk> container costs going from.
Four or $5000 container to 20 to $25000 a container that's obviously not sustainable for the long haul. The question is it is it months quarters or a four year before that comes back and.
I don't know that.
Anyone has the answer to that right now so I think there are structural costs were going to carry into next year for sure.
I don't know that they are structural indefinite way.
But that is that's a headwind everyone in our category is facing and this is where there are moves we can take there's opportunities for increased vertical integration that we are moving forward with to build more margin into our business.
And a very direct way, they're sourcing and economies of scale opportunities. We are looking at and and some meaningful. This is the the operational improvements labor reduction as we improve yield and performance.
And as well as just automation in general.
All of which is underway so.
Long term, that's that's real margin expansion, where we remained more optimistic and sort of a three to four year, mark but all of that helps offset the rising costs and we are going to have to take pricing actions I mean, when when Cogs are outpacing our price increases by this degree we and everyone in the category is taking pricing actions.
And back to the demand question earlier, we are hearing from our wholesale partners high confidence that they can sustain the price increases so.
So it's just it's a series of options that we I think many in the category are taking and that we have lineup slide opportunities in front of us.
Okay, well I appreciate all the color. Thank you.
Sure.
Thank you and I'll take our next question from Brad of Keybanc. The line is open to any kind of hate.
Hi, Good afternoon. Thanks for taking my question I wanted to follow up on on margins and initially talk about the short term and then follow up on the long term.
And Joe I was hoping you could just talk a little bit more about the.
The timing of the price actions you can take and the degree of of.
Vestments and advertising and how long you may continue to make those investments and I say it I think from the perspective of when we look at the implied EBITA guidance for fourth quarter and it looks like the margin trends are going to be worse in the fourth quarter than what we just experienced in the second and the third quarter despite sale.
Sales starting to Reaccelerate.
And so that does imply probably a tough start to 2022 and so just just wondering if you give us any more context on your ability to kind of get margins under control and how you're thinking about that I am showing for 2022.
I mean.
I think broad strokes are thinking the right way.
And we do have some challenges in front of us as we get back to profitability we are.
We are going to be running a profitable business and our entire strategy is around significant expansion of margin and EBITDA margins over over where we were a year year and a half ago. So I mean that is very much in line.
There are some near term challenges that we're facing and we've been trying to articulate.
Pricing actions I think we don't have it fully worked out exactly how much that is but we need to take pricing accents. All set our course, and we're going to do that and frankly.
At a time wholesale we see much less elasticity on these price actions for a whole lot of of reasons that are well documented in the industry.
So as we're leaning more into wholesale any way, it's a great time to take these pricing actions, but we also we have with new models coming next year with new margin profiles and.
Call it some opportunity for re assortment of existing models.
So we're going to build through both pricing actions and lineup changes next year any way opportunities to continue to grow margin.
Which in the near term helps offset costs and then in the long term creates opportunity for meaningful long term margin expansion.
Great and Joe is there any additional work you've done around the longer term margins.
Or just feeling like all of the work that you've done your time at the company still points too.
Those margin targets that you outlined Baxter analysts the airlines here.
Yeah I.
What I would say, it's my confidence in the expansion that we laid out in June has only grown as we've really dug into.
We have.
Really put our manufacturing and operations and sourcing and supply chain logistics, it's all been under a microscope over what we've been through and as is often the case with a young growing business. If there's lots of low hanging fruit and some of it is very material opportunity.
So my confidence has grown dramatically we're working with some great very experienced consultancies, we have identified very actionable very definable opportunities both near term mid term and long term.
To fundamentally change how we operate how we manufacture on the floor.
How we source in our sourcing strategies are labor balancing and labour yields are automation capabilities equipment improvements that are all just using best in class manufacturing techniques and I think I said this on the last call. We we make best in class product, but I would not characterize us as a world class manufacturer.
And we are on a path to become a world class manufacturer and that will yield intrinsic benefits that my confidence grows every month in that regard.
That's very helpful. Thank you Joe.
Good hearing from you.
Thank you then I'll take our next question from Susan Husby Riley. Your line is open. Please go ahead.
Hi, Alec leg on precision My question is just related to how you're balancing inventory between your <unk>.
Existing wholesale customers your new customers and then also within your own DTC channel.
Yeah, we.
Balancing inventory the way we used to have two which is we didn't have enough to go around and how did we try to be as fair and reasonable as possible and any allocations or or distribution decisions right.
Right now that's a non issue I mean, we have we have ample inventory and can lean into all channels.
So.
There is a different question as we sort of think about our product expansion strategy and product and price points and margins that.
That do better or have more opportunity and one channel or another and we're getting big enough with a large enough assortment that we're able to make some of those choices.
For example, our assent base, our new base, we finally got a price point.