Q4 2021 Purple Innovation Inc Earnings Call
Good afternoon, ladies and gentlemen, welcome to Purple innovations fourth 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.
It's now my pleasure to introduce your host Cody Mcallister of ICR. Please go ahead.
Thank you for joining purple innovations fourth 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'd 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.
<unk>.
For 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.
All statements included in our fourth quarter 2021 earnings release, which was furnished to the SEC today on form.
<unk> 8-K, as well as our filing with the SEC referenced in that disclaimer.
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'll turn the call over to Rob Demartini Purple innovation Chief Executive.
Officer.
Thank you Tony and thank you and good afternoon, everyone.
I'm glad to be here speaking to you today speaking with you in my new capacity as permanent CEO and I look forward to meeting many of you in the months ahead.
I started with purple two months ago and from the moment I engaged with the board to discuss this role.
Been impressed and excited to work with this brand and this company as we endeavor to bring comfort technology to the World building from a foundation, where we first win and fleet in North America.
The market fundamentals are there and purple has a growing portfolio of both intellectual property and knowhow with which to profitably extend extended share gains.
As way of background I have been fortunate over my career to work for and lead some great businesses that I believe had prepared me well for the challenges purple faces today.
And to capitalize on the opportunities that we have going forward.
I spent my first 20 years of my career at Procter and Gamble and sales and General management roles. I, then had the chance to work with Jim Kilts that Gillette and lead North America business during its turnaround and subsequent growth.
More recently I spent 12 years as CEO running new balance where the leadership team globalized and predominantly wholesale North American brand and moved it into the omni channel World.
During my time at new balance we grew from 1 billion five to over $4 2 billion.
I then took the last two and a half years to pursue a passion project, leading USA cycling.
I fully believe my experiences have prepared me to help get purple growing again, and a healthy and sustainable way.
I have confidence and conviction in this business and I believe in the strategy, we laid out laid out in the long term plan that have been shared with you previously.
This company has strong intellectual property demonstrable product differentiation and a category populated with a lot of meat to technology and we have clearly shown we can capture the attention of consumers.
We have a well developed e-commerce business and owned retail format with attractive economics that is clearly establishing our brand in the minds of consumers and a developing wholesale business that can reach many consumers who do not see online as a primary purchase channel.
I feel fortunate to have had the experience building all three of these channels in past leadership roles.
At new balance, where our talented team tripled the business in 12 years, the key drivers of profitable growth, we're very similar to the opportunities.
See here at Purple.
Execution excellence.
<unk> development.
Channel development and product innovation, where the keys to that growth and they are the keys to our growth here at purple as well.
I know what it takes to build great relationships with our channel partners and our end consumers and I know how to create programs that grow strong results through our partners and our brand.
While a new balanced we built over 3000 retail stores in 40 countries and went from zero E Commerce business to an ecommerce business that represented more than 20% of our mix.
Innovation has been core to our ethos of purple and success with our customers.
While im not able to share specifics today I can say that we will continue to be a leader in comfort innovation focusing on sleep and other categories that help our consumers we can healthy lifestyles.
Based on the learnings from my first 60 days there are handful of immediate opportunities we are addressing.
I'm still evaluating other areas of the business and we will be making additional decisions over the coming months, but for now I've identified four key areas that need our focus.
The first area is what I'll call execution excellence.
On a broad level, we have overbuild capacity and overhead across much of the company.
To this point, we made the right and difficult decision to rightsize, our labor force in February .
We were mindful to retain personnel in all critical roles and I am confident that the work that needs to be done will be accomplished more effectively with our new staffing levels.
We intend to manage our labor force based on better visibility into our near term growth.
In terms of capacity the company invested in opening a second plant last year, providing the opportunity to double our production over time.
While the need for increased production in the near term Hasnt materialized as expected and has created some inefficiencies until we grow into our production footprint.
Having the two plants up and running does provide benefits.
We need to focus we need to focus more intently on our operational excellence, which will allow more effective and efficient capacity utilization delivering higher product quality and enhanced returns on the cabinet capacity investments we've made.
Moving on to margins over the past handful of quarters input costs have been rising and progressively pressuring margins in.
In response, we have taken pricing action across the portfolio of products, including at the start of this year.
Aside from rising input cost we've experienced general erosion of gross margins as we've grown and expanded our operations.
Now that we've been able to build our capacity ahead of our demand we have the opportunity to slowdown to go fast and strengthen our foundation.
We are working on raw material costs by negotiating better prices with key suppliers.
<unk> to value and ensuring that every investment we make in our product is valued by our consumers.
Were also focusing aggressively on our operational costs, including potential manufacturing efficiencies with significant expected annual savings.
And balancing our manufacturing across the two plants.
This will enable us to reduce cost cross country shipments.
By the end of 2022, we believe we can return to gross margins roughly the levels. We achieved in 2020 with additional significant opportunities in 2023.
Second I'm focused on brand elevation and marketing.
With marketing our focus is to build a winning brand position that can deliver 20% market share of the premium mattress category.
In just five years people.
Purple has gone from essentially zero market share to approximately 11% of the premium mattress category, despite being significantly underrepresented at brick and mortar retail.
That tells US there is tremendous white space opportunity for the brand and we will be refining enhancing our marketing campaigns and tactics to reach a broader audience and drive increased customer engagement.
The third focus area is developing and expanding our three distinct channels.
Our differentiated science based product with superior consumer benefits has sold through well and our existing wholesale accounts with still a long runway for growth and improved execution on that front.
I am very familiar with brand building via brick and mortar how they operate and how to succeed selling through these channels will continue to build our team and our systems and develop a more robust go to market strategy to meaningfully expand both our wholesale presence and our brand execution.
That is.
It required for success for purple and our partners.
My fourth area of focus is product innovation purple was built on innovation and intellectual property that drive products, which improve our consumers' comfort and sleep.
We continue to have a strong IP portfolio and have the potential to bring exciting innovative products to market in our current categories and eventually explants expand to adjacent categories.
To get there, we're focusing on strengthening strengthening our R&D disciplined and go to market process.
There is some next generation products and our innovation pipeline that I am excited for the company to bring to market in the next 12 months to 18 months.
We've already taken actions to rightsize the organization improve margins via both pricing and efficiency and we're working to reenergize, the branding and marketing that purple needs to grow in the premium segments of our market.
The benefit of some of these actions will positively impact the profitability and growth trajectory of our company, while the improvements from others will take more time.
2022 will be a year of quarter on quarter improvements.
With the first quarter as an inflection point in our revenue trajectory and most heavily burdened by the combination of growth investments and carryover items from 2021.
By Q4 of 'twenty, two we expect to have our financial metrics back to where we had originally anticipated.
For 2021.
While execution and overall results should have been much better in 2021 I've been impressed with the team the company culture and the differentiated products, we bring to our customers.
I believe all the makings of a great brand are here and I am confident in the long term growth plan on a slightly modified timeline.
With hard work and smart choices purple can build on our position as a leader in the premium mattress category setting the foundation for profitable growth globally and into adjacent markets.
I'll now turn over the call to been enough Baum, our CFO , who will review the financials in more detail.
Thank you, Rob and welcome aboard.
Due to the extraordinary impact Covid had on consumer behavior.
I'm going to provide certain comparisons to the fourth quarter and full year 2019. In addition to 2020 to provide sufficient context.
For the three months ended December 31, 2021, net revenue was $186 4 million.
Up seven 2% compared to the $173 9 billion.
In the prior year period.
By channel wholesale revenue increased 35, 9% and DTC revenue decreased 4% as our wholesale business was favorably impacted by wholesale partner expansion DTC net revenues declining.
Due to lower e-commerce revenue, partially offset by growth in peripheral retail showroom revenue driven by the additional 19 showrooms, we ended the quarter with compared to a year ago compared to the more normal 2019 period net revenue was up by 50% with wholesale revenue up 48.
<unk>, 7% and DTC revenue up 57%.
Gross profit dollars were $64 7 million during the fourth quarter of 2021 compared to $82 million. During the same period in 2020 with gross margin at 34, 7% versus 47, 2% in the fourth quarter of 2020 and 47 seven.
In the fourth quarter of 2019.
The decrease in gross margin from the prior year can be attributed primarily to higher material labor and freight costs and a higher proportion of wholesale channel revenue, which carries a lower gross margin and revenue from the DTC channel.
Wholesale net revenues comprised approximately 36% of net revenue for the quarter compared with approximately 28% in the same quarter last year and 36% in the same quarter two years ago.
Operating expenses were 51, 4% of net revenue in the fourth quarter of 2021 versus <unk> 42, 9% in the prior year period and.
And 45, 4% in 2019.
The increase in operating expenses as a percent of net revenue compared with the prior year period was driven primarily by higher advertising costs due in part to higher advertising rates not increasing showroom related expenses associated with our continued showroom expansion and an increase in legal and <unk>.
Professional fees and an increase in personnel costs related to planned growth of our workforce.
For the current year quarter marketing and sales expenses as a percentage of net revenue was 49% compared to 34, 9% a year ago and 38, 6% two years ago.
This increase primarily reflected rising advertising rates in 2021, along with increased expenses and marketing costs due to continued product and channel expansion.
Net loss for the quarter was 20 $21 8 million.
Compared to a net loss of $73 5 million.
In the year ago period, and a net loss of $26 2 million.
Two years ago.
As disclosed we disclosed last year based on the SEC statement dated April 12, 2021 regarding warrants issued by specs, we determined that our outstanding warrants should be accounted for as liabilities and recorded at fair value on the date of the transaction and <unk>.
Subsequently re measured to fair value at each reporting date.
For the three months ended December 31, 2019, we.
We recognized a noncash loss of $26 9 million associated with the change in fair value warrant liabilities for the three months ended December 31, 2020, and 22021 and 2020 the company recognized a noncash gain of $4 7 million.
And a noncash expense of $87 5 million.
Respectively associated with the change in fair value of warrant liabilities.
On an adjusted basis net loss in the fourth quarter of 2021 was $23 9 million.
Or <unk> 35 per diluted share based on an adjusted weighted average diluted share count of $67 5 million compared to adjusted net income of 5 million or <unk> <unk> per diluted share based on an adjusted weighted average diluted share count of $68 6 billion in the prior year peer.
<unk>.
Adjusted net income for the fourth quarter was of 2019 was $1 $2 million or <unk> <unk> per diluted share on an adjusted weighted average share count of $55 5 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 2020 in 2019.
EBITDA for the quarter was negative $20 million.
Compared to negative <unk> $79 1 million in the fourth quarter of 2020 and negative $22 8 million in.
In the fourth quarter of 2019.
Adjusted EBITDA, which excludes certain noncash and other items, we do not consider as the evaluation of our ongoing performance and as detailed in today's earnings release was negative $23 4 million.
<unk> to positive EBITDA of $12 2 million in the same quarter last year and positive EBITDA of $5 8 million in the fourth quarter of 2019.
Now to our full year results.
For the 12 months ended December 31, 2021, net revenue was $726 $2 million.
Up 12% compared to $648 5 million in the prior year period full.
Full year net revenue growth overall was negatively affected by the production issues, we experienced in the second and third quarters of 2021 is 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 69, 5%.
$424 million.
By channel wholesale net revenue grew 54, 5% as our wholesale business was favorably impacted by wholesale door expansion, coupled with wholesale partner doors being opened all of 2021, while the prior year was negatively impacted by the pandemic and temporary shutdown.
<unk> of wholesale partner operations.
DTC net revenue declined two 3%.
Year over year, primarily due to decreased e-commerce demand, partially offset by growth in peripheral retail showroom revenue driven by the addition of linked <unk> showrooms in 2021 on a two year basis wholesale revenue increased 54, 5% and DTC revenue increased 78.
8%.
Gross profit dollars were $295 million in 2021 compared to $305 1 million in 2020 with gross margin at 46% versus 47% in 2020 and 44, 1% in 2019.
The decrease in gross profit over the prior year was primarily attributable to higher material labor and freight costs.
Unfavorable impact of inefficiencies realized as a result of the production issues.
And a higher proportion of wholesale channel revenue.
Which carries a lower gross margin with revenue from the E Commerce channel.
Wholesale net revenues comprised approximately 35% of net revenue for the year compared with approximately 25% last year and 38% two years ago.
Operating expenses were 43, 8% of net revenue in 2021.
Versus 36, 1% in the prior year and 43, 43% in 2019.
The increase in operating expenses as a percent of net revenue compared with the prior year period was driven primarily by higher advertising costs due in part to higher advertising rates and increase in showroom related expenses associated with our continued showroom expansion.
An increase in legal and professional fees and an increase in personnel costs related to planned growth of our workforce.
Marketing and sales expense as a percentage of net revenue was 33% compared to 2020% year ago, and 33, 1% two years ago.
This increase reflected an increase in advertising costs due in part to higher advertising rates in 2021.
<unk> marketing costs related primarily to planned expansion of our workforce increases and showroom related expenses associated with our continued showroom expansion coupled with slightly elevated.
Wholesale related marketing and selling costs.
For full year 2021, we reported an operating loss of $23 4 million.
Compared to operating income of $71 2 million in.
In 2020, and operating income was $16 2 million.
In 2019.
Net income in 2021 was $3 9 million.
Compared to a net loss of $229 8 million in 2020, and a net loss of $30 9 million two years ago.
As disclosed last year based on the SEC statement. The statement dated April two 2021 regarding warrants issued by specs, we determined that our outstanding warrants should be accounted for as liabilities and recorded at fair value on the date of the transaction and subsequently re measure.
Fair value at each reporting date.
For the 12 months ended December 31, 2021, we recognized a noncash gain of $24 1 million.
Associated with the change in fair value of warrant liabilities.
Net income in 2020 in 2019 included a $301 million noncash.
Noncash expense of $35 3 million noncash expense associated with the change in fair value of warrant liabilities respectively.
On an adjusted basis net loss from 2021 was $13 1 million or.
Or <unk> 19 per diluted share based on an adjusted weighted average diluted share count of $67 3 million.
Compared to adjusted net income of $49 5 million.
We're 78 cents per diluted share based on an adjusted weighted average diluted share count of $63 6 million in the prior year.
Adjusted net income for 2019 was $15 $9 million or <unk> 29 per diluted share and.
On an adjusted weighted average share count of $55 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 2020 and 2019.
EBITDA for the year was $14 2 million.
<unk> to a net loss of $269 million in 2020, and a net loss of $21 $6 billion in 2019.
Adjusted EBIDTA, which excludes certain noncash and other items, we do not consider the evaluation of our ongoing performance and as detailed in today's earnings release was $11 million.
Compared to $88 $1 million last year, and $33 4 million in 2018.
Moving to our balance sheet.
As of December 31, 2021, the company had cash and cash equivalents of $91 $6 million compared with $123 million.
At December 31, 2020.
The decrease was driven primarily by ongoing investments in our business that included building out our new manufacturing facility in Georgia that became fully operational in 2021.
Enhancing our manufacturing and safety capabilities at our manufacturing facility in Utah and continued opening of new peripheral retail showrooms during 2021.
Additionally, inventories increased at our overall use of cash on a year over year basis.
Net inventories totaled $98 7 million at December 31, 2021, compared with $65 7 million at December 31, 2020 with finished goods, making up the majority of that inventory increase as production levels increased throughout the year.
Finally, I do want to point out that we recently finalized an amendment to our credit facility the details of which can be found in our 10-K.
The key takeaways from the amendment or.
2022 principal prepayment of $2 5 million.
An increase in the interest rate until certain conditions are met.
Temporary covenant waiver period during which the net leverage ratio and fixed charge coverage ratios will not be tested through the second quarter of 2022.
Kind of any modification of these two ratios definitions and thresholds.
A temporary requirement that we maintain minimum monthly liquidity levels with mandatory prepayments of the revolving loan if cash exceeds $25 million.
The reporting requirements.
Temporary limitations on certain capital expenditures.
Operating weeks Encumbrance test for opening additional showrooms beyond the 28 additional showrooms currently planned for opening in 2022.
And.
Additional negative covenants that will extend into 2023.
Turning to guidance.
While challenges persist we remain confident in the foundation that has been built and the progress we have already begun to make on Rob's focus areas.
We expect 2022 to be a year of building momentum, but not without a tough start in the first quarter How's.
However, we believe we will eight we will be able to return to a more normal level of execution and profitability as the year progresses with sequential improvements each quarter.
Based on our current plans, we expect full year 2022 revenue to be in the range of $790 million to $830 billion, an increase of 8% to 14% over 2021.
As we begin to more fully capture the demand shift underway in the industry for e-commerce back to brick and mortar.
For the year, we expect adjusted EBITDA to be in the range of 26 million to $33 million a significant improvement over 2021, driven by the combination of topline growth increased leverage as we right size, our operation and gain further efficiencies in.
And improving gross margins as the year progresses.
For the first quarter of 2022.
We are forecasting revenue to be in the range of $125 million to $135 million with an adjusted EBITDA loss in the range of 20% to $26 million.
Our first quarter loss was similar to our fourth quarter on much lower sales volumes, reflecting the early progress we've made reducing expenses and the shifting consumer traffic.
More heavily to brick and mortar retail.
Our presence and ability to capture demand currently is less developed.
Based on our adjusted EBITDA outlook and planned uses of cash in the first quarter, including approximately $12 million to $15 million in Capex, which is primarily for showroom expansion a.
A reduction in accounts payable coming out of the elevated spend levels in quarter four.
In advanced payments for loan principle, we expect liquidity at the end of quarter, one to be between 15% and $22 million.
I'll now turn it back to Rob Rob.
Thank you Beth.
Since joining purple I've seen many positive attributes of the business that excite me about the future of the organization.
First we have a differentiated innovative product built with proven and proprietary technologies.
Our gel grid technology is the next evolution of sleep and the required proprietary in house manufacturing process provides purple a clear differentiation and help helps create an intellectual property moat around our business.
Additionally, our domestic manufacturing capabilities provide an added layer of benefit for the company as we control nearly all aspects of our finished mattress products.
Second the brand is healthy and the potential for creating even stronger demand is there.
The success of our company showrooms are the clearest indicator that fundamentally things are going well, we just need to focus on getting healthier and our other channels.
We continue to build market share even in the challenging fourth quarter, where we increased our share in the overall mattress category by a full percentage point from the previous quarter and up nearly a full percentage point from the previous high Mark in Q4 of 2020 in Q1 of 2021.
Additionally, our close rate on people, who are considering purchasing approval mattress was at an all time high in Q4, 'twenty, one which speaks to the healthy demand for our products.
Third our profitable showroom concept is a clear bright spot for us and our retail channel.
80% of online customers say, they want to lay on a mattress before purchase in our showrooms are the best way to showcase our full product line with consistent premium presentation.
While simultaneously, creating a north star for our wholesale partners to look to for elevating our brand within their stores.
Today, we have 30 owned showrooms 19 of those opened in 2021.
In 2022, we expect to open at least 25 additional showrooms.
These new stores are performing as expected and we see a clear path to having more than 200 over time.
Fourth our network of premium wholesale partners continues to grow in both quantity and quality.
In November we announced our new agreement with mattress firm.
Over the last three years purple has grown substantially and mattress firm's scale and reach has helped contribute to that we.
We reaffirmed our partnership with mattress firm last fall when we signed our current contract and I am excited to grow that relationship to enhance both our brand and theirs.
In addition, we've added over 1000, new doors in the past two years, expanding our national presence through new relationships with as Ashley furniture furniture row rooms to go and several others in the U S and sleep country, Canada.
The U S to just name a few of our partners.
Lastly, we are a capable and motivated workforce the passion of the people is evident I've had the opportunity to visit our two mattress manufacturing locations as well as our original facility that has the pillow manufacturing and our innovation Center.
And in each case I've been impressed with the employees that met on the production floor in fulfillment and working on new products.
I fundamentally believe that winning in the marketplace is rooted in a winning culture and I'm confident that we have the team it takes to grow our business.
Our culture will be built on strong execution individual accountability and winning as a team.
I believe these organizational strengths are a solid foundation to build upon to drive long term shareholder value.
I would now like to lay out my priorities for the company.
Colby shifted demand to our strongest channel E Commerce, where we're the number one player in the industry.
As such we are well positioned to take advantage of the changing landscape and capture that swell of demand.
As consumer behavior has normalized mattress buying has shifted back towards a heavily heavily in store bias.
We're happy with that we were able to capitalize on e-commerce , well, but also optimistic about the shift towards brick and mortar expansion in wholesale and retail stores are a major part of our growth strategy.
We're going from a strong online channel to a young brick and mortar channel, but we are gaining ground.
As we think about priorities for the company I turn back to my four focus areas, but first and foremost of which is execution excellence.
As a company, we need to reestablish credibility with our stakeholders.
The back half of 'twenty, one was not only difficult for us as a company for a difficult through the entire community.
I imagine there are a lot of questions, especially with the recent and meaningful management changes over the last nine months.
You need to be able to trust that we will do what we say and that we're going to do and we will prove that to you over the coming quarters.
Additionally, we need to right, we have the right structure and staffing to achieve our goals.
We've already taken actions against this priority in February when we right size the workforce, which brings me to my next goal developing and maintaining a winning culture rooted in individual accountability and winning as a team.
I believe team work and accountability, we will drive much better execution and performance we've aligned the leadership team around these key objectives, and we will execute against them relentlessly to ensure we produce the results we are planning for.
My highest operational priority under execution.
Excellence is developing stronger margins.
With the plan. We currently have in place we expect to exit 2022 with gross margins in the mid 40% range.
This is the first step towards substantially increasing margins over the longer term through more developed strategies aimed at driving greater efficiencies through all aspects of the business, including manufacturing supply chain product design and development marketing and more.
My next focus area is on elevating the brand and the effectiveness of our marketing.
We have the potential to become a large premium brand starting in January we have been focusing our energy on branding and expect to introduce new effective creative in the coming months.
Additionally, channel develop development and product innovation are actively being worked on and we will have more to share on these specific plans at our next earnings call.
The next several months will be difficult, we're only two months into building the framework for strong operational maturity and accountability.
That said I am confident that the steps we've already taken here early in the new year combined with successful execution of the strategic priorities I just outlined will position the company for solid profitable growth starting in the second half of this year.
While the team and I will continue to refine these strategies and priorities over the coming months. Hopefully this provides a better look into how we're currently thinking about our strategy in the future.
Let me close by thanking our employees for their hard work and dedication over the past 12 months and especially in the past to.
I recognize that that change is never easy, but we are devoted to getting the company to the position that will allow us to successfully capitalize on the many long term opportunities that lie ahead.
Thank you and at this point I'll turn it over to the operator, operator to take questions.
Thank you we will now be conducting a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue.
Press Star two if you would like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Okay.
Thank you. Our first question is from Brad Thomas with Keybanc Capital markets. Please proceed with your question.
Hi, good afternoon, Thanks for taking my question and.
Rob Congratulations on the.
Permanent full time role here as CEO looking forward to working with you.
Thank you Brad.
Hi.
I wanted to maybe start with kind of a bigger picture question that ties a lot of.
Questions that we get together, which is first just if you could share your thoughts on the margin potential for the business, obviously purple greatly benefited from the environment that we were in when the pandemic first first hit.
<unk> a lot of its core strengths and more recently as face to face some challenges.
How do you view that in the medium and longer term opportunity from a profitability standpoint for this business and this brand.
Brad Thanks, and some of it I definitely I'm still learning, but as I said in the script that we expect to get to where we had been before by the end of the second half and beyond that.
Based on experience I've had in other businesses, both from a pricing and from a manufacturing efficiency.
I don't see why we can't get well ahead of those targets in 2023.
Yes.
And then Rob I was hoping if you could just talk a little bit about the.
The sales outlook for the year and if I've done the math right. It does look like it's going to be a pretty difficult first quarter with sales down substantially and so to get to your full year guidance. It does imply a pretty big acceleration in sales.
And perhaps double digit sales moving through the year I guess can you speak to your confidence in getting that acceleration and what what you're assuming from an industry standpoint versus maybe a company specific standpoint that youre driving yourself.
And reading other People's releases clearly the category is facing some short term headwinds but.
We are planning for quarter on quarter improvement on just about every line of the P&L and the demand is still healthy to clearly the shift away from E. Commerce back to more normalized distribution is tough on us in the short run and I think we've got to make sure our marketing is working harder but.
We're investing at healthy levels, we're getting a reasonable return and I think theres room for improvement. So like you. We do see it's an uphill challenge, but we're confident in the plan and taking the actions to deliver that quarter on quarter improvement.
Got you that's very helpful. Thank you so much and I'll turn it over to some others.
Thank you Brian .
Thank you. Our next question comes from Matt Koranda with Roth Capital. Please proceed with your question.
Hey, guys and congrats to Rob as well.
Maybe just.
Picking up.
On the questions with regard to the acceleration for the rest of the year.
I guess, what it implies that you guys need to do at least 25% growth.
For the remainder of the year and likely it sounds like it's more back half loaded so probably a little bit greater in the back half of the year here.
Just wanted to see if you could maybe put a finer point on are there assumptions, including incremental price action that kick in beyond the first quarter.
Or maybe some channel inventory build from new wholesale partners.
That we're assuming that kicks in later this year, just any color on sort of.
What we're assuming to get to that acceleration.
Thank you, Matt So first off on pricing, we've taken the pricing action that we believe is appropriate.
Just on input costs, obviously, if those were to change dramatically, we would need to reevaluate that but today. We think we have that in a good place we definitely have the maturing of the retail our showrooms 19, new ones last year that were opened for less than a year and then the 25% to 28 new.
New ones that will open this year, so that grows faster than normal faster than the category for sure.
And we have the same thing happening on wholesale partners, we've opened a number of doors.
Last year, and we will continue to do that this year. So those two channels should grow faster.
But obviously, we also need to continue to make sure that the E. Commerce channel grows as well the combination of that is producing our confidence to get to that guidance on the top line that that gave you.
Okay. That's fair and then on the gross margin improvement side.
Yes, thanks for the sort of more solid numbers in terms of targets in the second half I appreciate that but I was wondering if you could maybe just bridge us to that mid 40% exit rate that you talked about Rob just in the form of how much of that is coming from.
Some of the price action that you seem to have already taken versus the efficiencies. You think you can wring out of the existing footprint versus the right sizing of production, just maybe a little bit more granularity.
Granularity on the gross margin improvement.
Building blocks to get to the mid 40 ish.
Yes, Matt I don't have those numbers directly in front of me, but it's about half and half in the current plan from pricing and efficiency.
Honestly as I walk the factories I think there's.
Meaningfully more in efficiency that is not fully in there. It obviously takes some time to take the actions to get that but I believe the mix in the current year is about it's about half and half coming from pricing and from better efficiency.
All right excellent I'll jump back in queue guys. Thank you.
Thank you. Our next question comes from Seth Basham with Wedbush. Please proceed with your question.
Thanks, a lot good afternoon, and congrats Rob I guess my first question around pricing, you've mentioned that you've taken out of the pricing a need to recover input cost inflation, but do you think that you may have taken pricing too high.
Because it seems like the price increases you've taken relative to other competitors. We track. It is much higher and you think that's impacting your demand too much.
It's a good question and I want to soon have the answer for you I don't have it today I think it's possible, but we do believe we've got.
<unk>.
We've got input costs covered and I think what we've got to do this as an adjustment for me with a lack of Pos.
POS data in the category, but we've got to get better at reading that and I don't want to we're not starting there, but clearly that's a door. We would have to open we'd look at it at this point, we're not there yet.
Okay do you have any good measurement of demand elasticity and how thats performed with your price increases over the balance of the last year or so.
I don't think were sharp enough on that that we want to be clearly the prices have accelerated aggressively in the back half.
In the late back half of last year and early into this year and some of our price increases on non mattress products have only been in market for two to three weeks. So we are reading them real time right now.
Okay.
Then lastly, my follow up question I may have missed this because I joined a little bit late but in terms of the cost cuts I know you've cut back on numbers.
Areas, but what are the most substantial areas that you've cut in terms of personnel and have you taken down any manufacturing capacity that you've added over the course of the past year.
We have not taken down any manufacturing we have.
Paused on some of the expansion that was partially underway.
And we've also had to make some pretty big adjustments in our Utah factory as we balance demand of $50 50, with a new plant in Atlanta.
That's probably the single hardest Sip location.
Obviously that pays us back relatively quickly because we're not shipping mattresses across the country.
But the Atlanta factory has.
<unk> has seen the most growth in the Utah factory the most.
Pullback.
Understood. Thank you very much.
Thank you. Our next question comes from Jeremy Hamblin with Craig Hallum Capital Group. Please proceed with your question.
Thanks for taking the question I wanted to come back to the.
The topline guidance for the year here, so the midpoint Q1 $130 million.
For Q2 to Q4 average I think implied here is about 225 to two.
$230 million.
Per quarter in terms of.
How we get there what is embedded within that guidance in terms of your wholesale door count growth. What was the number that you ended with in terms of your wholesale doors.
Do you expect that to be embedded within the guidance. That's part one and then part two is understanding what.
Your mix assumption is for 'twenty two of DTC business versus wholesale.
Thanks.
Jeremy Let me, let me come at it backwards.
Because I got the numbers clear to me that the year ends up being.
About.
60%.
<unk> and 40% wholesale.
In that this year, we have projected about.
6% to 700.
<unk>.
Store door growth in the wholesale channel and I will tell you we are on pace to deliver that sooner than what's in the plan.
But we still got a lot of work to do there.
On the first half of your question.
We will restate that for me again please.
Well.
First I wanted to know what was the ending door count, yes door count that's right 700.
Im sorry, 2000, 2700 or 2800.
There are a number there.
Last year.
Yes.
Alright, I'm just trying to get some notes here because I don't have all of these up top my head, but I believe we ended the year at about 26% to 2700 I can verify that.
And some of those included a pullback early this year in some of our retailers where the doors, we're not working.
And then we're adding a net of between 6% and 700 in 2022.
Okay. So if we add 600 to 700 doors.
Thought here that youre going to get increased.
Number of swaps in each store or that your door productivity is going to be significantly better that.
It took a little bit.
Let's step back versus where you were in 2019.
In 'twenty, one so just any additional.
Additional color there. Thanks, so much so we had one significant retailer where we pulled out of <unk>.
<unk> full number of stores in the two to $2 50 range.
And that was happening late last year and early this year the new stores.
As I said about 6% to 700 in the year and I'm still trying to get my hands around the door productivity on slots.
And I think we've got to get much more <unk>.
Maturity in our wholesale business in total to be looking at door productivity I referenced in my earlier comments about wholesale experience that I've had and I think about it if I'm not working harder than other choices for that retailer, we're not going to be able to hang onto the slots. So I think instead of Meg.
<unk> distribution.
As a single count I want to measure the productivity of distribution and we are working on that right now doors matter slots matter, but most importantly, our contribution to our wholesale partners customer or their performance is what matters. The most.
We should end the year at about 3000 stores maybe.
Maybe maybe a little bit above it but that includes cleaning up doors that weren't working for us or them and getting more contribution to our partners that we have.
Okay, and then just a follow up.
So in terms of making those doors more productive for both you and your partners.
Does that mean that your.
Advertising spend which.
I think had been quoted several times that it was down versus what it would've been because of the production issues is that expected to jump.
This year and if so by what one.
Percentage and thanks, that's the last one I'll hop out.
Hi, Jeremy So we've done we've done some work to make our advertising investment more productive that was done late in Q4, and we're encouraged by the early signs are advertising investment year on year is relatively level. So it hasnt gone down I think the real issue is.
We are making.
Making the making sure we're working with our big wholesale partners too.
Present, the product better make our advertising work harder for them and ensure that whatever slots. They give us are profitable for them and for us and that's just a degree of kind.
Kind of next steps of maturity and what I said before it was a very young wholesale business.
Thanks, So much guys welcome Rob best wishes.
Thank you Jeremy.
Thank you. Our next question is from Alex <unk> with B Riley. Please proceed with your question.
Alright, Thanks for taking our question. My question was just on the split between DTC and wholesale you mentioned, a 60 40 expectation. This year is that your new baseline expectations going forward and essentially increasing your wholesale mix or should we expect it to longer term revert back to $65 35 or even seven.
<unk>.
Yes, I don't think it does revert back I think we've got to get all three channels growing channel development is one of the single biggest priorities I'm focusing on.
And I do think you'll see it continue to move.
Towards showrooms and wholesale at a higher rate than DTC simply because im learning. This category. It seems like five four out of five consumers want to experience the product at retail and we've got to make sure that our product is available for them to do that so 70 30, I don't think we go back to that level.
Thanks, and then my follow up is just on your liquidity and cash balance at the end of.
This first quarter.
You mentioned, I think 15 million to $22 million.
What we are.
Wind is always the delta between fiscal year 'twenty, one and then getting to that 15 to 22 million at the end of this first quarter.
We ended at about 91 million.
And two major drivers in the reduction include.
The net EBITDA net loss for the quarter totaled $15 million in capital.
We had an enhanced spending advertising and some other areas. So our payables will go down.
Additional new amendment requires.
We prepay the years.
Principal prepayment, which is about $2 5 million.
Our prior owners we have.
TRA with required about $6 million of cash in the first quarter.
Thanks, and then I don't know, if I misinterpreted or misread, but.
In the new credit amendment any excess cash on the balance sheet over $25 million does it have to go back.
Back to that credit facility.
It could swept against the revolver, but it's still available to us.
Let's see part of the legal.
Thank you. Our next question is from Keith Hughes with <unk>. Please proceed with your question.
Thank you you had mentioned earlier some stores you step away from in the last couple of months.
Do you have any idea of how much that's contributing.
To this what is going to be there at 30% sales decline at the midpoint of your guidance range.
Can you just I heard the first half of the question not the second.
Yes, let me let me just talk about all of the job.
You had talked about.
250, <unk> stores that you were going to be exiting how much how big a role that will play in your guidance, which calls for about 30% decline in revenue year over year.
It really involves two different customers, but by definition.
They were not very productive stores for us or the partner so it's not a big part of the.
The volume equation and it gets netted out by growth.
Either more slops in existing doors and more doors in total.
Okay, Let me ask one final one here.
We've talked a lot about a lot of different channel things on the call here today I guess.
Just in general.
It appears that the whole brand has lost momentum over the last three quarters irrespective of what channel. It's coming from now you talked about some new product launches. It sounds like there was around 23.
Do you think would be the drivers to get the brand moving in the right direction in a short period of time here.
Yes, Keith.
Sorry, I'm going to add it a little bit your statement, but our showroom demand has been very strong and our wholesale demand has been I'll call. It solid.
DTC is where we have struggled a bit more and it goes right back to my priority about Reenergizing the brand.
As we've moved up in price.
Taken on new consumers and I don't think our marketing effort is kept track or has kept pace with that shift in kind of demo and psychographic consumer target. So that's why that's the.
The second priority on my list and we have to prove it to you I understand that but we expect to have some new creative in the market.
By mid second quarter at the latest.
Okay. Thank you.
Okay.
Thank you. Our next question comes from Curtis Nagle with Bank of America. Please proceed with your question.
Terrific. Thanks for taking my questions.
The first one and then I have a follow up is on comments you made it sounds like youre backing the prior teams.
Long term growth plans.
Do you still think you can hit that targeted I think what was acuity to $2 5 billion in three years to four years, despite a much lower revenue base.
And I guess why.
The second question was just trying to work out the gross margin back right. So we have much larger our wholesale penetration.
Right for the year, if there's like a thousand.
Difference between wholesale and DTC, so I understand that things are in place here.
Thanks to you.
Personally operational efficiency, but is that not a big continual headwinds. So I guess, how do we get to that mid 40%.
Gross margin at the end of the year with that wholesale headwinds in the business.
Alright.
Curt if I could I'll take them backwards, but I'll answer both questions.
The shift from its one of the first things I talked about with the board when I looked at the long range plans before I joined the shift to wholesale under normal.
<unk>.
Under our normal is the wrong word under mature development would clearly be dilutive I think this company has been chasing demand for so long that I believe we can offset that by greater efficiencies in the operation.
So while the straight shift.
Is dilutive there is enough opportunity in manufacturing and marketing effectiveness and to some degree in pricing and product construction that I believe we can offset it.
That really flows directly to the long range plan and while I am not experienced enough yet to project for you the timing when I think about the progress. This company has had in the premium side of the category.
Mostly in e-commerce only.
<unk> approach and.
As I said before we're in 11 share of the premium category Theres plenty of headroom now I've also learned pretty quickly. This is a very competitive category. So I don't take any of my competitors lately, but is the room there for us to be intuitive to $5 billion company absolutely.
Absolutely.
And we've got to go earn it nobody is going to give us a single share point, but it is here to be had if we execute well.
Sure.
Okay. Thank you.
Thank you Kurt.
Thank you. Our last question comes from April Mahoe, Laurie with UBS. Please proceed with your question.
Good evening, Thanks, a lot for taking my question.
I have four.
A two parter, but im going to ask the guidance question first.
So just going back to two just.
Revenue guidance and the implications that you have in the guidance that calls for a pretty sharp acceleration later in the year is this contingent on industry demand improving or do you believe you can achieve this outlook, even if the industry can match.
Consistent with where it is right now.
Yes.
Good question and we built these plans and then.
On the basis of the strategic choices and better execution clearly the headwinds of the last month or so haven't made that any easier, but we are confident in those numbers.
So I do think it is us executing better inside the category as opposed to the category.
Given us much of a tailwind.
Got it.
Then as my follow up.
Rob just based on the due diligence at that he has done over the past two months since you were here.
What would the timing of the reagents that purples revenues didn't accelerate even after the production issues for fixed later in the third quarter and marketing was ramped up in the fourth quarter, So what cost almost contract.
Yes.
I don't think I'm in a great position to talk about what happened six months ago.
I've just been been running companies long enough to know that situational decisions are what they are and it's hard for me to look at it I do think that as demand shifted back towards wholesale we were not as mature. There is we wanted to be in our showroom footprint is still quite small so we just were poorly positioned.
<unk>.
To maintain those those peaks that they were driven by store closures and stimulus checks.
Whether that's the right answer or not I'm not going to project and that's just what I have observed so far and at the same time I see that if we mature our channel development strategy as well then there's plenty of room for this brand to grow going well into the future.
Got it.
Good luck thank.
Thank you for that and good luck with this year.
Thank you.
Thank you there are no further questions at this time I would like to turn the floor back over to Rob D. Martini for any closing comments.
Well. Thank you I want to reiterate my confidence in both the fundamentals of this company and our ability to pull together as a team to get back on track Purples future has a lot of potential and with our focus on execution excellence elevating the brand channel development and product innovation I know, we can get there. Thank.
Thank you to our community of employees customers and partners and investors for your patience. During this transition period I am excited to be here with you and I look forward to building a strong future together. Thank you all very much.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
And.
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
Yes.
[music].