Q2 2022 Purple Innovation Inc Earnings Call
It was in line with our expectations, which is encouraging given the recent industry trends and our purposeful reduction in advertising spend.
Showroom performance improved quarter over quarter, primarily driven by the addition of six net new locations added in the second quarter as well as new doors from Q1 ramping up.
And wholesale revenue was also up quarter over quarter, driven by roughly 700 net new doors, we added in 2022.
As I think about my first six months with purple I'm encouraged with the progress we've made building the framework for sustained growth and consistent operational results.
The quarter over quarter improvement in profitability, we reported today underscores how much healthier the company now as compared with the start of the year.
Even as the macro environment is delaying our topline recovery.
While we still expect further positive progress quarter over quarter, given the current external headwinds, we're adopting a more conservative view of the remainder of the year.
We're adjusting our full year revenue guidance to $570 million to $590 million.
And adjusted EBITDA to a negative 15 to a negative $5 million.
Despite our revised outlook, we remain confident that our four strategic initiatives operational excellence brand elevation channel developing development and accelerating innovation remain the right building blocks for sustained profitable growth.
Ill detail some of the progress we've made this quarter and expect to see in the coming quarters with these initiatives before our Q&A session.
But overall, we're encouraged with the direction companies had it.
I will now turn it over to Ben who will review the financials in more detail after which I'll provide an update on the strategic initiatives ahead of our question and answer session. Thank you Ron.
For the three months ended June 32022, net revenue was $144 1 million.
Down 21, 1% compared to the $182 6 million in.
In the prior year period.
This decrease was due to a number of factors, including a challenging comparison to a stimulus assistant second quarter of 2021, coupled with the change with changing demand for home related products inflationary pressure on consumer wallets, and our intentional decrease of advertising spend which was down 56%.
Compared with a year ago by channel versus prior year wholesale net revenue declined five 9%, primarily driven by lower door productivity that was partially offset by opening approximately 1000, net new doors and direct to consumer net revenues declined 29 eight.
Sure.
Within DTC E Commerce declined 39, 2% in part, reflecting the aforementioned pullback in AD spend this was partially offset by a 150% increase in showroom net revenue driven largely by the opening of 27 net new showrooms over the past 12 months.
Gross profit dollars were $48 8 million.
During the second quarter of 2022 compared to $81 7 million during the same period last year with gross margin at 33, 9% versus 44, 7% in the second quarter of 2021 the.
The decrease in gross margin from the prior year can be attributed primarily to lower revenue.
Higher proportion of wholesale channel revenue, which carries a lower gross margin than revenue from the DTC channel and unfavorable cost absorption for the lower than planned production volumes in prior months.
Additionally, the decline in gross margin reflects the impact of elevated levels of materials labor and overhead costs, partially offset by benefits realized from our workforce restructuring.
Wholesale net revenues comprised approximately 43% of net revenue for the quarter compared with approximately 36% in the same quarter last year.
Operating expenses were 42, 3% of net revenue in the second quarter of 2022 versus <unk> 46, 1% in the prior year period.
The decrease in operating expenses as a percent of net revenue compared with the prior year period was driven primarily by our intentional reduction in advertising spend to improve marketing efficiency and stabilize profitability in the current environment and the restructuring of the marketing organizations that happened at the <unk>.
<unk> of the second quarter of this year.
Advertising spend for the second quarter was reduced by $24 $1 million year over year and $4 $8 billion from the first quarter of 2022.
Net loss for the quarter was $8 3 million.
Compared to net income of $2 $6 million a year ago.
As previously disclosed 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 subsequently re measured the fair value.
Each reporting date.
For the three months ended June 32022, we recognized a noncash gain of $3 million associated with the charge change in fair value of warrant liabilities for.
For the three months ended June 32021, the company recognized a noncash gain of $4 9 million associated with the change in fair value of warrant liabilities.
On an adjusted basis net loss in the second quarter of 2022 was $8 5 million.
Or <unk> 11 per diluted share based on an adjusted weighted average diluted share count of $83 2 million compared to an adjusted net income of $3 6 million or five service per diluted share.
Based on an adjusted weighted average diluted share count of $67 3 million in the prior year period.
Adjusted net income has been adjusted to reflect an estimated effective income tax rate of 31, 7% for the current year period compared to 25, 4% rate for 2021.
EBITDA for the quarter was a negative $8 8 million.
Compared to a positive $3 9 million in the second quarter of 2021, adjusted EBITDA, which excludes certain noncash and other items, we do not consider in the evaluation of our ongoing performance and as detailed in today's earnings release was negative $3 million.
Compared with positive adjusted EBITDA of $11 million, a year ago and negative adjusted EBITDA of $9 6 million in the first quarter of 2022.
Moving to our balance sheet as of June 32022, the company had cash and cash equivalents of $41 2 million.
Compared with $91 6 million.
At December 31, 2021, and $62 7 million at March 31, 2022.
The 21 5 billion decrease from the end of quarter. One was driven primarily by cash used in operations of $8 5 billion and capital expenditures of $13 million primarily related to show an expansion.
In addition to the $41 $2 million in cash at the end of the second quarter. We also have the full 55 million dollar amount available.
Billable.
Under our credit facility and we believe our cash is adequate for the next 12 months and beyond.
Inventories at June 30 of 2022 were $84 9 million.
A decrease of 14% compared with $98 7 million at December 31, 2021, and a decrease of 19, 8% compared with $105 8 million at March 31 2022.
The decrease in inventory since the end of quarter, one was driven by a reduction in both manufactured as well as resale finished goods and raw materials as we right size, our production and inventories to the current demand environment.
Turning now to our current outlook.
Recent inventory trends and the strengthening of certain macroeconomic headwinds have caused us to take a more conservative view.
On the rest of 2022.
We now expect net revenue to be in the range of $570 million to $590 million compared to our prior range of $650 to $690 million.
With the change primarily reflecting a reduction in projected wholesale volume to reflect the aforementioned change in industry trends.
For the second half of the year, we expect gross margins to improve compared with the second quarter levels and anticipate exiting 2020 with gross margins between 3700, 38%.
In terms of profitability, we now expect adjusted EBITDA.
To be between negative five and negative negative <unk> 15, and negative $5 million.
Compared to our prior guidance of 21% to $27 million.
Now I'll turn it back to Rob.
Thank you benefit while the current macro environment is has proven to be more challenging than we anticipated I remain confident in the progress we've made against our four strategic initiatives. So far in 2022 and the benefits they will provide in future periods.
I want to close today with an update on our progress this quarter, starting with operational excellence.
The work, we're doing to improve execution is aimed at driving more effective and efficient capacity utilization delivering higher product quality and enhanced returns on the capacity investments we've made.
Eric <unk>, our new Chief operating officer has hit the ground running since joining in June building on the work. The team has made with raw material and operational cost improvements.
Previously many of our raw material purchase contracts were exposed to potential inflationary pressures.
Not a significant factor for most of the history of this company inflationary dynamics of the current environment had begun to impact our raw material costs.
We've been able to offset some of these inflationary impacts with a series of negotiations on our larger spend items as well as some value engineering to structurally reduce cost in our component purchases.
Looking ahead, we have a pipeline of procurement and innovation projects that will enable continued input cost reductions.
Operationally, we undertook a reduction in force in our plants that reflected our continued improvements in productivity as well as the current supply and demand balance.
This action has positioned us with sustainable structural plant cost position in line with current demand expectations.
We also began to work to consolidate our operations from our Alpine Utah facility into our two primary facilities and grants will Utah and Mcdonough, Georgia.
This will streamline our overheads and allow us to allocate pillow and seat cushion production closer to our customer base like we've done with the mattresses to realize greater logistics efficiencies.
Our second strategic initiative is brand elevation through more effective marketing.
We've discussed the evolution, we are driving with purple advertising expanding beyond our historical performance centric vehicles to full funnel advertising that will build more awareness and preference for peripheral.
Creating new demand in all our sales channels.
In the second quarter, we delivered the next step creative we've talked about in our last call our campaign called overnight success.
Launched three weeks ago in linear and connected TV premium online video and across all social media channels.
Overnight success also includes a toolkit of campaign assets, our wholesale partners can tag and run to leverage purples brand power to increase their share of demand.
So it's early in the campaign has received a positive response from key partners and we see new creative quickly matching and surpassing performance metrics compared to recent and historical purple advertising.
In addition, during the second quarter, we completed our brand positioning work, which tested extremely well and qualitative testing. This important work is created in <unk> differentiated and highly consumer relevant positioning for purple that will serve as the foundation for all advertising and go forward brand communications.
Starting in the later part of 2022.
Shifting to our third initiative, developing and expanding our direct channels.
Starting with our showrooms these concepts that showcase our full product line with consistent premium presentation continues to perform well while acting as a north star for our wholesale partners.
We ended the second quarter was 40 showrooms after opening six net new locations during the quarter with plans to add 14 more showrooms over the remainder of the year.
We're excited about this emerging growth vehicle for the company and see a clear path to a store footprint of 200 over time.
Wholesale the second and larger component of our brick and mortar retail strategy continues to be an area of improvement this quarter at the end of Q2, we were selling through approximately 3200 wholesale doors, having added 77 net new doors in the quarter.
I mentioned last quarter, while our plan to selectively open additional doors going forward. Our priority is now improving productivity of our existing doors to grow market share and enhance the profitability of the channel.
To do so we identified three areas, where we could make impactful improvements.
First we focus on improving wholesaler incentives and strengthening our margins for our partners. We believe that we can do this without negatively impacting our margins as we increase operating efficiencies across the company.
We have begun working with our wholesale partners to ensure they have a vested interest in purple helping grow their business.
Secondly, we are now working more closely align manner with our wholesale partners to meet merchandising timelines to make sure that we're working together to drive demand for purple.
The July 4th Holiday was the first major holiday promotion, but we were able to meet deadlines to lock in promotions and messaging and as a result, the included in all available trade merchandising.
While more than one holiday will be required to earn our partners Trust. This was proof that we're able to label and willing to work together.
Additionally, we've already lined up trade merchandising and promotional offers for the next two major holidays, a significant improvement from where we were just three months ago.
Lastly, we need to develop synergistic approaches to wholesale product with our partners to ensure a mutually accretive product that simultaneously drives traffic and margins.
We've been actively meeting with our major partners to enhance relationships and start conversations around chat around channel specific product.
As a result, we're now developing a product roadmap that reduces channel conflict and places products in the channels, where they can be most effective.
Our fourth strategic initiative is product innovation.
Purple was built on innovation and intellectual property that improves our consumers' comfort and sleep.
I am pleased to say that with the addition of Jeff Hutchins as our new Chief Innovation Officer. This quarter. We once again have a strong innovation engine that is historically driven our company.
Our near term focus has been on revitalizing our immediate product pipeline with fresh introductions as quickly as possible.
In Q2, we developed and began deploying an improved cross functional new product introduction process that ensures predictable accelerated execution of our product roadmaps.
Team collaboration speed of execution and quality of results are all at new highs as evidenced by our first new product launch in quite some time, which is slated for later this fall.
We have much more to share on the new product in the coming months, but I am encouraged about the market opportunity, we will be able to address later this year.
I don't want to over promise here, but we are accelerating innovation and we'll be ready to share. This with you shortly.
In addition, we've been working hard on product innovation and developed a new three year product roadmap that outlines our new product introductions for 2022 2023, and the next two years beyond.
And setting the stage for a consistent stream of new products from purple going forward.
Looking ahead in Q3, and Q4 Q4, we will implement our new innovation strategy process and roadmap to accelerate our output of authentic innovation with a new emphasis on disciplined predictable execution and delivery while continue to amplify the disruptive heritage of the.
Purple brand.
Let me close with a word of gratitude and continued dedication for the hard work of each of our employees. The last six months have not been easy, but we're starting to see the benefits of our hard work already.
I am encouraged by the responses, we're getting from our from consumers directly and from our wholesale partners.
Wholesalers want us in their doors, despite the tough macroeconomic environment for everyone. We expanded into 700 net new doors. So far this year.
Our direct consumers are also responding positively evidenced by the stabilization of our ecommerce business that we're starting to see and the fact that our comp showrooms are performing better than the overall market.
We have a great product and the interest is out there with our continued work on our strategic priorities I am confident we will see quarter over quarter improvement that will lead us through this challenging environment and position us to capitalize on the many long term opportunities ahead for this company.
Thank you.
Yeah.
So let me do we want to go to questions.
And now at this time, if you would like to ask a question simply press the star key followed by the digit one on your telephone keypad also if you are using a speaker phone. Please make sure. Your mute function is turned off to allow you a signal to reach our equipment.
Once again press star one at this time.
We will first hear from Brad Thomas of Keybanc capital markets.
Hi, Thanks, Good afternoon, and thank you for all the details.
My first question was going to be around.
A little bit more color around some of the revenue trends and I was hoping you could share for us, but the productivity has been at some of the stores that you have some of the peripheral stores.
What revenue rate theyre trending at and maybe a little more color.
I think it's only about 13 stores that you've had opened for a year or longer.
Perhaps what same store sales look like at some of those showrooms.
Brian first of all thank you.
Our.
Showrooms are clearly showing the same pressure that is available that this category is seeing everywhere, but at about half the rate, we're seeing in our wholesale environment.
Our comp store business I don't really have a history yet.
Copper is about maybe down about $100000 a year, maybe slightly more but not much on that 12.
12 month basis.
Still well above the minimum performance requirements that we made.
You had a couple of other questions or did you also ask because that was just our care.
Yes.
Yes.
Really helpful. Robyn and we view that very much is a bright spot the productivity of those.
Purple stores, so that's very helpful.
Can you talk a little bit more about the incremental wholesale doors and what youre seeing so far out of the productivity of them.
Yes.
I don't know if ive heard it where does the door count stand today, and how things have been going in the doors that have opened a bit more recently for you.
Sure Brad So first of all on door Count you heard a couple of numbers I just want to clarify it we added about 1000 doors in the first quarter.
Usually in the first half and retracted about 250 that was a negotiated exit from a customer where we were performing well in some stores and not in others. So the net for the quarter was a little bit over 700 and that brings the total active doors.
I believe just under 30 to 50 30 to 40 something like that.
The door performance across the universe is better with our new stores, but soft in total and that is where we're seeing.
The real impact of the category being off 20 ish percent, but our door productivity is not off that far but it is off.
15%.
Comp basis from year ago, newer stores doing better where we've launched it I think with a more comprehensive support plan.
And our leader of the wholesale business without addressing all of the stores, but it's the stores we've been in the longest that half.
Limited bed count, where we're having the most difficulty.
That's really helpful and maybe just one last one here from me Rob you talked about how you are refining your.
Partnership with wholesalers and trying to lean into that partnership and encourage the RSA as two two pitch.
Purple as aggressively as hopefully they will they are willing to.
You really only at this point at one major holiday weekend to look at the fourth of July but.
Can you talk a little bit more about the learnings about where you are today and how.
How much work do you think you may have to do to improve that effectiveness.
Sell through in your wholesale partners.
Okay, and I'm going to come in at kind of backwards I think the root issue and I think this is why the the doors. We've been in the longest are performing less effectively is that we've got to teach the the part.
Partner's retail sales associate how to sell our product.
We've been pretty good at capturing the demand that we drove in the door.
But if they come in open and not committed to us or any other brand.
Got to make sure that that sales associate understands the technology and in a way that they can explain a couple of minutes to get people onto the bet when they lay on the on the product.
Definitely a polarizing experienced but people either like or are uncomfortable with but it's as we.
We can sell from there we've just got to make sure that they can make that shift because of the product looks different and feels different than everything else, they're used to and.
I don't think I'm, reaching at all to say this is not unlike what the memory foam category faced a decade or decade, and a half ago because it was a very different feeling product. We've got to make sure that we're training those folks. So they are comfortable speaking about that because we do know if they are not they will avoid the product they'll sample something else.
That's really helpful. Thanks, so much Rob and good luck.
Thank you Brad.
Next we'll hear from Seth Basham of Wedbush Securities.
Hi, businessman Mccartney onto staff.
Just a couple quick questions could you maybe talk about your current brand position.
Whether our pricing might have to come down a little bit, especially in light of some of the discounting we're seeing in the market right now.
Thank you first of all I mean, there is a fair amount of discounting in that category.
We had more in Q2 than we had originally planned I can speak to why.
But I don't think it's not a bridge I want to go over yet because we've got to get much better.
<unk>.
Hawaii Purple and what its advantages are and we're running some tests right now on our e-commerce business that are showing very encouraging.
Results, when we lead with wide purple instead of.
200, 300 $400 off.
And I think we've got to give them a chance.
To.
Be translated through and try to get some of the promotional message I don't want say out of the equation, but less distracting to the beginning of the equation.
All that said you will see in the gross margins a reduction in Q2 that really was driven by some specific discounting we did on the purple mattress to learn about the importance of the $1000 price point and the fact that promotion still going on today and you'll see later why work.
Doing that but we just really need to understand how much business. We left behind over these price increases over the last year, or so and kind of evacuating that price point.
Okay. That's helpful. Thank you just one more for you at the reduction in advertising has been pretty drastic just wondering are we reaching a steady state there and is there any update you can share on the online customer acquisition landscape.
Okay.
Yes. So there is steady state we're planning on pretty consistent spending to what you've seen of late certainly in Q2 and I'll tell you.
First of all I want to state. This on a full believer in aggressive effective marketing and spending to drive volume. While we are seeing with a significant pullback in a combination of better planning and better tools, we're getting very consistent quality sessions.
With even with that significant reduction and you can also see it in the search.
Is total brand search where were consistent with <unk>.
The leader in the category on this it's a brand that doesn't participate in wholesale but you can look at Google analytics and see who it is were the second highest search brand.
The internet over the last quarter or half year and year and that's held up through those advertising reduction. So we want to spend more on advertising, we just want to make sure it's working.
And it looks like so far we've been able to tease out the less effective in keeping the most effective.
Great. Thank you.
Next we will hear from Bobby Griffin of Raymond James.
Good afternoon, it's Alexandra <unk> on for Bobby Griffin.
Can we just dive a little bit in Q gross smartphones, what is baked into your assumption that second half gross margins will improve from that level.
I think in the press release, we've said we exited the year at 3700 38 in between there. So that's three points of improvement from where we are right now and maybe three to four points.
Yes.
Yes.
What exactly.
Are you getting more benefit from pricing uncertainty manufacturing.
Maybe some really yes.
Yes.
It's not pricing at this point that pricing is all reflected it is flow through of raw material savings that we.
We have already confirmed and will flow through in and quite frankly, a little bit that hasnt been confirmed but will flow through.
And then that's that's a little bit off from what we said last quarter and that's because of the volume challenges that we're facing that is overhead absorption.
Kind of soaking up some of the headwinds.
Okay. That's helpful and then.
Maybe could you talk about how the Georgia facility is stepping up to date.
Yes.
Eric <unk>, our new Chief operating officer is actually there this week and next.
It's a good factory and it's going to be a great asset it was.
As I have previously said I think it was brought into the equation and probably a little earlier than we needed it and it hasnt had the right leadership onsite, yet I expect that to be fixed this month and in Eric's hands I'm, absolutely confident that it will be it will challenge grants bill for being as productive.
As we can be so.
It's the right place to have it as we said last quarter, even at its significantly reduced volumes offset it was more than offset the shipping burden. We would have if we send everything from Utah. So I'm convinced it's in.
In our portfolio to stay and will be a great productive asset moving forward.
That's very helpful. And then lastly for me.
Maybe highlight like what level of sustainable quarterly revenue do you think you need to generate positive free cash flow is that $25 million more quarter $10 million more what do you think you get that positive free cash flow.
Yes.
We're close and I've kind of set up there. We've got the cost structure is right I think $15 million more.
Good good.
Let us over that line.
Okay. That's helpful and best of luck on the rest of the year.
Thank you.
Brian Nagel Oppenheimer has our next question.
Hi, good afternoon.
So a couple of quick questions how are you a.
A couple of questions.
So at least I guess stepping back and looking at the results and then probably more importantly, the reduction in guidance for the balance of the year and this comes after a prior reduction. So the question I have Rob is that.
As you're watching the business unfolds here.
Is it is it.
As was worse than expected for you.
Is it primarily macro or is this also a function of just kind of internal challenges the purple that maybe were not fully recognized initially.
I think this adjustment is primarily a macro.
In fairness, probably the first quarter adjustment was more driven by what we were facing internally.
But this is I mean.
This is definitely macro and it's not only macro it's specific to our wholesale door performance.
But it doesn't make it any easier or it's just it's pretty isolated our e-commerce business has stabilized.
<unk> business, while facing some of the category challenges is outperforming them. It is the productivity of our wholesale doors and we've got to fix that and we do have some plans.
To address that some are in place and some are yet to come but that's where the adjustments coming from.
And then just as a follow up to that then so with regard to the wholesale doors I think thats maybe.
A follow up to a prior question, but are you seeing something really noticeable with regard to geography or any other segmentation of the business where should help explain kind of really real pressure points are right now.
We're not seeing any macro trends geographically I can say that where customers lead us.
See our performance within their footprint and we can get the retail sales associates up against it we're able to improve those results and so we're aggressively encouraging our customers to share that information with us but no macro.
Geographic differences.
That we're seeing right now.
Right.
The final question a follow up to those two but you've laid out.
I think a very compelling aggressive kind of reposition strategy here for the brand for the company as Youre watching this now more difficult macro environment unfold as does it change your kind of your view on either the timing or maybe you can give some of the initiatives you're undertaking.
I think the construct of it stays the same I have to be.
A little bit more patient.
And we added obviously, we've got to make sure the balance sheet can support it and we believe fully that it does but I'd like to see the change happened faster I know how hard our people are working.
And I want them to.
See this company grow again.
Are seeing internal signs that.
They are happening, but if I'm sitting in your camp I'm, saying show me and obviously in this headwinds it's tough to do that right now.
I appreciate all the color. Thank you.
Thank you.
Sure.
At almost flurry of UBS.
Good evening, Thanks, a lot for taking my questions.
A question on revenue and that I had a gross margin follow up southern revenue guidance.
If I look at it on a.
Compared to 2019 on a quarterly basis.
First quarter on a CAGR.
Was up 20% second quarter decelerated through up 12% and now the guidance implies mid to high single digit for the back half. So my question is are you already seeing that can materially step down.
Versus 2019 in the third quarter quarter to date or are you simply being conservative and assuming a <unk>.
Visible slowdown to come later this year.
Yes.
Let me try to answer it a slightly different way because I didn't hear all of what was inside that but then tell me if I get there I mean with the guidance that we're giving in total we expect our quarters to continue to behave the way the last to get and that is driven by macro assumptions around.
The category strength.
I don't have the yearly 19 quarters in front of me is that the total year, but not the quarters.
They've got to be is that what you were comparing them two to 19.
Yes, and converting them to 19, it seems like the back half of this year.
Implied in the guidance would imply a very sizeable step down versus 2019.
So the back half of <unk>.
Total revenue of $19.
Total revenue of 19 was $4 30 to 428, so I don't see how it could be a step down in the second half.
Follow up Im sorry, I, just don't have that in front of me right now.
And so what we will follow up with that yeah, what we'll take that offline and then.
I think thats.
Yes go ahead.
Okay. So my follow up question is on gross margin drop.
So granted there is expected to be some improvement in the back half of this year, you still ending the year at.
37 to 38.
It's still in some ways off versus where you were in 2019, there was I think 44%.
So what.
What is that.
What are some of the key factors that.
Have caused this gap is it.
Oh, sorry.
If you are able to provide some some quantification around that.
Majority of this is coming from.
<unk> inflation.
<unk> of that is from basically channel mix and then what.
What portion of this gap.
You can bridge over the next couple of years.
And what are some of the structural factors, that's going to impede you from getting to that level.
So if I look at gross margin of 19 mid was at 44 one.
Yes, I would think theres three components and I will have to.
Go offline to size. These for you, but the single biggest one is channel mix.
And that business in 19.
Was 62% DTC, we're now.
A little bit higher than that so to me it's channel mix. It is.
Certainly catching up with some of the input costs that we think we have.
Done now and then its absorption with the second factory.
And there may be some others, but I'm sure those are the three biggest drivers.
The channel mix I think is are still live with 60 40, something like that is probably something we've got to be prepared to handle the absorption.
And the input costs, we've taken the action on the input cost and the absorptions when you get the volume up and.
And we should be able to get to those those margin.
Historical performance is certainly at 19 level.
And we're not throwing the towel on that whatsoever, it's just taken us longer because of the topline challenges to get that absorption number right to get all of those input costs fully slow the growth.
I think I missed something.
Okay. Okay.
Okay Awesome. Thank you that's helpful and good luck with the rest of the year.
Thank you Joe.
Next we'll hear from Keith Hughes of Coupist.
Thank you some encouraging signs in talking about new product launches with the <unk>.
Three year road map.
First of your comment.
Do you plan to launch product or products in the second half of this year and do you have any kind of approximate timeline.
I don't think im fully ready to.
Detail exactly when but.
We are aggressively chasing new product and we will have both a steady stream.
And.
Youre going to see it sooner than sooner than later.
Okay.
And then one other fairly small question.
Adjusted EBITDA number does that vendors separation.
I'm talking about what that was and is that something where we sold many more of those.
Yes.
Go ahead Ben.
Actually we've been working on are.
On our functional excellence of our operational efficiency.
We had a contract period here, who is doing a lot of good work with us and we hired her haner.
Who is our new VP.
Gardner Chief operating officer.
And as we look going forward, we saw that are always more effective to terminate our relationship with our outside contractor and put into the hands of Eric So paying this fee.
In the end will be a much more positive financial decision relative to continuing to work with our existing contractor.
Yeah.
Okay. Thank you.
Matt Koranda Roth capital.
Hey, guys. Thanks.
Just curious if you could talk about trends within the direct business, maybe the cadence of growth.
On a monthly basis year over year throughout the second quarter as you.
Reined in marketing expense and then just any.
Preliminary sort of commentary around the direct.
Revenue growth on a year over year basis quarter to date.
Yes.
The spend reductions were kind of feathered in starting at the very end of Q1 and through Q2.
And our volume has I mean, it was definitely challenged early in the quarter and then it's gotten modestly stronger, but the most important signal as it's been relatively stable and predictable and we're encouraged by that and as I said earlier the quality sessions, we get we define quality.
Session by somebody that clicks on.
More than just the first page when they come to the website.
We've been able to maintain those at about 90% of the high watermark with about 30% of our spending.
So we're encouraged by that.
Use that to continue to invest behind.
More quality sessions and trying to drive the conversion rate up.
Okay, Great and then just curious if you could maybe give us I know.
These things are maybe hard to discuss some public calls, but so all of a bit more color around the wholesale customer exit that you had mentioned how.
How much is that impacting sort of the cut to the revenue outlook for the year.
Yes, roughly.
Terms of.
Door count what is that sort of.
Imply in terms of lower door count.
Yes, so door count is higher net of the reduction the reduction was about 240 stores.
And I mean, this respectfully, but neither us or the customer are going to miss that volume.
Okay.
Okay great.
And then maybe just last one for me.
Gross margin recovery, you had mentioned three points of improvement through the end of this year and a portion of that has already been action that is just sort of timing of flow through that happens and then some more has to be action roughly would you put it at 50 50 in terms of whats already been action versus what.
Is on the come and then when you say that.
The 37% to 38% exiting the year just help us put a finer point on what that means is that sort of we're going to be hitting that run rate towards the end of the fourth quarter or are we talking we should be modeling 37 to 38 in the fourth quarter.
Yes, I think it's fair to model that in the fourth quarter, we do have about half of that.
<unk> and the other half still ahead of us, but it's not unidentified ahead of US we know how we're going to get there and it is fundamentally a combination of some of that work that's been referenced a few minutes ago as well as Eric's steady hand on how to run our plants safely and effectively for high quality in.
Just the right output when you need it. So we are confident that that will happen.
Okay. Thank you I'll leave it there best of luck.
Thank you.
And next we'll hear from Jeremy Hamblin of Craig Hallum.
Hi, Thanks for taking our calls this is Jack coal on for Jeremy.
You guys talked about inflationary pressures impacting raw material input costs, just how much of these costs and maybe freight costs increased on a year over year basis, and then could you maybe speak a little bit more to the expectations going forward with some of those negotiations and the procurement pipeline you've touched on.
On.
As it sounds like you guys do have a pretty good grip on those going forward.
Yes.
Our cost last year were up.
About 25% and raw materials, and freight and they've continued to escalate a little bit through the first and second quarter and now we're seeing starting to see a ameliorate.
The increases ameliorate.
We've seen a little more softness in the.
International freight costs, we're starting to just see some softness in domestic freight costs.
And I think with a more stable oil price.
We'll see a leveling for the balance of the year.
Kind of how we're thinking about it.
Thanks for that color, that's all I have.
Jack.
And our final question for today will come from Curtis Nagle of Bank of America.
Yes. Good afternoon, thanks for taking my question.
So I guess, just starting off with the.
The owned stores right. So the plan to do is another.
14, or so for the rest of the year.
Just on <unk>.
Our commentary I think imply something like $11 billion.
Capex utilized.
Why not be more conservative like I understand that on a relative basis. They are definitely better than all the rest of it but does that fixed cost.
Cash flow was negative environment is uncertain and then just as a follow up.
From the guidance on EBIT or what should we imply in terms of the cash position at the end of the year does that imply any work working at that facility.
Let me take the store question I'll have been talking about the cash question.
It's a fair point, but.
Number one the showrooms continue to be encouraging performing better than the category in total.
And very close to what we had projected kind of.
Three and before these headwinds so we're very optimistic about that channel over the long haul the second part of Curtis as I'm sure you can understand that store development is it's an engine that it wants to run.
It's hard to start and stop it.
And so we've got good locations with 2014 have probably been kind of under development for.
At least six months at this time and we're trying to keep our commitments to our partners and get our.
Showroom business developed as we can so.
We think it's a good investment they have been performing well even through these headwinds and we're going to keep making that investment at about that pace.
Okay.
Yes, if you look at the cash flow, we think we have adequate cash for the balance of the year, even without drawing down the line at this point if you look at the first half of the year, we used a lot of cash.
Primarily as our.
The Capex is our EBITDA was negative in the first quarter.
Payables were very high coming into the year as we spent a lot of advertising and built up inventories last year I.
I think our payables will come down to about the level, where they are going to exist and as you can see we've started to rationalize our inventories have come down.
So I think basically for the balance of the year, if we can run.
That to a really positive EBITDA.
Spend just a little bit more capex, we've got cash to go through the balance of the year.
That's how we're thinking about it.
Okay. Thank you.
And at this time I would like to turn the call back over to our presenters for any additional or closing comments.
Yeah, all I would just like to say to the team on the phone. We appreciate your interest in the company we are very optimistic.
That we will get through these difficult headwinds and get this company growing again.
We are available to help you understand anything further as you see fit.
Thank you.
That does conclude today's conference. Thank you all for your participation you may now disconnect.
Yes.
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Yes.
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