Q4 2022 Purple Innovation Inc Earnings Call
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Good afternoon, ladies and gentlemen.
I'll come to the Purple innovation fourth quarter 2022 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.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad it.
It is now my pleasure to introduce your host Cody Mcallister of ICR. Please go ahead.
Thank you for joining purple innovation sports quarter 2022 earnings call a copy of our earnings press release is available on the Investor Relations section of peripheral website at Www Dot purple Dot com I.
I would like to remind you that certain statements. We will make in this presentation are forward looking statements. These forward looking statements reflect purple innovation judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of factors affecting companies fit well.
Accordingly, you should not place undue reliance on these forward looking statements.
For a more thorough discussion of the risks and uncertainties associated with the forward looking statements. We've made in this conference call and webcast.
Refer you to the disclaimer regarding forward looking statements included in our fourth quarter 2022 earnings release, which was furnished to the SEC today on form 8-K, as well as our filings with the SEC referenced in that disclaimer.
We do not undertake any obligation to update or alter any forward looking statements, whether because 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.
That I will turn the call over to Ralph D. Martini Purple innovations Chief Executive Officer.
Thank you Cody and good afternoon, everyone with me on the call today has been at Nussbaum Purple Chief Financial Officer.
As I reflect on my first full year as CEO . It was certainly more challenging than I initially anticipated.
When I joined <unk> in January of 'twenty, two I know there was I knew there was a good deal of work to be done to turn the business around and return the company to profitability.
I didn't fully anticipate was the difficult market conditions that we would be operating in throughout 2022.
While it was expected that the industry would give back some of the COVID-19 related gains. It is captured in 2020, one decades high inflation and the shift in consumer spending towards services and experiences put even more pressure on demand and led to what has been cited by many is the worst annual decline.
In the history of the U S bedding industry with unit volume estimated to be down 20% to 25%.
Against this challenging background backdrop, our organization has made significant headway towards improving the efficiency of the business and strengthening our foundation for growth as we executed the strategic initiatives that we believe position the company to deliver improved results even in the face of continued market.
<unk>.
Looking back on 2022, we right sized our cost structure and lowered expenses to align with current demand.
This included the difficult but necessary decision to.
To meaningfully reduce our head count.
Net of showroom growth head count is down approximately 45% compared with this time a year ago.
At the same time, we eliminated inefficient and expensive advertising, bringing advertising spend down nearly 60% from the 2021 levels.
These two actions allowed us to increase profitability during the back half of 2022.
Sacrificing operational productivity.
We added new expertise to our leadership team to prepare purple for the next stage of profitable growth.
Jeff Hutchins joined the team in May as the company's first ever Chief Innovation Officer.
Jeff it's been busy reinvigorating, our innovation department and filling our product pipeline.
Additionally, he is implementing a continuous innovation process to ensure we are consistently deploying new products that are truly innovative and authentic.
Eric <unk>, our Chief operating officer joined the team in June since that time. He has made significant progress with raw material and operational cost improvements, helping offset inflationary pressures.
Eric has also helped to drive continuous improvement in our productivity, while balancing supply and demand.
This action along with rebalancing our production between our two facilities.
Helped maintain a sustainable structural plant cost position in line with the current demand projections. He's also delivered significant improvements in safety and customer service.
<unk> joined our team as Chief Marketing Officer in early November to lead our brand repositioning in support of our past the premium strategy.
She has been instrumental in the coming launch of our elevated brand positioning that'll happen in the second quarter of 2023 and is leading the process to identify the most efficient ways to reach and subsequently convert our consumers across all channels, our new brand positioning will debut in mid May.
Meg.
And most recently, we appointed Scott Kirby is chief of owned retail.
Scott joined US in January of 23 from Sephora, where he served as head of stores for Canada since 2019 Scot.
Scott's been tasked with elevating our company showrooms into highly productive beacons of the new premium brand position, while also continuing to expand the fleet as we continue to balance our direct channels with our wholesale channel.
Jeff Eric Karen Scott have helped solidify and complete a strong senior leadership team that's been assembled at purple.
Finally, we took a step to better position purple in the premium category with our acquisition of <unk>.
In addition to the share technology, eliminating licensing barriers and opening full innovation potential the manufacturing expertise attractive financial profile and highly complementary product offering made <unk> an excellent fit for purpose.
<unk> portfolio of higher priced mattresses compared to our legacy offerings provided a natural extension of purple purples product line. This accelerated purples product development schedule by several year years, and immediately placed us in the $5000 and up segment of the mattress market.
Yeah.
The addition of Intel a bed combined with Jeff Hutchins work accelerating our innovation engine generated a great deal of excitement among our wholesale partners at the Las Vegas market in January we came out of that show with commitments to significantly increase our retail presence this coming year, both in terms of number of.
What's on the floor and increased point of sale materials, which I'll speak to more later on the call.
Despite the significant and ongoing challenges for the mattress industry. We are encouraged by the way 2022 unfolded.
Over the course of the past year, we saw sales and margin stabilize and build after bottoming in the first quarter.
While our financial performance is not yet where we want it and know it can be including a tough start to the new year. We hope you'll take away from today's call is that we believe we've taken the necessary steps to successfully operate in the current environment and have set the business up to achieve incremental topline and bottomline growth.
In the back half of 2023, even if the macro environment remains challenged.
As a leadership team our commitment to and excitement for our long term outlet outlook remains unchanged. This category has repeatedly demonstrated resilience and durability through its history and I'm confident that the work. We accomplished this past year has positioned us to weather the current environment and reestablish a <unk>.
<unk> growth trajectory once the market headwinds subside.
We remain confident that our four strategic initiatives accelerating innovation elevating the brand developing our three distribution channels and achieving operational excellence will be fundamental to our success. This year.
In addition to that we believe that our new product launches, new elevated branding position and the expansion within our with our wholesale partners will provide substantial tailwind as we begin to establish purple as the new premium lifestyle Challenger brand.
Cover those in an additional 23 focus areas in more detail ahead of the Q&A session, but now I will turn it over to Ben who will review the financials in more detail and share the outlook for 2023. Thank you Rob.
For the three months ended December 31, 2022, net revenue was $145 $1 million, a decrease of 22, 2% compared to the $186 4 million in the prior year period.
The year over year decrease was due to a number of factors, including changing demand for home related products inflationary pressure on discretionary consumer spending and our intentional reduction in advertising spend.
Panel versus prior year direct to consumer net revenues declined 34, 5%.
Within DTC E Commerce declined 43, 4%, primarily driven by market conditions and compounded by changes to consumer consumption patterns.
[laughter] showroom net revenue increased 41, 3% driven largely by the addition of 27 net new showrooms over the past 12 months.
The overall decline in the DTC channel was partially offset by an increase in wholesale net revenue of <unk>, 3% driven in part by the <unk> acquisition.
Gross profit dollars were $57 million during the fourth quarter of 2022 compared to $64 7 million. During the same period in 2021 with gross margin of 35% versus 34, 7% in the fourth quarter of 2021.
The increase in gross margin over the prior year can be attributed primarily to the cost reduction initiatives implemented this year, partially offset by a higher proportion of wholesale channel revenue in the quarter, which carries a lower gross margin than revenue from the DTC channel and an increased promotion.
<unk>.
Environment versus last year wholesale net revenues comprised approximately 46% of net revenues for the quarter compared with approximately 36% in the same quarter a year ago.
Operating expenses declined.
$34 million.
Or 35, 4% to $61 9 million compared.
Compared to $95 $8 million in the fourth quarter of 2021.
This was largely driven by an intentional decrease in advertising spend which resulted in a reduction of marketing and sales expense of $38 2 million or 50% compared with the prior year.
Even with lower revenue or expense reductions drove significant leverage in the quarter as a percent of revenue operating expenses improved eight eight percentage points to 42, 6% from 51, 4% in the fourth quarter of 2021.
Operating loss improved $20 million to $11 1 million from $31 $1 million last year.
Net loss for the quarter was $70 2 million compared to a net loss of $21 8 million in the year ago period.
On an adjusted basis, which excludes certain noncash items and other items, we do not consider an evaluation of our ongoing operational performance, including gains from the change in our tax receivable agreement income and the change in valuation of our net deferred tax assets net.
Loss was $9 1 million.
Or 10 cents per adjusted share compared with 23.
$3 9 million or <unk> 35 per adjusted share in the year ago period.
Adjusted net income has been adjusted to reflect an estimated effective income tax rate of 25, 9% for the current year compared with 25, 4% in the year ago period.
EBITDA for the fourth quarter was $156 $3 million compared with a loss of $20 million in the fourth quarter of 2021.
Adjusted EBITDA, which excludes certain noncash gains and losses and certain other items detailed in todays earnings release was essentially breakeven compared to a loss of $23 4 million in the same quarter last year.
With our annual results available in our earnings release and with many of the factors that drove our fourth quarter performance. The same as the full year I'm going to move onto our balance sheet.
As of December 31, 2022, we had cash cash equivalents and restricted cash of $41 $8 million compared with $91 6 million.
At December 31, 2021.
Last month, we completed a primary public offering that resulted in $57 million of net proceeds for the company.
The primary purpose of this transaction was to rise with the financial flexibility to execute our new product and brand strategy that we unveiled at the Las Vegas market trade show in early January .
There, we announced a number of exciting changes that we believe will be transformative for the purple brand and business in 2023, as we re imagine our product lineup, our brand messaging and our wholesale presence.
In February we also extinguished our $24 $7 million senior term loan and reduced our existing credit revolver to $50 million, which currently has zero borrowings against.
Net inventories totaled $73 $2 million at December 31, 2022, compared with $98 7 million at December 31, 2021, and $91 4 million at 20 at September 32022, representing decreases of 25 eight.
Percent at 19, 9% respectively.
Turning now to our outlook.
We are confident that the work our teams completed in 2022 has the company positioned to drive profitable growth in the years ahead.
Which included the development of the new product line that was well received at the Las Vegas market in January .
While we are encouraged by our internal accomplishments, we recognize the macroeconomic environment remains challenging with limited near term visibility.
Taking all this into account.
We are expecting 2023 net revenue to be in the range of $590 million to $615 million with adjusted EBITDA between 13 and $17 million.
In terms of how the year unfolds the challenging market trends from 2022 have continued into the start of 2023.
On top of this some retailers are clearing their inventories ahead of taking the initial sell in of our new mattress models of the second quarter.
Which is adding extra pressure to our quarter one performance.
For the first quarter, we expect net revenues to be approximately $105 million.
Negative adjusted EBITDA of approximately $9 5 million.
Driven by the new product launch in May a stronger presence throughout our wholesale channel and new marketing programs. We are projecting quarterly quarterly results to improve sequentially throughout the year with Q2 revenue up nicely from quarter, one and similar to the second quarter of 'twenty.
22 <unk>.
Before returning to year over year growth in the second half to reach our full year targets.
For modeling purposes, following the sale of the $13 4 million shares in our February equity offering our fully diluted share count is now approximately $107 million.
Finally, after the close today, we filed a 12 B 25, with the SEC, which provides a 15 day extension for filing of our 10-K. This delay is needed in order for certain of our service providers to.
To complete the evaluation over the effectiveness of their control environment.
We expect to file our 10-K on or before March 31.
Now I'll turn it back to Rob.
Thank you Ben well, we expect the current operating environment will remain challenging I am confident that our four strategic initiatives. We will continue to act as the fundamental building blocks for our path to long range revenue and profitability.
In addition to these ongoing initiatives I want to close today by detailing a few key areas of focus that we believe will accelerate growth beginning in the back half of the year.
Starting with the changes to our product lineup. The <unk> acquisition in late 'twenty, two provided us with an immediate entre into the luxury end of the market.
Since that time, we've been working to integrate the premium until a bed product set while also engineering, our existing product lineup to better bead margins better meet margin specifications needed across our distribution channels.
The full <unk> product line has been organized into three tiers.
The purple Essentials collection represented our most successful products with prices under $2800. This collection is comprised of our legacy purple and purple plus mattresses, along with our newly engineered purple New day mattress priced at $1000. These products have been engineered.
Q4, and will primarily be sold through our ecommerce channel.
Our purple premium collection represents our new mid range offerings with six all new mattresses, ranging from 2000 to $4000. The restore restore plus and restore premier mattresses are completely reengineered grid, plus coil hybrid offerings that will be.
Available in two distinct firmness offerings, a first for purple that we believe will broaden the appeal of our grid based technology.
Our premium collection will be available in both our wholesale and direct to consumer channels.
And finally, our purple Luxe collection will feature our highest end products ranging from 5000 to $7500. This top of the line sleeping experience is delivered through three revamp rebranded and tell a bed mattresses, rejuvenate rejuvenate plus and rejuvenate premier.
These mattresses incorporates superior pressure relief through enhanced Joe grid, plus intentionally designed to sit deeper within the mattress along with the enhanced foam layers and are responsive coil system.
From a channel standpoint, the Luxe collection will primarily be available through our showrooms and our wholesale channel.
Initial testing with our wholesale partners has been very positive so far.
While we're excited about our new product lineup and believe this re re invigoration of our innovation engine positions us for growth later in the year. It is putting pressure on first quarter results has been at outlined.
To prepare for the launch of our new mattresses and May some retailers are working down their on hand inventories by selling through our legacy models without replenishing orders, which is temporarily impacting sales.
While this will make for a difficult start to the year. The response to our enhanced offering from our wholesale partners has been very positive adding to our confidence that the upcoming launch will accelerate consumer demand as the year progresses with the understanding that the broader economic environment will also play a part in shaping.
Trajectory of a recovery in the near term.
Turning now to our brand messaging care has been instrumental in helping develop a premium brand position that can support our single brand multi channel strategy and the distinct consumer segments, we want to address.
To create an <unk> differentiated and highly consumer relevant positioning for purple as the brand for life enhancing sleep.
We're refining our marketing strategy in 2023 in several ways.
To begin we're re imagining the purple brand to be bolder and more appealing to the premium customer set.
While we have historically had great success with marketing campaigns tailored to our DTC consumer as our product set has expanded into the premium space our target consumer has evolved.
Can expect to see us address a higher end consumer with our brand messaging in 2023 with a shift in measured messaging that better articulate the unmistakable benefits of our differentiated gel technology.
While many competitors attempt to differentiate them differentiate themselves with common materials one of the hallmarks of the Purple brand is revolutionary technology that provides a truly differentiated sleep experience.
We use our innovation to our advantage in 2023 and position ourselves as a true alternative to the premium memory foam mattress segment.
Along with this messaging and the target demographic shift tactically. We're also focused on driving higher ticket values in 2023.
We will adjust our approach with bundled pricing and enhance our messaging with our mattress basis, and mattress enhancers like premium bedding and pillows to drive increased add on revenue.
Another key aspect of our 2023 strategy is strengthening our wholesale partnerships.
At the Las Vegas market, we shared how our new product lineup and new incentive structure combined with enhanced point of sale assets will drive increased sell through with higher average selling prices and higher margins the.
The response was very positive and has resulted in the following results wholesale product placement comment commitments have far exceeded our inbound goal of 20%.
Dozens of shop in shops confirmed with interest for several hundreds more an overwhelmingly positive feedback on the new trade up direction of the brand.
At the same time, we remain focused on expanding our successful showroom channel in 2023, we.
We ended 2022 with 55 showrooms the 46 net new stores, we've added over the last two years continue to perform in the current more challenged operating environment.
We remain very positive about the future of our showrooms and plan to add 11 in 2023.
In closing I'd like to thank our employees for their hard work through a truly transformational year for our company.
So much change in such a short period of time is never easy your dedication through this challenging challenging period has enabled us to stabilize and change the trajectory of our company during a very difficult time for our industry.
I'm proud of the progress we've made in 2022 and I look forward to continued success with you in the coming year.
As I said as I hand, it off to the operator to take questions I'd like to remind everyone that the purpose of today's call is to discuss our fourth quarter and full year 2022 results as well as our financial outlook as we head into the Q&A. We ask that you limit your questions to these topics.
Operator, we're now ready to begin to take questions.
Thank you.
We will now be conducting a question and answer session. If you would 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.
You May press star two if he 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 poll for questions.
Thank you Andrew.
First question is from Brad Thomas with Keybanc Capital. Please proceed with your question.
Hi, good afternoon, Thanks for taking my question.
I wanted to talk a little bit more about the rollout.
<unk> out of the new products and I was wondering Rob if you could talk a little bit more about that.
Performance.
<unk> been seeing and May continue to be seeing in some of these pilot prototype stores, where you had had tested out.
Adding the <unk> products.
With the peripheral branding.
Any other signs about what kind of lift a store may see.
When they get the new assortment.
Yes.
Great. Thank you it's a good question so.
Just to frame for the group, we because of the pace of how we brought the new Lux product market, we hustled into fourth quarter and put the Intel a bed mattresses with simply purple logo on them into approximately 60 different cut.
<unk> across our customer base and we did that so when we went to Las Vegas, we would have some evidence of results.
The trade up story quite frankly is a pretty easy concept to sell but in fairness, our customer said great.
Great idea will it work and we were able to demonstrate that that not only was intel of beds results, where they had distribution.
Pretty accretive to a retailer we were able to take 60 stores and show them that not in every case, but in the majority of the cases with no marketing very little branding on the product with the exception of a purple logo. They were able to achieve very encouraging results, we think the incremental.
Slots are probably.
Worth maybe about a thousand one $5000 a month.
Across the new line and that along with the average retail price makes that a very good.
Proposition for retailers that can sell that we're expecting to get incremental placement in 250 to 300 stores of <unk> throughout the year or a purple looks throughout the year.
Did that get at your question Brian .
Definitely very helpful.
And just as we think about the timing of the rollout.
Undertake here, creating share can you just talk a little bit more about some of the timing milestones that we should think about.
Yes, we will the retailers are destocking right now.
Well, we will begin to ship wholesale during April and we will have a hard conversion to the new line on may 15th and our own channels, So online and in store will synchronize wholesale with that.
Separately, but because you've got so many moving parts across 3500 doors there'll be some that will have that product a little bit early and there'll be some that will be later in the summer based on their internal plans. So think about hard conversion may 15th of own channels and a transition conversion.
Our partner channels in May June and July .
Very helpful. A lot of exciting things going on and good luck to you.
Thank you Brad.
Okay.
Thank you and our next question is from Jeremy Hamblin with Craig Hallum. Please proceed with your question.
Thanks, and I wanted to follow up on some of those points and just make sure I understood.
Our expectation should be.
As it relates to that May 15th Uh Huh.
Hard launch.
So if I do the math it looks like your implied revenues for Q2 to Q4 or about $162 million to $170 million a quarter.
With adjusted EBITDA over the course of those three quarters $23 million to $27 million.
In terms of thinking about the Q2 results versus what you're expecting in the back half of the year because it sounds like there's still going to be softness in Q2, and then you're expecting a meaningful uptick.
Should we be thinking about.
Second half of the year when Youre looking at 175 million plus a quarter in revenue.
Any type of color that you can share on that and again, maybe some some tangible evidence in terms of how we can kind of back into that math.
It would be super helpful.
Okay.
Thank you Jeremy So obviously Q1 is softer than we expected some of that is clearly destocking, but some of it is also.
Our sale product not performing as well as the category and the category is not very strong. So the combination of that is produced.
Q1 that has us.
The $5 90 to $6 15 that we gave you is a lower number than we started planning for the year driven by that Q1. So that is reflected in that has been at outlined we expect Q2 to be pretty typical with a normal quarter in Q in 2022, and so then from there you guys can do the math.
There is.
Definitely an uphill year and I don't really like plan in that way, but given that we don't start to launch until May 15.
We are planning for expecting and realize the challenge that creates for you guys. When you model this of a very strong back half.
Okay and talk me through it.
The confidence on that just a little bit more so you were expecting.
Placements, presumably swap.
That are going to increase I think you said are exceeding your goal of 20%.
And then.
Maybe just a little bit more color on that kind of a F. P change that you're expecting.
Yes.
Mix change across the total business will be driven mostly by a purple looks.
Our premier prices are ever so modestly a little sharper than the business, we're pulling out so that really won't add to the asp's. So the ASP blend will come from.
The purple Lux business, but if you think about the growth year on year. There is there is really.
Three or four components. So so.
The wholesale growth, we talked about we've got a nice healthy growth in slots and we know what those are worth and we have haircut them pretty sharply on the incremental side thinking that each slot, we put into our stores probably worth a bit less than the last slot that we have.
But we've also got showroom maturity you got 46 stores that are less than two years old and 26.
They haven't even annualized yet so that will contribute growth through the year.
And then marketing is up.
11% I'm not sure I got the number at 11% on the year, but about 40% on the back half.
Because we underinvested in Q1 that also contributed to the softness because we're trying to save the powder for the launch so the combination of annulus Asian, new wholesale slots increased marketing spend and although we're expecting but we didn't put a lot of building blocks.
On the quality of that marketing that's if care is on the line don't let her don't repeat that we expect it to get better, but we didn't build in.
Volume for that but those are the components of that growth and it'll start in may and be heavily delivered in the second half.
And just clarifying that the 11% increase in marketing spend that's the total that you're planning for for the year.
Okay.
That is correct that's correct.
Okay, Yeah on top of that Jeremy last year was <unk>.
Q1 was by far our highest spend and this year. It is by far our lowest spend and yet the spend is up 11% on the year.
But you've seen year to date or for the total for the year.
Total year.
Year to date I don't have that number in front of me, but year to date spending in the quarter is probably about 50% of what it was year to year ago.
Got it.
Okay, guys are exciting our best wishes.
Thank you Jeremy.
Thank you. Our next question is from Bobby Griffin with Raymond James. Please proceed with your question.
Afternoon, everybody. Thanks for taking my questions.
Robin team I, even a clearly a lot of moving parts here with the product launch on the Saudi stuff getting out there do you have an estimated of what the EBITDA drag is from the part of the losses are kind of.
Helping support the retailers and whether it's just any type of you know, where we can kind of try to get a feeling of the underlying profitability of the business. This year.
When you mean EBITDA drag by Baidu main tell me say more about it you mean in the product construct.
Well I mean, there's clearly some onetime costs that you're absorbing here retailers I guess, we're gonna be absorbing some to that launch something as big as youre locking kind of given the history of the company is the biggest product launch. So just curious is there. Yes is there any dollar figure around that and what product launch costs here are.
Or any way to kind of back into that where we can kind of get a better feeling of where the underlying profitability of the business.
Yes, I'm trying to figure out a good way to answer that.
Customary practice in this industry that floor samples go in at half their normal wholesale costs. So.
Resetting 3400 doors, there is a price to that I don't have that in front of me, but we can figure that out and share that with you and then in a couple of cases and we have built in some <unk>.
Some dollars to clear inventory markdown in rare cases, maybe even pickup and resell in another format. So there definitely is a cost tied to that.
I don't have a good roll up for you right now we will get one and follow up with you.
Okay I got you.
Do you have that for 3400 doors, we can kind of figure out we can back into a price.
What do you know the average FQ that's gone in per door, and I can probably back into the rest of them there.
Yes, we're going to move from pre launch about four four beds per door and that will go up about one and a half to one eight.
Okay.
Okay. That's helpful and then I guess just on the quarter itself.
The sequential decline in gross margin from the 41, 5%. The 35 that we just reported in the fourth quarter is that all.
Just the change in mix wholesale went up 500 basis points I know, we've talked previously about a more promotional environment too.
Yes, I mean, as we said going into when we wrapped up Q3, we knew.
It would be more promotional that probably cost us a couple of points channel mix cost us a couple of points.
These are the two big steps.
Okay, and then Rob Lastly for me I mean, I understand your comments about your product being you know you've got to get the new product out there to really kind of see what's going on from demand outflow do you think the industry itself here in the year to date period has stabilized or do you think it took a further step down.
It feels to US now I think our brand is underperforming the market right now because the product is stale and thats part of that soft quarter I'm not pin and all of that on the category, but I do see it did feel as Q1 kind of week on week got weaker after January .
Okay, and then the comparisons start to get easier for the industry here towards the end of March is that correct in your view.
So I hear.
I haven't had any easy comparisons yet Bobby.
You and I, both look forward to hopefully seeing some of that.
Well, let me, let me say it let me say more positive, though we are confident in the wholesale expansion. The work that's going to go on in our showrooms.
And fresh marketing and product too to Reenergize E Commerce.
I clearly believe we grow behind this initiative irregardless of the health of the category.
Okay Fair enough I appreciate the detail and best of luck here with this big launch.
Thank you Bobby.
Thank you. Our next question is from Seth Basham with Wedbush Securities. Please proceed with your question.
Thanks, a lot and good afternoon. My first question is just making sure I understand the components of the revenue guidance for the first quarter.
Obviously retailers are destocking, and Danny a product, but I can't imagine that's too much that a hit to your sales considering they are probably a little less than two weeks. So is the vast majority of the year on year decline in the growth that you're expecting for sales driven by the.
The outperformance of your product and how all of that the pressure on the industry.
Seth I think that's fair, it's definitely not the majority of it but I do think it's a meaningful piece.
And I also think brand underperformance, because we've got product that's been out there for three plus years without being refresh.
Is contributing and then I think that the category contribution is probably the smallest of those three components.
But we've got to perform better Theres no question about it.
Got it okay.
I understand the market and how you may add momentum.
Sorry, I'm going to add to that the marketing.
Spending in Q1 also didn't make us a stronger because we were saving investment to put you won't see us invest at year ago up levels until may.
Got it Okay and second question on the slots that you're gaining any sense from your retail partners are losing months loss.
Now when we're in Vegas, the number of folks asked us that theyre very much not they were pretty firm on what we were going to get.
They really do not communicate where it comes from I would tell you I don't think it comes from timber.
Yeah.
And so it would come from other players, but it's we're not pushing them off the floor. We're really trying to present, an idea that gives the retailer and alternative premium brand to put in the position directly next September .
Got it and my last question is on the new product line than the pure merchandise margin rate.
Products relative to your prior line isn't materially higher.
Yes.
Lux definitely as the others are not materially higher there are a little bit better in most cases and a little bit sharper for the retailer.
So theyre not.
We've got to do it by growing units it isn't engineering margin to get back to good profitability.
We did look very hard at the prices we were off the margins we were offering the retailer the margins, we were making and the prices where our products needed to be to be competitive. So we don't get a big uptick in unit margin in the restore line, we obviously do and the rejuvenate line.
Understood Alright, thank you so much and good luck.
Alright. Thanks.
Thank you. Our next question is from Matt Koranda with.
Ross can please proceed with your question.
Hey, guys good afternoon.
I mean, just trying to attack this from a different angle so the back half of the year.
It needs to be kind of in the high teens to low 20% growth.
How much of that growth is coming from units versus the <unk> improvement youre going to get from the new launch.
Matt how are you disconnect in the launch from the units I mean, it definitely is unit growth in the back half.
And then mixed growth because luxe is annualizing and in the line.
Okay, but the majority of the units is what we should assume the majority of its units I mean, even though less units.
On a unit basis is slower than the rest of the line because of their premium price.
Okay. So we're annualizing.
Go ahead.
No that's targeted bedrock.
Part of it is annualizing that Intel a bad business.
I believe there are only four months of it in 2022.
Okay, Great and then maybe just could you talk about the gross margin progression just given that.
The back half is going to be mostly unit growth it sounds like probably some better utilization through the facilities.
How should we be thinking about how that factors into gross margin improvement and how you think about flowing those dollars back into reinvesting in marketing.
Yes.
Because of the downsizing work that we've done and some of the efficiency that Eric has brought.
This business is.
Very sensitive to the volume we put through the plants. So we get that unit growth will contribute to that and then mix is also helping in the back half of 2023.
Okay, great on the gross margin up on guys. Thank you.
Thanks, Matt.
Thank you. Our next question is from Keith Hughes with <unk> Securities. Please proceed with your question.
Thank you.
Lots of them on the line are you changing.
Advertise historical advertising co op.
We'll see a salesperson incentives is it going to be different than what it's historically been a peripheral on the new products.
Yeah.
I'm sorry.
Given that question again, I'm, sorry, I missed half of it.
Sure.
With the launch of the new products are you changing your advertising co op agreement with the retailers or some of the retail again, Florida incentive payments things like that are different than it's been in historically.
No we have sharpened the margins.
I don't have this language as used in this industry, but what I would call front margin basically what they buy it for what they sell it for we have sharpened those in the restore line to try to get at some of the historical drag that was on the wholesale business.
In most cases are I can't think of a case, where we've changed the back end at all.
<unk>.
Yes, they're not cases, where we've changed any of the back end, we have sharpened the front end a bit and then as Lux gets into the line.
That margin dramatically helps the vendor margin as they look at how much purple contributes.
Because those are very rich sales for the retailers that sell purple Lux.
Okay. Thank you very much.
Thank you our.
Our next question is from Michael.
<unk> with UBS.
Please proceed with your question.
Good evening. Thanks, a lot for taking my question, Rob I am going to apologize in advance, but I also have a back half question.
So a lot of exciting stuff clearly going on now with the product launches and the incremental slots, but what have you assumed for industry growth in the back half that are like what's embedded in the guidance.
We have not assumed industry growth, we've assumed share growth in the industry.
If you can tell me what the plan I will do that but we didn't.
Alright.
This is Dave we also we didnt improve we didn't include further decay either.
Got it.
And then my follow up is on the gross margin I think you mentioned a few.
A few hundred basis points drag from promotions higher promotions in the fourth quarter.
Please correct me if I'm not if I'm correct.
That's correct.
But what have you assumed for promotions for 2023 and related to that what is the risk that oldest increase promotions could condition. Your customer to expect these offers even as you launch the higher quality new beds.
We do have planned in the year, some improvements and discount levels and in most cases, we've already begin to see some of that it's a little hard to read in wholesale right now because of the Destocking noise. That's in there, but we have assumed modest improvement in discount levels across all three.
The channels.
Yes, so a decrease in promotional make sure I'm, saying that clearly.
<unk>.
Awesome. Thank you very much and good luck with this year.
Thank you.
Thank you. Our next question is from Curtis Nagle with Bank of America. Please proceed with your question.
Good evening, thanks for taking it.
Just wanted to I guess clarify.
What's going on.
Slotting perspective, so I think you said.
Four four per door, it's going up by.
One and a half or so maybe a little bit more is that does that.
And is that across all 3200 doors.
Or just a portion.
Yes.
And really what that looked like when youre done well.
I mean I was given your blended rates, but we're not going to put lux into.
A significant majority of our doors.
We've got 3400 doors.
And across the average it'll end up being maybe one two to one four somewhere in there.
Increase yet.
Got it okay.
And then just on the point about the store in stores.
And yet you are putting in.
You guys are funding that I think.
Yes.
Cost per.
Per door.
Are the retailers.
You bet.
There is a few different flavors kind of depending on the breadth of the brand and Curtis, we're being cautious and making sure that investment we have planned for it we will be.
Very discriminating in how and where we put that in to make sure we get a reasonable return.
Okay, and then just what should we expect for Capex this year.
Total capex, you're looking at about $35 million in total capex.
Okay. Thank you.
There are no further questions at this time. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
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