Purple Innovation, Inc. (NASDAQ:PRPL) Q1 2023 Earnings Call Transcript May 10, 2023

Purple Innovation, Inc. beats earnings expectations. Reported EPS is $-0.12, expectations were $-0.13.

Operator: Good afternoon, ladies and gentlemen. Welcome to Purple Innovation First Quarter 2023 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. [Operator Instructions] It is now my pleasure to introduce your host, Cody McAlester of ICR. Please go ahead.

Cody McAlester: Thank you for joining Purple Innovation’s first quarter 2023 earnings call. A copy of our earnings press release is available on the Investor Relations section of Purple’s website at www.purple.com. I would like to remind you that certain statements we will make in this presentation are forward-looking statements. These forward-looking statements reflect Purple Innovation’s judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of factors affecting the company’s business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements included in our first 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 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’s, Chief Executive Officer.

Rob DeMartini: Thank you, Cody, and thank you, and good afternoon everyone. With me on the call today is Bennett Nussbaum, Purple’s Chief Financial Officer. The first quarter played out largely as we expected from a financial perspective. Revenue was down approximately 24% year-over-year to $109 million, as our decision to reduce advertising spend by 50% combined with softer industry-wide demand and a more challenging macroeconomic backdrop, pressured our top line performance. In light of the lower sales volume this period, I am encouraged by the meaningful increase in gross margin we delivered. The work we’ve done over the past year rightsizing our cost structure and improving our supply chain and manufacturing efficiencies is yielding sustainable benefits.

From a strategy standpoint, the first quarter was productive as we made progress — important progress, setting the business up for improved results as the year unfolds and over the long term. As we outlined in our Q4 call in March, we introduced our broadest most innovative product line ever at the Las Vegas market in January of 2023 and the response from our wholesale partners has been positive. We’re receiving orders to expand our existing footprint by over 1900 slots, a 15% increase in the base. In April, we started shipping our new mattresses to partners ahead of their debut at retail in mid-May. While it is too soon to confirm demand, we’re optimistic that consumers will respond to our enhanced sleep products and new brand messaging and we remain confident that we have the right strategic plan in place to drive profitable growth and sustained market share gains.

Our strategic plan is comprised of four key components: redevelopment and expansion of our product lineup; new inspirational brand positioning; investment in our wholesale partnerships; and continued showroom expansion. Regarding our product lineup, as a reminder, the full Purple product line has now been categorized into three tiers. The Purple Essential Collection represents our most accessible products with prices under $1800. These products have been engineered for and are primarily being sold through our e-commerce channel. Our Purple Premium Collection represents our new mid-range offerings with six all-new mattresses ranging from $2,000 to $4,000, available in both our wholesale and direct-to-consumer channels. And finally, our Purple Luxe Collection features our highest end products ranging from $5,000 to $7,500, available through showrooms, e-commerce and through our wholesale channel partners.

Early sales results of our Luxe Collection in our four Utah showrooms have confirmed consumer interest in these super premium products. We’re on track for the launch of the new product in our showrooms, on our website and select wholesale accounts on May 15th. The remainder of our wholesale network will change over their floor sets in the next few months. Selling activity with these partners has progressed as planned and we look forward to sharing the initial reads on sell-through on our Q2 call in August. Turning now to our brand messaging. We’ve reimagined the Purple brand to be bolder and more appealing to the premium consumer. We’re working to reach this customer set through a shift in messaging that better articulates the unmistakable benefits of our differentiated GelFlex Grid technology.

The hallmark of the Purple brand is revolutionary technology that provides a truly differentiated sleep experience and we’re using that innovation to our advantage, positioning ourselves as a true alternative to the premium memory foam mattress segment. This new messaging will be live in market in five days through increased television advertising and will become more prominent including numerous consumer and trade PR activations that are timed to coincide with the new product launch. This will be followed by a steeper ramp in marketing spend in the third and fourth quarters as our forecast includes advertising dollars increasing more than 80% over the second half of last year. Another key aspect of our 2023 strategy is strengthening our wholesale partnerships.

We’ve worked with our wholesale partners to ensure improved contribution levels along with enhanced point-of-sale assets that we believe will drive increased sell-through at higher average selling prices and higher margins for both us and them. The response from our wholesale partners was quite positive and we are shipping orders for 1,900 incremental wholesale slot placements at this time. Overall, we’ve received strong positive feedback on the new trade-up direction of the brand and are optimistic about our improving relationships with our wholesale partners going forward. And lastly, we remain focused on expanding our showroom channel in 2023. Despite the headwinds I’ve discussed, showrooms performed in line with projections in the first quarter.

With a new leader of owned retail joining the team in early January to lead the channel, we have good visibility to improve store presentation and enhance channel margins. Showrooms play a key role in our brand execution and profit road map. We ended the quarter with 55 showrooms and plan to add seven more in 2023. In long-term we envision a store footprint of about 200 stores. While near-term challenges persist in our industry and across the broader consumer markets, we believe we’ve taken the necessary steps to successfully operate in the current environment. With the upcoming launch of our new products and heightened level of brand and advertising spend, we’re optimistic that we have set the business up to achieve incremental top line and bottom line growth in the back half of 2023 even if the macro conditions remain challenged.

I’ll now turn it over to Bennett who will review the first quarter financials in more detail. Bennett?

Bennett Nussbaum: Thank you Rob. For the three months ended March 31 2023, net revenue was $109.4 million, down 23.6% compared to $143.2 million in the prior year period. This decrease was primarily due to an ongoing shift in demand for home related products inflationary pressure on discretionary consumer spending and the intentional 50.7% reduction in advertising spend compared with a year ago. Additionally, we saw wholesale demand for our legacy mattress models was impacted by the upcoming launch of our new premium product lineup in the second quarter. By channel versus prior year, wholesale net revenue declined 25.3% and direct consumer net revenues declined 22.5%. Within DTC, the e-commerce decline of 30.1% was partially offset by a 24.4% increase in showroom net revenue, driven largely by the net addition of 21 showrooms over the past 12 months.

Gross profit dollars were $43.2 million during the first quarter of 2023, compared to $51.6 million during the same period last year, with gross margin at 39.5% versus 36.1% in the first quarter of 2022. The increase in gross margin from the prior year can be attributed partially to lower materials, labor and freight costs, compared to the prior year period, along with the manufacturing efficiency and cost reduction initiatives that we implemented last year. Operating expenses were $65.2 million or 59.6% of net revenue in the first quarter of 2023, compared to $70.0 million or 48.9% of net revenue in the prior year period. The reduction in operating expenses compared with the prior year period was driven primarily by a decrease in marketing and sales expenses of $11.8 million or 23.6% due to the intentional reduction in advertising spend, to improve marketing efficiency, stabilize profitability and align spending with current demand levels and the shift of approximately $3 million in launch-related expenses into the second quarter.

This decline was partially offset by a $5.8 million increase in general and administrative costs that were primarily attributable to expenses incurred by the Special Committee. As previously disclosed, the Special Committee was terminated on April 27, 2023, so there will be no further costs incurred beyond those that will appear in our second quarter financials. Net loss for the quarter was $23.4 million compared to $13.6 million a year ago. On an adjusted basis, which excludes adjustments for certain noncash items and other items we do not consider in the 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 in the first quarter of 2023 was $12 million or $0.12 per share — per diluted share based on an adjusted weighted average diluted share count of 98.9 million, compared to adjusted net loss of $16.5 million or $0.24 per diluted share based on an adjusted weighted average diluted share count of 67.5 million in the prior year period.

Adjusted net income has been adjusted to reflect an estimated effective income tax rate of 25.9% for the current year period, compared to 14.9% for 2022. EBITDA for the quarter was negative $16.3 million compared to negative $10.6 million in the first quarter of 2022. 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 $4.4 million. This compares favorably to our guidance for adjusted EBITDA of negative $9.5 million, as higher-than-expected revenues, improvements in gross margin and a shift in launch costs, resulting in a better-than-expected bottom line performance. Moving to our balance sheet. As of March 31, 2023, the company had cash and cash equivalents of $54.5 million, compared with $41.8 million at December 31, 2022.

The increase was driven primarily by cash provided from net proceeds of $57.2 million received from the secondary offering completed in February 2023. This was partially offset by cash used in operations of $13.5 million, capital expenditures of $3.1 million primarily related to additional investments made in our manufacturing facilities and the repayment of the full $24.7 million outstanding on our credit facility. Inventories at March 31, 2023 were $87.7 million compared with $73.2 million at December 31, 2022. The increase in inventory since the end of 2022 is primarily due to an increase in finished goods. Turning now to our current outlook. Based on our first quarter results and continued confidence in our new product launch we are reiterating our full year guidance.

For 2023 we still expect net revenue to be in the range of $590 million to $615 million; adjusted EBITDA between $13 million and $17 million and gross margins in the low 40% range for the full year. We expect second quarter to reflect continued softness in the market ahead of our May 15 launch. Revenue is expected to be stronger than quarter one but below Q2 a year ago. Adjusted EBITDA will reflect launch costs including the $3 million shifted from Q1 into Q2. With first half revenues and adjusted EBITDA still tracking to our initial projections combined with the product, marketing, and channel of issues planned for the remainder of the year we feel good about our ability to achieve our 2023 financial targets. Back to you Rob.

Rob DeMartini: Thanks, Bennett. While the category continues to face challenges, I remain, confident that the business is set up for success by continuing to drive efficiency and manage costs and by leaning into the new brand and product rollout supported by strong investment in advertising. Additionally, I’m optimistic about the longer-term opportunity to profitably drive growth, securing Purple’s position as a true challenger brand. I’d like to thank our employees for their significant efforts to recharge this differentiated brand. I’d also like to thank our retail partners that recognize the unique benefits that Purple’s GelFlex Grid and how it can deliver a superior night sleep. That concludes our prepared remarks. Operator, we’re now ready to take questions.

Q&A Session

Operator: [Operator Instructions] And our first question comes from Brad Thomas with KeyBanc Capital Markets.

Q – Brad Thomas: Very helpful and good luck, in the days ahead here. Thank you

Operator: Our next question comes from Brian Nagel with Oppenheimer.

Operator: Our next question comes from Jeremy Hamblin with Craig-Hallum Capital Group.

Operator: Our next question comes from Bob Griffin with Raymond James.

Operator: Our next question comes from Matt Koranda with ROTH Capital.

Operator: Our next question comes from Keith Hughes with SunTrust [ph]

Operator: Our next question comes from Atul Maheswari with UBS.

Operator: Our next question comes from Curtis Nagle with Bank of America.

Operator: This concludes Purple Innovation Conference Call. Thank you for attending today’s presentation. You may now disconnect.