Purple Innovation, Inc. (NASDAQ:PRPL) Q1 2024 Earnings Call Transcript

Purple Innovation, Inc. (NASDAQ:PRPL) Q1 2024 Earnings Call Transcript May 7, 2024

Purple Innovation, Inc. misses on earnings expectations. Reported EPS is $-0.47365 EPS, expectations were $-0.15. PRPL isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, ladies and gentlemen. Welcome to Purple Innovation First Quarter 2024 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 2024 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 2024 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 gross margin, 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. Good afternoon, everyone. With me on the call today is Todd Vogensen, Purple’s Chief Financial Officer. The first quarter marked an encouraging start to 2024 with the second consecutive quarter of year-over-year sales growth. Sales were within our expected range increasing 12.5% year-over-year and if not for a shift in timing of some shipments into second and third quarter, we would have delivered sales results closer to the high-end of our guidance range. Overall, demand played out largely as we expected as our new products and new brand messaging gained further traction, allowing us to continue taking share even as industry trends remain challenged. While comparisons were favorable to the slow start of 2023 ahead of the new product launch in May last year, we are clearly seeing momentum build for our path to premium sleep strategy.

Adjusted EBITDA for the quarter came in within the middle of our guidance range positioning us well to meet our 2024 expectations that we outlined on our fourth quarter earnings call, which include returning to positive adjusted EBITDA in the second half of the year. Looking at our performance by channel, direct-to-consumer was flat year-over-year. Within DTC, showroom revenues increased 11% driven by an increase in average selling price from both price increases that we instituted in January and a meaningful mix shift from our essentials and premium collections into our higher priced Luxe collection. Mattress average selling prices increased month by month as did total revenues demonstrating the growing adoption of our new product set in the showroom channel.

More than 56% of our showroom locations opened for more than 12 months comped positively in the quarter and the total store fleet exited March up in the high single digits. Showroom performance was offset by a 4% decline in e-commerce sales driven in part by price testing and changes to promotions that impacted sales as we continue to adjust our e-commerce strategy. Our wholesale channel increased 33% year-over-year with net revenue accelerating as the quarter progressed due in part to the easier compare as accounts limited their receipts ahead of taking new product in Q2 last year. The collaborative partnerships we formed with our retail partners focused on expanding our premium assortment continued to yield positive results for both parties.

We saw revenue per door in the wholesale channel increase around 25% versus last year, supported by strength from our top accounts and a mix shift into our premium collection. We also added approximately 100 new doors late in the quarter as the reception for our new mattress line continues to drive new demand from our wholesale partners. Overall, we’re encouraged with our first quarter results, particularly in light of the continued sluggish industry environment. The launch of our three tiered mattress line, Essentials, Restore, and Rejuvenate, combined with our new Sleep Better, Live Purple marketing campaign, has allowed us to take share and overcome many of the persistent negative industry trends. While broader industry growth has continued to trend negatively, there is meaningful room for further improvement across our business, and we believe we’re well positioned to build on our recent trends.

Thanks to our differentiated products and improving brand strength. As we look to the remainder of 2024, we remain focused on five key initiatives to drive long-term profitable market share gains. First is improving the productivity of our existing showroom and wholesale doors. In showrooms, we prioritize profitability over door expansions this year with only one store addition slated for 2024. We plan to drive profitability through a combination of demand driving initiatives as well as cost optimization. On the demand side, we’ve pivoted our showrooms to a more selling focused environment by introducing new tactics like mattress takeaway, carrying more pillows in stores, and additional incentive compensation testing. We also signed a new consumer financing partnership that will be rolling out mid-May, putting Purple on a more competitive footing for higher priced product.

From a cost perspective, we’ve successfully renegotiated several leases and are continuing conversations with landlords about additional opportunities. We’ve also taken actions to manage payroll and other store expenses to improve profitability. With our wholesale partners, we’re continuing to focus on deepening our partnerships at each functional touchpoint. Including joint business planning, improved service delivery, collaborative marketing, and sales associate training to maximize productivity and enthusiasm for the Purple brand. We’ve made good progress in the quarter as we held quarterly business reviews with each of our top accounts, created a new wholesale marketing team dedicated to working with our partners to create new marketing opportunities, partnered with several key accounts to co-market for major holidays throughout the year and refocused our sales team to prioritize sales associate training in our key accounts.

Second is improving e-commerce mattress conversion. In the first quarter, we focused on increasing revenue per order and improving margin with the price changes and shipping tests to drive profitability enhancements, which as we expected has led to lower conversion rates in the near-term. In the second quarter, we’ll look to enhance conversion through data enabled personalization, improved customer financing offers, and streamlining our website while testing new messaging, configurations, and techniques. Third is driving gross margin improvement through tactics such as selective pricing actions, continued mix shift towards our premium and Luxe collections, and manufacturing and supply chain optimization. We’ve seen some early gains with these initiatives including decreased discounting and improved production efficiency through multisource procurement and increased plant productivity.

Additionally, midway through the quarter, we were able to eliminate the airfreight inefficiencies that stemmed from the product launch, while also improving the efficiency of white glove delivery service through our e-commerce shipping tests and increasing carryout in our showroom channel. We’re encouraged by the initial progress on these initiatives and expect to see meaningful margin improvement in the second half. Fourth is our continued focus on innovation. We’re focused on ensuring our product pipeline is full of new product and sleep technology that’s both innovative, desirable, and margin accretive. This commitment to cutting edge solution cements our category leadership, enhances the longer term profile of the company and supports our longer term profitability goals.

And fifth is improving our marketing efficiency. In 2024, we’re bringing the execution of our paid digital advertising back in-house, shifting more spend toward higher converting media, reallocating media-based on consumer segmentation and geographical analyses, and leaning into new impactful advertising with the goal of decreasing our cost of acquisition. Additionally, we’ll look to drive more customer engagement through new marketing techniques. For example, in Q1, we increased showroom traffic with new exposed grid bed demos that intrigue and draw in mall consumers not yet in the market. We also saw increased traffic resulting from our egg hunt campaign over the Easter holiday. In closing, we’re confident that our first quarter performance combined with the initiatives we have in place for the balance of 2024 will enable us to achieve our financial targets for the year.

We’re excited by the opportunities ahead to drive sustained profitable growth over the long-term as we continue our transformation of Purple into the preeminent premium sleep brand. Now I’ll turn the call over to Todd to discuss our first quarter financial results in more detail. Todd?

Todd Vogensen : Thanks, Rob. For the three months ended March 31, 2024, net revenue was $120 million an increase of 12.5% compared to a $106.7 million last year. The increase was largely due to the growing positive response to our new product lineup coupled with an easier comparison from the year ago period ahead of the product launch in May 2023. This year’s top line drivers included higher average selling prices from the performance of our premium and Luxe collections along with an 11% increase in wholesale partner spots. And based on commentary from others about the overall market, we believe we are continuing to take market share. By channel, direct-to-consumer net revenue was consistent with the prior year period. Within DTC, e-commerce declines were offset by an 11.3% increase in showroom net revenue, driven partially by the addition of five net new showrooms over the last 12 months along with higher ASPs compared to last year.

Wholesale net revenue increased 33.1% in the period, driven primarily by the previously mentioned growth in net revenue per door and slot growth in the wholesale channel. Gross profit was $41.7 million during the first quarter compared to $40.6 million during the same period in 2023, with gross margin rate at 34.8% versus 38% last year. Gross margin in the first quarter of this year was impacted by a composition of DTC and wholesale revenue that was consistent with the previous few quarters but was more heavily skewed towards the wholesale channel than the year ago period. Wholesale revenue represented 45% of total Q1 revenues, up nearly 700 basis points compared with Q1 last year. Additionally, use of airfreight early in the quarter, liquidation of discontinued product, and costs associated with products shipped in early Q2 were each headwinds to gross margin that we don’t expect to recur.

Operating expenses were $64.9 million compared to $65.2 million in the first quarter of 2023. The slight decrease was largely driven by a $5,9 million decrease in G&A expense related to the non recurrence of special committee costs from 2023 largely offset by investment of $3.3 million in ad spend and wholesale marketing and sales expense. As a percent of net revenue, operating expenses improved 710 basis points to 54% compared to 61.1% in the first quarter of 2023. As a result, adjusted net loss in the first quarter of 2024 was $20.4 million compared to an adjusted net loss of $14 million last year. Adjusted EBITDA was negative $13.2 million versus negative $7.1 million a year ago, and first quarter adjusted loss per share was $0.19 compared to an adjusted loss per share of $0.14 in the first quarter of 2023.

Now turning to the balance sheet. At the end of March, we had cash and cash equivalents of $34.5 million compared with $26.9 million at December 31, 2023. As we detailed on our Q4 call in March, we completed a refinancing in January 2024 that included the establishment of a new upsized term loan of $61 million that was used to refinance and replace our prior debt facilities while also providing the company with approximately $22 million of incremental available liquidity. Net inventories at March 31, 2024 were $72 million, down 17.9% compared to March 31, 2023 and up 7.7% compared to December 31, 2023. Now turning to our outlook for the balance of 2024. Based on our first quarter performance, we are reiterating our outlook for the full year of 2024.

We still expect 2024 net revenue to be in the range of $540 million to $560 million and adjusted EBITDA to be between negative $20 million and negative $10 million. And now, I’ll turn the call back over to the operator for questions.

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Q&A Session

Operator: [Operator Instructions] Thank first question comes from Brad Thomas at KeyBanc Capital Markets.

Brad Thomas: A couple of financial questions, if I could. First on gross margin. I was hoping you could talk a little bit about some of the opportunities moving forward through the year, for efficiencies and self-help. Obviously, we understand there’s a mixed headwind that you’ve been up against, but it seems that there are a number of opportunities ahead that we’d love to hear about. Thank you.

Todd Vogensen: Sure. So this is Todd. First, I should say there was a number of things that happened in Q1 that were nonrecurring items that should not recur going forward. So, we do get to kind of set those aside as we look into the future orders. But as we look going forward, we have a number of initiatives underway in our operations group, partially around sourcing and how we better dual source and competitively source some of our products. And then in addition, in the manufacturing realm, as we get further and further past the launch of our new line last year, we’re gaining a lot of efficiencies. So those efficiencies in production will help from a direct labor perspective, as well as an overhead absorption perspective. And so a lot of those initiatives will really start to come to fruition. We’ve already started to see some of the benefits and we’ll continue to see them in Q2. We see the benefits much more significantly as we get into the second half.

Brad Thomas: And regarding 2Q, is there any more you could share with us about how you’re thinking about sales coming together for the second quarter? I know generally for the industry, second quarter is going to be a stronger quarter from a seasonal standpoint and that’s I believe how things have played out for you. But anything else you can share with us in terms of what you’re thinking that growth rate might be for this quarter?

Todd Vogensen: Sure. So as we look at the second quarter, we are going into a stronger selling period with Memorial Day and feel confident that we’re well positioned for that. As we look at the quarter though, there are a number of industry headwinds that have been noted by folks, so we’re going to be working our way through that. As we step back, just to kind of set some guardrails for you, we certainly expect to see some solid modest growth over last year as we go into Q2, though maybe not to the same extent as the 12.5% increase that we saw in Q1. So continuing to look at ourselves as taking share in what is a tough industry and continuing to grow revenue both sequentially and year-over-year.

Brad Thomas: And then maybe last one if I could just for Rob, I thought the commentary about how your own stores have been comping positive was really encouraging. I know you’ve been working on exercises and training and point of sales and advertising efficiency. But can you talk a little bit more about what you’re seeing at some of those stores and partners that were sort of earlier in the transition a year ago as you lap that rollout a year later?

Rob DeMartini: Sure, Brad. Thank you. We’re seeing really the longer the product has been in the market, the stronger the results. And that’s both in our own showrooms that have comped up positively. I think it’s five out of the last six months. January was soft in showrooms, but the three months prior and the two months since have all comped nicely positive. And then you heard the numbers in my earlier talk about wholesale same-store sales were up about 25% versus same period previous year. Now that was a soft shipping quarter, but it shouldn’t have been that soft from a consumption standpoint because those older products were on the floor. And so that 25%, we’re encouraged by and we want to see it continue. Obviously, some of our larger customers made the conversion later. Their business is also positive, but we think still has some healthy upside left in it.

Operator: The next question comes from Seth Basham at Wedbush Securities.

Seth Basham: My first question is just on slot growth, encouraging signs that it continues to gain slot, especially at top accounts. Can you give us some more color on what’s driving that, please?

Rob DeMartini: Well, I think it’s, Seth, I think it’s the performance of the Restore line that people are seeing it. We gained about 300 slots in the quarter. Some of those come in quite late in the quarter, so they didn’t contribute much volume. But, the market is certainly difficult and not growing naturally. And I think retailers are very smart to try to find brands and items that are contributing, and we were fortunate enough to be part of that and saw some slot growth in the quarter. I want to reinforce that we’re really pushing on slot productivity, because I think the best way for long-term health is to make sure that our partners are happy with the performance, our showrooms are performing better where they are. So we are not doing much prospecting right now, but still seeing a little bit of growth there.

Seth Basham: And then on the e-commerce side, can you give us some more color on the price testing, and changes, promotions and shipping? What you learn from that in the first quarter and how do you going to adjust going forward to drive profitable growth?

Rob DeMartini: Seth, we definitely are still learning. I mean, some of the price testing we did early on, we saw a pretty positive response. We are seeing less productivity when we’re off promotion. And I think we’re seeing that when we’re hearing the same thing from our wholesalers. But as you know, this category is so highly promoted. We are working at ways to try to get sharper. We’ve cut the discount on a lot of our ancillary products sharply, and we’re not seeing negative volume implications from it. Mattresses are a little bit tougher. It’s highly sensitive to promotion right now, and I don’t see a near-term end of that in the short run. So I think we got to keep our eyes on that.

Seth Basham: And then my last question is just on the inventory build from the last quarter to the end of this quarter. Is that simply because of the seasonal effects and stronger seasonal sales expectations? Or are there anything else there to read into it?