Purple Innovation, Inc. (NASDAQ:PRPL) Q4 2022 Earnings Call Transcript

Purple Innovation, Inc. (NASDAQ:PRPL) Q4 2022 Earnings Call Transcript March 16, 2023

Operator: Good afternoon, ladies and gentlemen. Welcome to Purple Innovation Fourth Quarter 2022 Earnings Conference Call. 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 fourth quarter 2022 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 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. With that, I will turn the call over to Rob DeMartini, Purple Innovation’s Chief Executive Officer.

Rob DeMartini: Thank you, Cody. And good afternoon, everyone. With me on the call today is Bennett Nussbaum, Purple’s 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 Purple in January of 2022 I knew there was a good deal of work to be done to turn the business around and return the company to profitability. What 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-related gains it had captured in 2020 and 2021, 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 as the worst annual decline in the history of the U.S. betting industry with unit volume estimated to be down 20% to 25%.

Against this challenging 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 positioned the company to deliver improved results even in the face of continued market headwinds. Looking back on 2022, we rightsized our cost structure and lowered expenses to align with current demand. This included the difficult but necessary decision to meaningfully reduce our headcount. Net of showroom growth headcount is down approximately 45% compared with this time 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 without sacrificing operational productivity. We added new expertise to our leadership team to prepare Purple for the next stage of profitable growth. Jeff Hutchings joined the team in May as the company’s first ever Chief Innovation Officer. Jeff has 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 Haynor, 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, has helped maintain a sustainable structural plant cost position in line with the current demand projections. He has also delivered significant improvements in safety and customer service. Keira Krausz joined our team as Chief Marketing Officer in early November to lead our brand repositioning in support of our path to premium strategy. She has been instrumental in the coming launch of our elevated brand positioning that will 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. And most recently we appointed Scott Kerby as Chief of Owned Retail. Scott joined us in January of 2023 from Sephora, where he served as Head of Stores for Canada since 2019. Scott has been tasked with elevating our company’s 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 channels. Jeff, Eric, Keira and 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 Intellibed. In addition to the shared technology, eliminating licensing barriers and opening full innovation potential, the manufacturing expertise, attractive financial profile and highly complementary product offering made Intellibed an excellent fit for Purple.

Intellibed’s portfolio of higher priced mattresses compared to our legacy offerings provided a natural extension of Purple’s product line, this accelerated Purple’s product development schedule by several years and immediately placed us in the $5,000 and up segment of the mattress market. The addition of Intellibed combined with Jeff Hutchings 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 slots on the floor and increased point of sale materials, which I’ll speak to more later on the call. Despite the significant ongoing challenges for the mattress industry were encouraged by the way 2022 unfolded.

Over the course of the past year, we saw sales and margins stabilize and billed 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 what 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 top line and bottom line growth in the back half of 2023, even if the macro environment remains challenged. As a leadership team, our commitment to an excitement for our long-term 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 strong 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 tailwinds as we begin to establish Purple as the new premium lifestyle challenger brand. I’ll cover those in additional 23 focus areas in more detail ahead of the Q&A. But now I’ll turn it over to Bennett, who will review the financials in more detail and share the outlook for 2023. Bennett?

Bennett Nussbaum: 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. By channel, versus prior year, direct-to-consumer net revenues declined 34.5%. Within DTC, ecommerce declined 43.4%, primarily driven by market conditions and compounded by changes to consumer consumption patterns. 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 0.3%, driven in part by the Intellibed acquisition. Gross profit dollars were $50.7 million during the fourth quarter of 2022 compared to $64.7 million during the same period in 2021 with gross margin at 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 promotional 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 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, our expense reductions drove significant leverage in the quarter. As a percent of revenue, operating expenses improved 8.8 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 non-cash items and other items we do not consider in 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 $0.10 per adjusted share compared with $23.9 million or $0.35 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 a 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 non-cash gains and losses and certain other items detailed in today’s 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 on to 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 provide 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 it.

Net inventories totaled $73.2 million at December 31, 2022 compared with $98.7 million at December 31, 2021 and $91.4 million at September 30, 2022 representing decreases of 25.8% and 19.9% respectively. Turning now to our outlook. We are confident that the work our teams completed in 2022 as 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 million 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 in 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 and 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 results to improve sequentially throughout the year with Q2 revenue up nicely from quarter one and similar to the second quarter of 2022, 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 12b-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 complete the evaluation over the effectiveness of their control environment. We expect to file our 10-K on or before March 31st. Now I’ll turn it back to Rob.

Rob DeMartini: Thank you, Bennett. While we expect the current operating environment will remain challenging, I am confident that our four strategic initiatives 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 Intellibed acquisition in late 2022 provided us with an immediate entree into the luxury end of the market. Since that time, we’ve been working to integrate the premium Intellibed product set while also engineering our existing product lineup to better beat margin €“ better meet margin specifications needed across our distribution channels.

The full Purple product line has been organized into three tiers. The Purple Essentials collection represents our most accessible products with prices under $1,800. This collection is comprised of our Legacy Purple and Purple Plus Mattresses, along with our newly engineered Purple NewDay Mattress priced at $1,000. These products have been engineered for and will primarily be 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. The Restore, Restore Plus and Restore Premier Mattresses are our completely re-engineered 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 Lux collection. We’ll feature our highest-end product ranging from $5,000 to $7,500. This top of the line sleeping experience is delivered through three rebranded Intellibed mattresses Rejuvenate, Rejuvenate Plus and Rejuvenate Premier. These mattresses incorporate superior pressure relief through enhanced gel grid plus intentionally designed to sit deeper within the mattress, along with the enhanced foam layers and our responsive coil system. From a channel standpoint, the Lux 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 reinvigoration of our innovation engine positions us for growth later in the year, it is putting pressure on first quarter results as Bennett it outlined. To prepare for the launch of our new mattresses in 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 the trajectory of our 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 ownable, 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’ve 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. You can expect to see us address a higher-end consumer with our brand messaging in 2023 with a shift in messaging that better articulates the unmistakable benefits of our differentiated gel technology.

While many competitors attempt to differentiate themselves with common materials, one of the hallmarks of the Purple brand is revolutionary technology that provides a truly differentiated sleep experience. We’ll 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 bundle pricing and enhance our messaging with our mattress bases 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 sale through with higher average selling prices and higher margins. The response was very positive and has resulted in the following results. Wholesale product placement commitments have far exceeded our inbound goal of 20%. Dozens of shop and shops confirmed with interest for several hundreds more and 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 ended 2022 with 55 showrooms to 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. While so much change in such a short period of time is never easy, your dedication through this 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 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.

See also 10 Mad Money Stock Picks This Week and 11 Best Cryptocurrencies to Invest In for Beginners.

Q&A Session

Operator: Thank you. Thank you. And our first question is from Brad Thomas with KeyBanc Capital. Please proceed with your question.

Brad Thomas: Hi, good afternoon. Thanks for taking my question. I wanted to talk a little bit more about the rollout of the new products and I was wondering, Rob, if you could talk a little bit more about, the performance that you had been seeing and may continue to be seeing in some of these pilot prototype stores where you had had tested out adding the Intellibed products with the Purple branding and any other signs about what kind of lift a store may see when they get the new assortment. Thanks.

Rob DeMartini: Brad. Thank you. It’s a good question. So to frame for the group, we because of the pace of how we brought the new Lux product to market, we hustled in the fourth quarter and put the Intellibed mattresses with simply a Purple logo on them into approximately 60 different customers 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 idea, will it work? And we were able to demonstrate that not only was Intellibed’s 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 $1,000 to $1,500 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 stores to 300 stores of Intellibed throughout the year or Purple Lux throughout the year. Did that get it, your question, Brad?

Brad Thomas: Definitely very helpful, Rob. And just as we think about the timing of the rollout of there’s a lot to undertake here for you this year, can you just talk a little bit more about some of the timing milestones that we should think about?

Rob DeMartini: Yes, we will, the retailers are destocking right now. We’ll begin to ship wholesale during April and we’ll have a hard conversion to the new line on May 15 in our own channels. So online and in-store. We’ll synchronize wholesale with that conceptually, but because you’ve got so many moving parts across 3,500 doors, there’ll be some that’ll 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 owned channels in a transition conversion of our partner channels in May, June, and July.

Brad Thomas: Very helpful, Rob. A lot of exciting things going on and good luck to you.

Rob DeMartini: Thank you, Brad.

Operator: Thank you. And our next question is from Jeremy Hamblin with Craig-Hallum. Please proceed with your question.

Jeremy Hamblin: Thanks. And wanted to follow-up on some of those points and just make sure I understood where our expectations should be as it relates to that May 15 hard launch. So if I do the math, it looks like your implied revenues for Q2 to Q4 are 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 like second half of the year where you’re looking at $175 million plus a quarter in revenue or any type of color that you can share on that? And again, maybe some tangible evidence in terms of how we can kind of back into that math, it would be super helpful.

Rob DeMartini: 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 stale product not performing as well as the category. And the category is not very strong. So the combination of that has produced a Q1 that has us the $590 to $615 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. As Bennett outlined, we expect Q2 to be pretty typical with a normal quarter in queue, in 2022. And so then from there you guys can do the math. It, there is a definitely an uphill year and I don’t really like planning that way, but given that we don’t start the 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.

Jeremy Hamblin: Okay. And talk me through, the confidence on that, just a little bit more. So, you are expecting product placements presumably slots that are going to increase, I think, you said far exceeding your goal of 20%. And then maybe just a little bit more color on kind of the ASP change that you’re expecting?

Rob DeMartini: Yes, the mix change across the total business will be driven mostly by Purple Lux. 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. So the ASP blend will come from the Purple Lux business. But if you think about the growth year-on-year, there is really three €“ well, four components. 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 a store is 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 that haven’t even annualized yet.

So that will contribute growth through the year. And then marketing is up 11 €“ I want to make sure I get the number right, 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 annualization, new wholesale slots, increased marketing spend, and although we’re expecting, but we didn’t put a lot of building block on the quality of that marketing, that’s if Keira is on the line, 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 will start in May and be heavily delivered in the second half.

Jeremy Hamblin: And just clarifying that, the 11% increase in marketing spend, that’s the total that you are planning for, for the year or that’s

Rob DeMartini: That is correct. That’s correct.

Jeremy Hamblin: Okay.