Purple Innovation Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 11 speakers on the call.

Operator

Afternoon, ladies and gentlemen. Welcome to the Purple Innovation Second 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. It is now my pleasure to introduce your host, Brendan Frey of ICR.

Operator

Please go ahead.

Speaker 1

Thank you, and thank you for joining Purple Innovation's Q2 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.

Speaker 1

For a more thorough discussion of the risk 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 Q2 2023 earnings release, which was furnished to the SEC today on Form 8 ks as well as our filings with the SEC referenced in that disclaimer. We do not undertake any obligation to update Or all thirty 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 De Martini, Purple Innovation's Chief Executive Officer.

Speaker 1

Rob?

Speaker 2

Thank you, Brendan, and thank you and good afternoon, everyone. With me on the call today is Bennett Nussbaum, Purple's Chief Financial Officer. Since taking the helm of Purple 18 months ago, our focus has been building the right team and implementing the systems and process that will allow Purple to successfully compete and grow the premium segment of the nearly $20,000,000,000 U. S. Mattress industry.

Speaker 2

The entire organization has been driving towards the largest, most innovative product launch in the history of the company And launching a compelling and effective new marketing campaign. The introduction of 11 new products, Including multiple firmness options, 3 new luxury tier offerings and advanced smart bases Began on May 15. Since the launch, there have been several positive signals that our path to premium sleep strategy is the right course for the future of the company, which I'll speak to throughout this call. We introduced the store and rejuvenate product lines and the sleep better, live purple marketing campaign in our showrooms and on our website on May 15 and began the rollout with wholesale partners during the Q2. To date, less than 50 at the end of the quarter, less than 50% Of our wholesale doors were transitioned and in the 2nd quarter and the remaining wholesale partners are set to change over the back half of the year.

Speaker 2

The Sleep Purple Live Better marketing is achieving 2 important goals. First, our advertising, organic content website and support materials clearly communicates the way our proprietary Purple GelFlex Grid delivers 3 key benefits: Unmatched cooling and temperature regulation, pressure relief and instant adaptability, All in the name of deep uninterrupted sleep. 2nd, the Sleep Better, Live Purple campaign linked sleeping on a Purple mattress To an active healthy lifestyle, highlighting the brand's commitment to wellness. Sales improved month over month as the quarter progressed. June was the 1st full month with our new product in market and it was the strongest month of the quarter, up 18% compared with the run rate in the first 5 months of the year.

Speaker 2

Importantly, consumer response to the new premium and luxe mattresses has been strong out of the gate in our showroom channel With average selling prices up 10% or better since launch. We also saw traction in the e commerce channel After several quarters of sequential declines, e commerce sales stabilized in the 2nd quarter. We've already seen several of our wholesale customers increase the number of slots for our Luxury collection based on initial sell through performance. While still early, these initial signals demonstrate that we are on the right path to sustainable and profitable growth. We've also seen very compelling consumer feedback for the new product lines.

Speaker 2

Year to date, we've connected with 7,500 consumers, including more than 200 in home use tests. Survey respondents overwhelmingly agreed that Purple provided better pressure relief, Overall, testers of our new mattress portfolio indicated that purchase consideration was high and that was not just from testers who already own Purple Mattresses. We talked to owners of 2 major mattress brands and 9 out of 10 of those consumers said they definitely would Or probably would consider a Purple Mattress for their next purchase. This overwhelmingly positive consumer feedback It's some of the strongest I've seen in 35 year in my 35 year career. It's really an indicator of the clear purple gel flex grid benefits and the differentiated experience that position us to capture share and grow our position amongst a field of largely undifferentiated While this industry has a notoriously long purchase cycle, we're intently focused on capitalizing On the growing interest for Purple enabled by our new marketing position and fresh new product lineup.

Speaker 2

While the mattress industry continues to face softness due to forward buying in recent years and inflationary pressures on consumer discretionary spending, We're encouraged by the leading indicators in our business that show the path to premium sleep strategy is the road to growth. Looking at our 2nd quarter performance, net revenue of $121,000,000 was up 11% sequentially from the 1st quarter And at the low end of our expectations as the speed at which the new strategies gain traction has varied by distribution channel. Showrooms, where we control the presentation and the selling process, is showing the most encouraging results. And although it's still early in the launch, Our new marketing campaign is delivering the brand benefits and driving increased traffic to our site, to our showroom and to our partner stores. The path to premium sleep strategy is working and it needs to work harder to continue to accelerate our demand.

Speaker 2

Shifting to results by channel, starting with showrooms. Echoing my earlier comments, we're pleased with the early results from the channel, And we have the evidence that our showrooms are delivering the premium experience necessary to support our product launch. In a recent consumer survey, 89% of respondents are more likely to buy after visiting our showrooms and 85% So they would recommend us to family and friends. Over half of consumers noted that they were very or extremely likely To purchase a Purple Mattress in the future after visiting one of our showrooms. From a product Our showroom sales team has done a great job trading consumers up into the luxury line of REJUVINATE mattresses, Which are priced between $5,500 $7,500 with approximately 15% of showroom mattress revenue in June coming from the Luxury Collection.

Speaker 2

This drove a significant increase in average mattress selling price over the baseline during the important Memorial Day sale period. Additionally, our premium and premium plus adjustable basis are exceeding expectations due to the great value and benefits, especially when paired with a Purple Mattress. Moving to e commerce, searches for our brand and total site visits are up dramatically following the launch of the new product and ad campaign, an indication that our new marketing strategy is driving the top of sales driving the top of the sales funnel. With interest growing, we're testing how to best optimize the site in order to capitalize on the increased traffic and drive higher conversion rates. This includes personalizing the website and testing both product messaging and assortment offering, while evolving the overall website design to align with the brand's more premium positioning and maximizing each visits contribution to the business.

Speaker 2

While we turned our marketing engine back on in mid May, the planned pullback in spend prior to that weighed on the e commerce demand during the quarter. We are encouraged that e commerce sales were flat compared to the previous quarter, marking the first time since Q4 2021, The channel did not experience quarter over quarter declines. All ecom major metrics are moving in the right direction and we expect that the business has flattened out And we'll return to sustained growth. From a product perspective, we're seeing customers trade up within our new premium collection more than they had previously, Driving up the average selling price for the ReStore collection. Encouragingly, we're selling more Luxe units online than we estimated for the channel Early in the transition.

Speaker 2

With respect to wholesale, we continue to make timely progress rolling out the new product portfolio to our channel partners. By the end of the second quarter, a little less than half or approximately 3,300 doors were live with our new line of mattresses. As the industry has reported, many retailers reported mixed category results following the Memorial Day holiday, Our new products saw improved velocity from most customers. From a product perspective, we're seeing growing support for our new line And we're hearing from customers that our new products are outperforming the old. This feedback has given us continued confidence in the rollout And we expect to convert the remaining doors throughout quarter 3 with the final third of our doors launching in very early Q4.

Speaker 2

Overall, we're confident that the results from our new path to premium sleep strategy indicate that we've set the right course for Purple. We look forward to seeing our top line recovery accelerate as the positive data points from the Q2 have the business pointed for further improvement in the second half of the year. Adding to our confidence is the new debt facility we signed earlier this week consisting of a $25,000,000 term loan with Caladyne Commercial Finance and a revolving facility led by the Bank of Montreal that provides up to $50,000,000 in revolving loans subject to a borrowing base. This facility, which replaces our prior credit agreement led by KeyBanc, is less restrictive, including no minimum EBITDA requirement, allowing us more flexibility to invest in accelerating our growth initiatives and increasing market share. Looking ahead, our initial guidance for 2023 assume that the U.

Speaker 2

S. Mattress market would show signs of stabilizing as the year progressed. Based on the industry trends we're seeing, we're moderating our outlook. Bennett will walk you through the specifics shortly, but in short, We're using June July volumes to project growth going forward and building in continued modest improvements in the month over month balance of the year. I'll now turn it over to Bennett, who will review the financials and guidance in more detail.

Speaker 2

Bennett? Thank you, Rob.

Speaker 3

For the 3 months ended June 30, 2023, net revenue was $120,900,000 Down 16.1 percent compared to the $144,100,000 in the prior year period and up 10.5% from Q1 of this year. This decrease year over year was primarily due to an ongoing shift in demand For home related products, inflationary pressure on discretionary consumer spending, forward buying of consumers In recent years, industry standard price reductions on the selling of new mattress floor models to wholesale partners and increased discounting of discontinued models sold through our direct to consumer channels. The increase in net revenue on a sequential basis was driven by an uptick in consumer demand driven by the positive response to our new premium mattresses at higher average selling prices. By channel versus prior year, wholesale net revenue declined 15.5% And direct to consumer net revenues declined 16.6%. Within direct to consumer, e commerce declines of 23.1% were partially offset by a 13.5% increase in showroom net revenue, driven largely by the net addition of 16 showrooms over the past 12 months.

Speaker 3

Gross profit dollars were 38,500,000 dollars during the Q2 of 2023 compared to $48,800,000 during the same period last year, With gross margin at 31.8 percent versus 33.9% in the Q2 of 2022. Excluding discounts and the impact of transitional costs associated with the new product launch, adjusted gross margin in the current year quarter was 38.6%. These discounts and costs include industry standard price reductions On the selling of new mattress floor models to wholesale partners, coupled with increased discounting of discontinued models sold through our direct to consumer channels as we transition to our new premium and luxury product lineup. The 470 basis point improvement year over year was driven by the ongoing realization of efficiencies and cost savings put in place during the first half of twenty twenty two. Operating expenses were $75,700,000 or 62.7 percent of net revenue In the Q2 of 2023 compared to $60,900,000 or 42.3 percent of net revenue in the prior year period.

Speaker 3

The increase in operating expenses compared with the prior year period was driven primarily by an increase in legal and professional fees of $8,200,000 incurred by the special committee, including a $4,000,000 accrual made in the Q2 of 2023 for the settlement amount owed to Coliseum. Marketing and sales expenses were also higher in the 2nd quarter as management increased advertising spend to align With the launch of our new premium and luxury product lineup. Advertising spend was $20,100,000 in the Q2 of this year compared to $18,900,000 in the Q2 of last year and $11,700,000 in the Q1 of 2023. Net loss attributable to Pet Purple Innovation was $37,500,000 for the Q2 of 2023 compared to $8,300,000 in the year ago period. On an adjusted basis, which excludes adjustment for certain non cash items and other items we do not consider in the evaluation Of our ongoing operational performance, including gains from change in our tax receivable agreement income and the change in valuation of our net deferred tax Net loss in the Q2 of 2023 was $21,100,000 or $0.20 per diluted share based On an adjusted weighted average diluted share count of 105,100,000 compared to an adjusted net loss of $8,800,000 or $0.11 per diluted share based on an adjusted weighted average diluted share count of $83,200,000 in the prior year period.

Speaker 3

Adjusted net income has been adjusted to reflect An estimated effective income tax rate of 25.9 percent for the current year period compared to 31.7% for 2022. EBITDA for the quarter was negative $31,300,000 compared to negative $8,000,000 in the Q2 of 2022. Adjusted EBITDA, which excludes certain non cash and other items We do not consider in the evaluation of our ongoing performance and as detailed in today's earnings release was negative $18,500,000 Moving to our balance sheet. As of June 30, 2023, The company had cash and cash equivalents of $26,900,000 compared with $41,800,000 at December 31, 2022. The decrease was driven primarily by cash used at Operations of $38,100,000 capital expenditures of $5,800,000 primarily related to additional investments made in our manufacturing facilities and the repayment of the full $24,700,000 outstanding on the credit facility.

Speaker 3

This was partially offset by cash provided from net proceeds of $57,200,000 received from the public offering completed in February 2023. Inventories at June 30, 2023 were $78,400,000 compared with $73,200,000 on December 31, 2022 in support of the new product launch. Turning now to our current outlook. While we have continued confidence in our new product launch, We are tempering expectations for our full year guidance based on 2nd quarter results and persisting industry softness. For 2023, we now expect net revenue to be in the range of $560,000,000 to $590,000,000 And adjusted EBITDA between minus $10,000,000 and breakeven, with gross margins on a reported basis in the mid-thirty percent range.

Speaker 3

Excluding the discounts and transitional costs related to the new product launch, We incurred in the 2nd quarter and expect to incur in the 3rd and 4th quarters gross margins on an adjusted basis for the year are projected to be in the high 30% range. Now back to Rob for his closing comments.

Speaker 2

Thank you, Bennett. The early signs of progress following the launch of our new product in premium marketing position indicates that our path to premium sleep strategy is working. We have built a talented team whose work has translated into incredible consumer satisfaction built on the foundation of demonstrably superior And differentiated product coupled with brand love that we are only beginning to leverage. Looking at the future for this business, I'm as optimistic as I've been about the This quarter was a significant step forward, but it is just the beginning. The product launch is the foundation of Purple's emergence as a true premium challenger brand, and I'm confident that our current and future innovation pipeline will accelerate our position in the industry.

Speaker 2

I want to thank our employees and our wholesale partners for the significant role they played in getting us to this point. I look forward to growing the Purple brand together in the quarters and the years ahead. Thank you. That concludes our prepared remarks. Operator, you're now ready to take questions.

Operator

We will now begin the question and answer session. The first question comes from Brad Thomas with KeyBanc Capital Markets. Please go ahead.

Speaker 4

Hi, good afternoon, Rob and Bennett. Thanks for taking my question.

Speaker 2

Thank you, Brad.

Speaker 4

I wanted to just kick off asking about the new product and the revenue outlook here. It Sounds like there's certainly a number of very encouraging signs about the initial reaction to it. Can you give us a little bit more color around maybe how July early August have been trending. And as we think about the guidance for the second half of the year, if I've done the math right, it implies Sales in the second half of the year will be up about 15% to 25%. Any more color on maybe how you're thinking of the trajectory in the back half?

Speaker 4

Thanks.

Speaker 2

Thank you, Brad. And yes, I agree the guidance is a It's wide for the amount of year left, but it speaks to how early we are in this brand rebuilding of both momentum and then doing it That's a difficult category. You've done the math right. We've got to average about $55,000,000 a month to hit the low range of the guide. We've got average about $60,000,000 a month at the high range.

Speaker 2

So on a month to month basis, it's a relatively modest amount of differentiation, but it's still Mostly ahead of us. The signs I talked about, they continue to grow as we expand the wholesale conversion And e commerce and showrooms are making progress. So that's how we came to that guidance and it definitely requires a pickup in sales. We're relying a little bit less on the general market pickup because it seems like that's just been slower coming than I think all of us hoped for.

Speaker 4

Got you. That's helpful. And Bennett, you made some comments around gross margin for the year being in the mid-30s. Just if we try to look through some of the transitions here, what do you think sort of a run rate pro form a Gross margin looks like for you just with the transition being complete, not even in the layer any other operational opportunities that you may What is maybe the run rate pro form a

Speaker 5

look like?

Speaker 3

If you look in the press release today, the last page bridges the reported Gross margin and the financials, what I consider to be the operating gross margin, all things being equal, and the operating gross margin For the quarter, it was about $30,600,000 And I think that's a fair number On an operating basis, what we should run for the balance of the year in the absence of a big volume pickup, where we would have some operating leverage.

Speaker 4

Got you. And Bennett, presumably though with the Luxe And the rollout occurring, I would assume that there's probably opportunity for that to move even higher as the rollout goes forward. Is there a good way to think about what the base may look like for you in 2024 to build off of from a gross margin standpoint?

Speaker 3

Well, I think if you start with that number, we have opportunities along the lines of purchasing better, Finding a little more efficiency in our plants and finding as we get the volume, our cost absorption spread over warm mattresses Should provide a nice opportunity.

Speaker 4

Got you. Thank you so much. I'll turn it over to others.

Speaker 2

Thank you, Brad.

Operator

Our next question comes from Brian Nagel with Oppenheimer. Please go ahead.

Speaker 6

Hey guys, good afternoon.

Speaker 2

Hi Brian.

Speaker 7

So my first question is,

Speaker 6

I think it's going to be somewhat of

Speaker 7

a follow-up to Brad's question, but Just with respect to I'll make sure I understand this dynamic. So we gave a lot of very solid indicators on the initial performance of these products. But then you also trimmed guidance for the balance of the year. So not to get too nuanced here, but as you look at that guidance for the balance of the year, Is the sort of say the new product component of that tracking in line with your expectations, the weakness of the market? How should we think about that balance basically?

Speaker 2

Brian, if I understand the question, I think the trimming of the guidance is It is mixed with both of them, right? I said as I said, the strategy looks clearly like it's working. It's got to work harder. There are general signs of improvement in each channel, but there are also areas that we know have to get better. So some of that we own.

Speaker 2

I think some of it is also we did expect the market to be generally a bit healthier than it's been. I think most retailers I've talked to would say Memorial Day and 4th July were decent holidays, but the periods in between have been Flatter than all of us like. And so it is a combination of both

Speaker 6

of those

Speaker 2

things. Our strategy is, as I said, I think it's right, it's got to work harder, But we also are discounting out any market recovery in the rest of the year.

Speaker 6

Got it. Okay, that's helpful. And then

Speaker 7

my second question related to all that, but where are you on a from a marketing standpoint? Is the marketing of these new products now in full force or You have more

Speaker 2

to come. We definitely have fine tuning to come and we have some spending to come that is in that plan right now. There are parts of the marketing campaign that we know are working very well, particularly delivering the benefits of Grid. There are portions of it that we know have to work harder and most of that revolves around how premium the brand is versus the brand some people remember. And so we've got to continue to sharpen that.

Speaker 2

Kiira's team is working daily to ensure that the e commerce presentation or more importantly, the website presentation, Because it serves all channels, is making very clear what the benefits of Purple and why you should buy Purple. And That's a constant struggle, but it's definitely not fully dialed in yet. I appreciate it. Thank you. Thank you, Brian.

Operator

Our next question comes from Jeremy Hamblin with Craig Hallum Capital Group. Please go ahead.

Speaker 8

Hi, thanks for taking the questions. And I want to come back to the revenue guidance to start. Just to be more direct in terms of your July performance, right, you've guided effectively to Just at the low end of your guidance, dollars 55,000,000 per month, did you see that level of sales in July Or something higher than that?

Speaker 2

Well, we obviously haven't closed out July fully yet, but it's trending that direction. We're not all the way there. I mean, I Gave you the averages on a per month basis, but it's going to build through the year, particularly driven by holidays and Black Friday and that type of thing. We were not all the way there in July.

Speaker 8

Okay. It seems like okay. So Just a follow-up question to that is, I think you indicated roughly 50% of wholesale port partners Has converted with the new product as of the end of the quarter. I think that Seems like it's a little bit behind where your expectations were in May. And if that's Okay.

Speaker 2

At your point and slightly behind that on doors, and obviously, we've got as we've Q and A before, we've got some customers who have just chosen to go much later in the year for their own reasons. Has it been slower than I'd hoped? Yes. Is there any message in there? The only message I'm learning is this is hard to do.

Speaker 2

There's been no loss of support. I just came out of 2.5, 3 days in Vegas where I talked to about 35 of our customers, our team talked about 80. They continue to be fully in the camp of the brand and the initiative, and it's taken longer. I was In Atlanta, day before yesterday, speaking with a customer and they coordinated the launch meetings and the launch timing With 2 of our competitors. Some do that, some choose to do it individually.

Speaker 2

So we are a little bit subject to There are plans and what I'd like to see it happen faster? Yes, absolutely.

Speaker 8

Okay. Is it fair to us another quick hitter here on the revenue guidance. Is it fair to assume that built in your guidance number Is Q4 higher than Q3?

Speaker 2

Yes.

Speaker 8

Okay. And then just there's a lot of noise around the G and A side here, you've got costs, significant costs Related to the Board special committee fees, legal fees associated with that. Yes, I think in total that amounted to about $11,000,000 in the quarter, the company had to pay. And then maybe $1,300,000 in executive costs. I just wanted to get an understanding.

Speaker 8

Is that kind of the math, Bennett, on what you see? And In terms of presumably the special committee fees and the legal fees are in the rearview mirror. But In terms of the executive cost, the $1,300,000 is that something that you're still We should still expect here in Q3, Q4?

Speaker 3

Yes. I think we'll see that in Q3 and Q4 and that will go away, But it will remain with us this year.

Speaker 8

Okay. And are these costs that are being incurred for specific positions?

Speaker 3

A lot of it has to do with our financial planning group and certain executives like myself who are interim.

Speaker 5

Got it.

Speaker 8

Thanks for the color and best wishes.

Speaker 2

Thank you, Jeremy. Thank you.

Operator

Our next question comes from Seth Basham with Wedbush Securities. Please go ahead.

Speaker 9

Thanks a lot and good afternoon. My first question is just on the wholesale rollout that you're talking about earlier. Have you seen any customers that have cut orders or cut number of slots they plan on adding relative to 3 months ago when you spoke to us?

Speaker 2

No, we haven't, Seth. First of all, thank you for the question, Seth. We haven't. As I believe I went through in Last quarter, there was definitely slippage coming out of Las Vegas to execution, and that was about 5 percentage points Of slots. Since then, we've seen no deterioration.

Speaker 2

And I want to reinforce, the Longer time to deploy than I planned does not speak to the customer's energy behind it. It speaks to the executional Challenges, some on our side, some on their side, but their energy for the initiative has not changed at all and it hasn't slipped beyond what I Detailed last quarter, that was I would chalk it up to the difference between showroom enthusiasm and the execution of having to get the work done.

Speaker 9

Got it. Fair enough. And then secondly on gross margins, in terms of the performance this quarter relative to your expectations, obviously your volume came Sure. So there's more fixed cost leverage within the gross margin results. But was there anything else that drove the weaker gross margins and plan?

Speaker 2

We did have a few operational issues. We had some air freight in there that we would hope not to recur. We had to slow the lines down a bit as Eric was learning how to make these mattresses at the highest quality. So most of it will outgrow and I'll let Bennett comment as well. But We do feel like, while volume has certainly been a significant challenge, we've got control of our expenses.

Speaker 2

Whether it's people hiring or our operational costs, we do feel like we've got control of it and it's being spent Where it's intended to be spent, with a few $1,000,000 not more than that of surprises in this quarter.

Speaker 3

Yes. As I mentioned earlier, the 38.6% at our current volumes is a very solid performance. It was cut back because of basically the half price mattresses and discounting. We have the same mattress cost with less revenue. And then as Rob said, we had 1 or 2 onetime operational issues.

Speaker 3

But the 38.6% is a very solid number given our current volume And our current outlook is that we can improve on that, as I said earlier, through purchasing and through volume leverage, Primarily when we get those things. So yes, we feel very good that we're up for the sake of argument 6 points from last year, Okay. Five points and then we can hold that on an operating basis, if not a reported basis due to the discounting of the transition.

Speaker 9

Got it. And just to make sure I have my numbers right, coming out of the Q1 of your results, I think you were commenting that you expected gross margins to be In the low 40% for the full year. First of all, is that right? And is that on an adjusted basis or is that on a reported basis?

Speaker 2

Yes. We had said we'd hope to exit the year at 40 and that was on a reported basis. And I think the volume softness will put some pressure on that, But we're somewhere in between that and the $0.38 that Bennett just talked about.

Speaker 9

Fair enough. Thank you so much.

Speaker 2

All right. Thank you, sir.

Operator

Our next question comes from Matt Koranda with Ross Muken, please go ahead.

Speaker 10

Hey, guys. Good afternoon. Thanks. So just maybe coming back to the guidance on the top line. Just curious, so if we're not at the sort of level of growth That is implied in the back half guidance in July.

Speaker 10

Why set the guide there? What are you seeing And sort of future order flow or launches with incremental also customers, it gives you confidence that you're going to hit the sort of the 19%, I guess, growth that's implied in the back half?

Speaker 2

Yes. It is based on the progress. We've invested a lot in this initiative and we need to make sure that it works. We are seeing improvement month on month and we're projecting that through the year and adding in the holiday seasonality that It is in the normal shape of the business. So it's still ahead of us, but the signals are Pretty clear of where they're going to come from, wholesale expansion, showroom productivity and a stronger e commerce business.

Speaker 10

Okay. And then any sense or sort of commentary that we can get on the percentage of doors that you're going to be Transitioning over in the Q3 versus the 4th, maybe just so we can get a better understanding for the ramp up there?

Speaker 2

Yes. The beginning of the 4th is a big number. So the balance of everything else will happen in Q3. I'm Doing this in my head right now, but it's probably about 400 doors in Q3 and then the remainder the remaining 1,000 at the very beginning of Q4. Those are rough, Matt.

Speaker 2

They're pretty close.

Speaker 10

All right, perfect. That's helpful. And then just wanted to make sure we put a finer point on this and make sure everybody understands the adjusted EBITDA guide. That does not Take account or add back the adjusted gross margins that you're highlighting for folks just in terms of the launch costs?

Speaker 3

That's correct.

Speaker 10

Okay, got it. Any is there any way to help us understand sort of The adjustments in sort of a dollar basis that you'll be taking in the 3rd Q4 associated with the launch, I know you gave us kind of the rough spread between adjusted gross margin And the reported gross margin, but Bennett maybe any help on the dollar costs there? Yes. I would assume those are real costs for you.

Speaker 3

Just to put it in perspective, again referring to the page the last page of the Press release, we said it's about $12,000,000 for the first half, actually for the quarter. So I think from a stock standpoint, as Rob said, we're more than halfway through. So I think it will be somewhere Less than half of that, half or less of that number in the next two quarters, Quarter of magnitude. Okay.

Speaker 10

All right. Yes, that helps. And then just on the balance sheet, curious if you could maybe highlight Any of the costs with the new term loan that you'll be incurring, is that 25 I would assume that 25% was fully drawn at the close and then ABL is going to be drawn up and down based on sort of working capital needs, but maybe just put a finer point on that for us.

Speaker 3

I think you said it exactly right. Yes. I think you said exactly right. We've taken down the whole 25. We've taken down nothing on the ABL.

Speaker 3

And that will be determined by basically our profitability in the second half. As you can see, we managed our inventories a lot Eric did a lot closer And we're able to avoid the build and the line draw that we expected in the 2nd Q3. Ending the quarter with no debt It was quite healthy. And I think by the end of the year, we'll have a little bit more in inventory. And our CapEx, again, considering cash in the first half, was only about $6,000,000 but that will be higher in the second half As we open about 6 showrooms.

Speaker 3

So I'd say that we'll probably if I we might get into the line Towards the end of Q3, maybe in Q4, I'd like to avoid that, but it's very Probable, very possible that we will get into the revolver.

Speaker 10

Okay. And then just the cost of the term loan, any color on sort of the run over LIBOR or whatever, so we can take into account interest expense?

Speaker 3

It's in our Q. It's so far plus, I believe, 8.

Speaker 10

Okay, got it. I'll leave it there guys. Thank you.

Speaker 2

All right. Thank you, Matt.

Operator

Our next question comes from Bobby Griffin with Raymond James. Please go

Speaker 5

ahead. Good afternoon, everybody. I guess first, Rob, on the June data, Can we just talk a little bit more about that? Is that excluding the floor model ship ins that are taking place as you guys are launching, so it's Clean kind of organic growth of the new products or does that June step up also include some of the floor models that would be shipping in Do these new retail accounts that we need to keep that in mind when we think about what June was showing us?

Speaker 2

Yes, it definitely includes the floor And there's been a debate in here of is that really consumption or not because they're selling off the one that's there and replacing it and replacing it at Half the revenue or discounted revenue to us. But yes, it's in there and it will be We'll have more of that the rest of the year. But as Bennett said, we're a little bit ahead on slots and behind on doors. So there's less of that to come than we've experienced in the Q2.

Speaker 3

But it's

Speaker 2

mixed into the sales line and the gross margin line.

Speaker 5

Okay. That's helpful. And then, Vinit, when we think about I appreciate the detail on 4Q versus 3Q revenue, but when we think about the EBITDA side of that same equation, Is it the opposite since we're going to be doing more doors in the 4th quarter, so we'll incur more of the profitability From the launch cost in the Q4 or am I trying to cut it to then there?

Speaker 3

I think it's probably more related to slots than it is to doors. If I had put weight on 1 or the other, and we're over half our slots. So I don't think it would be worse. So I wouldn't cut it too finely.

Speaker 5

Okay. All right. And then Since we're currently kind of still in the middle of it, are the plants still making the old product line too, so that is some inefficiencies Running through the manufacturing facility or are you fulfilling the old line right now for the customers that haven't transitioned just out of inventory on hand?

Speaker 2

No, we're still making both lines right now. We've Eric's worked ahead a bit on the old stuff, because we can see the end there, but there's still Reasonable amount of doors that are buying the old product.

Speaker 5

So that's some level of inefficiency Running through the business, right, Rob? I mean, is that fair to say?

Speaker 2

It is. And this is a discussion I've had with them. Changeovers are not a huge deal for us. We Enjoy a pretty flexible plant, but it does impact the supply lines because it's twice the types of covers to carry, twice those types of things. So there Should be continued efficiency to get when we start growing volume and it's less changeover related than we've been in the last two quarters.

Speaker 5

All right. And then lastly for me, is the media plan for the second half still roughly about the same when we talked last 1Q, I think About 18% or so?

Speaker 2

Yes. We are doing everything we can to protect that even with the challenging volume because I believe we've got to grow our way out of the position we're in.

Speaker 5

Absolutely. I appreciate the details. Best of luck here getting the launch complete in the back half.

Speaker 2

Thank you, Bobby.

Operator

Our last question comes from Atul Maheshwari from UBS. Please go ahead.

Speaker 6

Good evening. Thanks a lot for taking my questions. Rob, as you know, there is a good amount of seasonality in the mattress business. So I just want to better understand Context behind the June commentary of business up 18% Versus the 1st 5 months of the year. Could you provide some perspective on whether June is up year over year?

Speaker 6

And if so, By how much? Because I just want to bid on that.

Speaker 2

No, Atul, I

Speaker 6

can't step up you need to.

Speaker 2

I completely understand your question, and it's not up year on year, Yes. I'm forgetting what last June was, but it was 15% higher or something like that. To try to get at that because I've been looking for the signals, I went I can look at the 1st 5 months versus June July for the last 5 years. And that 18% lift, Last year, it was plus 4%, the year before that, it was minus 15%. And you have to go all the way back to 2019, where we saw a 20% And just footnote, 2019 was probably the last normal year this category has had in the last 5.

Speaker 2

So I guess that there's seasonality in June, but the lift looks like the business is performing pretty clearly and that's why I chose to talk about it. But I do understand the seasonality of the 1st 5 months versus June July. We used June July to amend the guidance To the range that Bennett laid out.

Speaker 6

Got it. That makes sense. And then as my follow-up, Rob, in In the prepared remarks, you provided a very bullish take on how the showrooms were doing. Could you provide some take on How the wholesale doors that have already that already have the new products, how is the sell through there? What are you hearing from them?

Speaker 6

And If they're not performing at the same level of at the showrooms, what do you need to get them there?

Speaker 2

It's a good question. It's the same one I've been asking our team. We're not good at POS predictions in the short run. I did sit with all of our big customers in Vegas beginning of last week, and they are uniformly Optimistic in telling me that slot by slot sell through is better than it was before. They're dealing with a total category that's still not as healthy as they'd like.

Speaker 2

There's a lot of mixed noise in the system, but it is anecdotal, which I don't like, but it's all I've got to share, but it was Unanimous that they felt like the new line was performing better than the line we had in there before. And in many cases, you can see it in the shipment numbers.

Speaker 6

Got it. Thanks for that color and good luck with the rest of the year. Thank you.

Speaker 2

Okay. Thank you, Atul.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Rob De Martini for any closing remarks.

Speaker 2

Thank you, Megan. No closing remarks for me. Thank you for the interest in the business and appreciate your questions and hearing our story As we close through Q2. Thank you very much.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Purple Innovation Q2 2023
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