Purple Innovation Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2024

There are 11 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. Welcome to Purple Innovation First Quarter 20 24 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, Cody McAllister of ICR.

Operator

Please go ahead.

Speaker 1

Thank you for joining Purple Innovation's Q1 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.

Speaker 1

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 Q1 2024 earnings release, which was furnished to the SEC today on Form 8 ks as well as our filing 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 De Martini, Purple Innovation's Chief Executive Officer.

Speaker 2

Thank you, Cody. Good afternoon, everyone. With me on the call today is Todd Bogenson, Purple's Chief Financial Officer. The Q1 marked an encouraging start to 2024 with the 2nd consecutive quarter of year over year sales growth. Sales were within our expected range, increasing 12.5% year over year.

Speaker 2

And if not for a shift in timing of some shipments into 2nd 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 Q4 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.

Speaker 2

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.

Speaker 2

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 Q1 results, particularly in light of the continued sluggish industry environment. The launch of our 3 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.

Speaker 2

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 product and improving brand strength. As we look to the remainder of 2024, we remain focused on 5 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.

Speaker 2

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.

Speaker 2

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. 2nd is improving e commerce mattress conversion. In the Q1, 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 Q2, 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. 3rd 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.

Speaker 2

We've seen some early gains with these initiatives, including decreased discounting and improved production efficiency through multi source procurement and increased plant productivity. Additionally, midway through the quarter, we were able to eliminate the air freight 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. 4th 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.

Speaker 2

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 5th 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.

Speaker 2

We also saw increased traffic resulting from our egg hunt campaign over the Easter holiday. In closing, we're confident that our Q1 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 Q1 financial results in more detail. Todd?

Speaker 3

Thanks, Rob. For the 3 months ended March 31, 2024, net revenue was 120,000,000 dollars an increase of 12.5 percent compared to $106,700,000 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 slots 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.

Speaker 3

Within DTC, e commerce declines were offset by an 11.3% increase in showroom net revenue, driven partially by the addition of 5 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 $41,700,000 during the Q1 compared to 40 $600,000 during the same period in 2023 with gross margin rate at 34.8% versus 38% last year. Gross margin in the Q1 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 percent of total Q1 revenues, up nearly 700 basis points compared with Q1 last year.

Speaker 3

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 $64,900,000 compared to $5,200,000 in the Q1 of 2023. The slight decrease was largely driven by a $5,900,000 decrease in G and A expense related to the non recurrence of special committee costs from 2023, largely offset by investments of $3,300,000 into ad spend and wholesale marketing and sales expense. As a percent of net revenue, operating expenses improved 7 10 basis points to 54% compared to 61.1 percent in the Q1 of 2023. As a result, adjusted net loss in the Q1 of 2024 was $20,400,000 compared to an adjusted net loss of $14,000,000 last year.

Speaker 3

Adjusted EBITDA was negative $13,200,000 versus negative $7,100,000 a year ago. And 1st quarter adjusted loss per share was $0.19 compared to an adjusted loss per share of $0.14 in the Q1 of 2023. Now turning to the balance sheet. At the end of March, we had cash and cash equivalents of $34,500,000 compared with $26,900,000 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 $61,000,000 that was used to refinance and replace our prior debt facilities, while also providing the company with approximately $22,000,000 of incremental available liquidity.

Speaker 3

Net inventories at March 31, 2024 were $72,000,000 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 Q1 performance, we are reiterating our outlook for the full year of 2024. We still expect 2024 net revenue to be in the range of $540,000,000 to $560,000,000 and adjusted EBITDA to be between negative $20,000,000 and negative $10,000,000 And now, I'll turn the call back over to the operator for questions.

Operator

Thank First question comes from Brad Thomas at KeyBanc Capital Markets. Please go ahead.

Speaker 4

Hi, good afternoon. Thanks for taking my question. 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, as I 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.

Speaker 4

Thank you.

Speaker 3

Sure. So this is Todd. First, I should say, there was a number of things that happened in Q1 that were non recurring 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.

Speaker 3

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.

Speaker 4

That's helpful, Todd. And regarding 2Q, is there any more you could share with us about how you're thinking about sales coming together for the Q2? I know generally for the industry, Q2 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?

Speaker 3

Sure. So as we look at the Q2, 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 headwinds that have been noted by folks. So we're going to be working our way through that. As we sit back, just to kind 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.

Speaker 3

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.

Speaker 4

That's great. 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

Speaker 2

that were sort of earlier

Speaker 4

in the transition a year ago as you lap that rollout a year later?

Speaker 2

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 5 out of the last 6 months.

Speaker 2

January was soft in showrooms, but the 3 months prior and the 2 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. So that 25% we're encouraged by and we want to see it continue. Obviously, some of our larger customers made the conversion later.

Speaker 2

Their business is also positive, but we think still has some healthy upside left in it.

Speaker 4

That's very helpful. Thanks so much.

Speaker 2

Thank you, Brad.

Operator

Thank you. The next question comes from Seth Basham at Wedbush Securities. Please go ahead.

Speaker 5

Thanks a lot and good afternoon. My first question is just on slot growth, encouraging signs that it contains the gain slot, especially at top accounts. Can you give us some more color on what's driving that, please?

Speaker 2

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 coming 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.

Speaker 2

So we are not doing much prospecting right now, but still seeing a little bit of growth there.

Speaker 3

That's great. And then on

Speaker 5

the e commerce side, can you give us some more color on the price testing and changes to promotions and shipping? What you learned from that in the Q1 and how you're going to adjust going forward to drive profitable growth?

Speaker 2

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.

Speaker 2

We've cut the discount on a lot of our ancillary products sharply and we're not seeing negative volume implications from it. Mattress is 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.

Speaker 5

Got it. 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 seasonal effects and stronger seasonal sales expectations? Or are there anything else there read into it?

Speaker 2

Yes. I think there's 2 things. I think we ended the year a little lower than we wanted based on demand being a little bit stronger than we wanted. And what you're seeing at the end of Q1 is going into Q2 holiday period or promotional period, so a little bit of buildup. But I think if you look at our track record over time, we feel Todd and I feel very confident.

Speaker 2

Eric's got great command of the inventory and we can keep it where we need it to deliver service. I think the other thing that's clear is our service to our wholesale customers is significantly better than it's ever been before. And we'll try to keep the inventories at the right level to be able to keep that

Speaker 6

up. Thank you

Speaker 5

and good luck.

Speaker 2

Thanks, Seth.

Operator

Thank you. The next question comes from Matt Koranda at ROTH MKM. Please go ahead.

Speaker 7

Hey, guys. Good afternoon. Just wondered if you could maybe touch on the cadence of growth during the Q1. Just curious how you kind of performed relative to your expectations relative to the industry. And it sounds like maybe just a little bit of a lower rate of growth in April May, but still positive thus far.

Speaker 7

Can you just clarify that for us? And on pricing, you said you took action. Can you just clarify what pricing we're talking about here?

Speaker 2

Yes. We took so let me go backwards because I'll lose my way if I don't. We took pricing on mattress in January in our DTC channels. And because of the way our agreements work, it didn't take full effect until early March in the wholesale channel. And really what that pricing was, was a relatively modest to 4%, something like that.

Speaker 2

Yes, about 4%. And it was really to get us back to our competitive benchmarks. When we launched last May 15, we went a little bit below those benchmarks and honestly saw nothing for it. So we took that pricing back January through March. The growth in the quarter was it was good in January, I think a little bit more than low double digits.

Speaker 2

It was high double digits in February and then high single digits in March. I don't know what really to make of that. You get Presidents Day in there. And what we've seen in April May is a little bit of softness as we were off promotion, but we still are going to grow versus the base period that we're very confident in. Did I miss part of that question, Matt?

Speaker 7

No, you got them all, I think. But I guess just clarifying the April, May period was not you didn't see a negative growth, Brent, it was still positive.

Speaker 2

No, we're still growing. Okay.

Speaker 7

We're still growing.

Speaker 8

And then just wanted

Speaker 7

to cover the gross margin commentary in a little more detail. I know Todd mentioned maybe some one time items or some items that do not recur for the rest of the year. But I don't think I heard you quantify anything, but so maybe do you want to take a crack at bridging us on sort of an adjusted gross margin or at least just what items are not going to sustain through the rest of the year that allow the gross margins to step up sequentially?

Speaker 3

Sure. So we ended Q1 with margin at 34.8%. It was down 3 20 basis points versus last year, But about half of that was just pure channel mix. So wholesale grew from 38% of sales last year to 45% this year. And so that had an impact on the margin rate.

Speaker 3

But then the remainder of it really were things that were very isolated to the quarter. We had airfreight very early in the quarter. We had the liquidation of some discontinued hybrid mattresses. Those are the mattresses that were replaced by our Restore line. And then we had some costs for some products that were shipped in Q2.

Speaker 3

So I guess to give perspective, the largest one of those 3 is the cost associated with the excess and discontinued inventory, which at this point we've really moved through the bulk of that. The other thing I'd note, airfreight, airfreight was really limited to January and we haven't incurred any material amount since then, not really planning on incurring any significant amounts for the rest of the year. So each of those three factors that I mentioned are very unique and they are the types of things that should not meaningfully impact gross margin as we go into the future.

Speaker 7

Okay, got it. And then do you want to make it just take a crack at the cadence of gross margin improvement for the rest of the year? I know we've, I think, talked to at least qualitatively or a little bit quantitatively last call about maybe reaching the high 30% or exiting the year in the high 30% range. But do we just want to kind of help build a glide slope for folks to kind of level set everybody's expectations for the remainder of the year in terms of gross margins?

Speaker 3

Yes, certainly. It really should progressively improve as we go across the year. A lot of the operations initiatives that we have in place should really start becoming very significant as a portion of margin as we get into the second half. So maybe a way to think of it, I know consensus is out there for 38% in Q2 and I think we're comfortable with the way people are thinking about that and then improving from there to be approaching 40% by the time we exit the year is how we are modeling things at this point.

Speaker 7

Okay, very helpful. Appreciate it guys. I'll take the rest of mine offline.

Speaker 2

Thanks, Matt.

Operator

Thank you. The next question comes from C. J. Tappellino at Craig Capital Groups. Please go ahead.

Speaker 9

Hey, everyone. It's CJ on for Jeremy Hamlin. Wanted to touch on the consumer real quick. We all know that feeling the effects of higher inflation. Curious what you're seeing from your competitor set in terms of promotions and discounts?

Speaker 9

And then as a follow-up to that, how are you kind of how are you thinking about promotions and discounts moving forward?

Speaker 2

Well, I think, CJ, it remains very promotional, very promotional. And offers have gotten and again, this didn't just happen. It's been happened in the last 24 months. They're deeper, longer, and a significant portion of the year is on major promotion. We are trying to find ways to, 1, maintain volume momentum while reducing the overall discount impact on gross margin and profitability.

Speaker 2

And quite frankly, it's tricky. We don't those answers yet, but we've as I talked about earlier, we've been reducing the depth of some promotion and taking some items off promotion. And quite frankly, it's a challenge because you do sometimes see that in the volume. Now, we reduced some of our ancillary items, as I said before, and have not seen a negative impact. But on mattresses, it's pretty direct.

Speaker 2

And so we've got to do that cautiously. And I think until the category returns to more normal levels of demand, we're not expecting any big changes in that.

Speaker 9

Okay, got it. Thank you. That's very helpful. And then moving to the income statement, looks like marketing and sales took a sequential step down to about $41,000,000 Is this sort of like a new run rate that we should be thinking about for the rest of the year? Do you see that picking back up?

Speaker 3

No. We're doing a number of things as we look to control costs. And that cuts across, as Rob had mentioned, some of the things that we're doing in showrooms to make our showrooms more efficient, all the way to bringing in house some of our marketing activities. And so this really should be setting the baseline for us as we go forward. We'll continue to look for efficiencies, but where you're seeing it is probably a good place to start.

Speaker 9

Okay. Thank you. Very helpful. I'll hop back in the queue.

Speaker 6

Thank you. Thank you, C. J.

Operator

Thank you. The next question comes from Brian Nagel at Oppenheimer. Please go ahead.

Speaker 6

Hi, good afternoon. Hi, Brian. I guess, I want to focus my questions, maybe some follow ups, but just on top line primarily. But Shazool, I recognize that the sales have been sales growth has been bounced around here a bit, but there definitely was a nice improvement from what we saw in Q4 to Q1. So I guess plus 1 to plus 12, plus 13 or so.

Speaker 6

The question is how much of that how much of that is was that improvement on internal improvements at Purple versus did that or did the sector help you out at all?

Speaker 2

I mean, again, as you know, Brian, there's not a great barometer for this category at the consumption level, but I think most of what I've heard is that the category is down somewhere between 5% 10% and maybe closer towards that high range. So I don't think we got any help from the category. I do think on the compare basis, we got some help from a pretty weak base period as wholesalers were getting ready to consuming at the same rate last year, but shipping in less as they were getting ready to make the product shift. So I think some of that 12 percentage points is comparison softness versus a little more strength. But clearly, that's not more than maybe 3% or 4% of that and probably 8% of it is self view.

Speaker 2

I mean, 25% door productivity improvement in wholesale and 11% comp performance in showrooms, that's real growth in a difficult time and we want to see that continue.

Speaker 6

Okay. That's helpful. Then, I reckon we have the guidance for the year, but I guess, we're maybe more qualitatively as we think as a follow-up to that question, as we look through the balance of 2024, assuming just for the sake of simplicity that the sector is not going to turn into a type of tailwind, so it's going to be challenging. I mean, what are the key from internally, what are the key factors that could help to potentially drive some type of acceleration of that sales growth?

Speaker 2

Well, I think I do think that our marketing messaging needs to work harder than it's working right now. It's working, but it can work harder. I don't think we're differentiating our product enough and communicating to consumers what the benefits are. So our marketing team and I are working on that. Again, I don't want to make promises yet.

Speaker 2

We like the guidance we have out there, but we've got to get that investment to work harder. E com is a challenge as well. Our conversion rates of late have been weak, and we've got to fix that. I'm very optimistic about the way showrooms and wholesale is performing. I'm optimistic about what we're seeing in the supply chain and what's still to come.

Speaker 2

I'm very optimistic about the way consumers react to this new product. We get we do a lot of testing and we're very, very confident that this product is performing better than whatever they were sleeping on before. And we have to just get better at communicating that. If we do that, it will accelerate our growth.

Speaker 6

Got it. And then just one final question, just maybe more for Todd, on the balance sheet. So, but I think the guidance implies potentially positive EBITDA second half of this year, if I got that correct. But the question I have, with that, how do you view that, the cash balance? Is this sufficient at this point to continue to get you through this choppy period?

Speaker 3

Yes. We really do believe it is. So we ended Q1 with 35 dollars 1,000,000 in cash. The cash usage we had in the quarter was less than our EBITDA less cash flow or CapEx. So we're managing cash tightly.

Speaker 3

And as you point out, as we get into the second half, all plans are to get ourselves back to breakeven or better from both an EBITDA and a cash flow perspective. So we believe we're well positioned from a cash perspective at this point.

Speaker 6

I appreciate all the color. Thank you.

Speaker 2

Thank you, Brian.

Operator

Thank you. The next question comes from Bobby Griffin at Raymond James. Please go ahead.

Speaker 8

Hey, guys. Thanks for taking

Speaker 3

my questions.

Speaker 8

Rob, just first on your showroom comments, appreciate the detail there and I apologize if I missed this question as part of the script. But did you comment any on how the profitability is trending among those stores or as you've seen some of these positive comps, how is the showroom channel profitability trending?

Speaker 2

It is trending in the right direction. We got a lot of work left to do, but I think we moved 5 more stores from negative to positive in the quarter and are now more than half of them are positive. We got a lot of work left to do and it's tough. I think as I said on past calls, it's when you compare it to the historical pro form a, it's hard to tease out how much of this is brand relative brand strength to where it was before versus how much of its category consumption. But I talked about in the script the exposed grid.

Speaker 2

We're in high priced locations and we've got to find ways to get people into the stores who weren't otherwise on a mattress shopping trip that day and we've got some encouraging things going on. So yes, they're moving in the right direction. Yes, they're getting more profitable. And yes, we got a lot of work left to do.

Speaker 8

All right. Good deal. I appreciate that with especially extra detail with a little over half of them being now profitable. When you look through now you got 60 showrooms or so, when you kind of look through the part that is comp in negative versus comp in positive, are you starting to see some interesting trends that can now be leveraged to kind of improve? I believe it would be the other 44% that were still comping down during the quarter?

Speaker 8

Or is it really just kind of wide based on the differences among

Speaker 2

them? It's a little bit more hit or miss than Scott and I would like it to be. I mean, we're in the same locations with the same co tenancy. We do think that we've got a different degree of maturity in the staff and the stores, and we're trying to make sure that we're coaching them up. But I can't point to one thing and say this is what it is.

Speaker 2

There are a couple of places where we know it's just simply a lease that we probably shouldn't have gotten into. But in most cases, it's investing in the people and the training and make sure that the marketing that supports them is getting people to walk in. And when that happens, we've got a very good consumer experience and one that's getting better at selling as well.

Speaker 8

Okay. And my last question really is just it's a follow-up on, I guess, those comments on maybe feeling comfortable where the Street is around 38% gross margin in 2Q, which we got the step up from the non repeating issues. Anything else that you're kind of seeing as mix moving back in your favor with maybe DTC being a little bit better in 2Q than wholesale? Or is 1Q going to be a peak wholesale quarter? Is there anything else you're seeing in the quarter to date to help us bridge that step up?

Speaker 3

Yes. So where wholesale was in Q1 is much what we expect out of the mix going forward. To be in that mid-forty percent range is solid performance from wholesale and what we had seen across much of the back half of last year. So really more the driver for us is going to be the things that we have control over. We had some selective price increases that we had gone through in Q1 and so we're getting the benefit of that.

Speaker 3

In addition, we are already seeing the benefits off of our operational initiatives, both from a sourcing perspective and a manufacturing efficiency perspective. And so those initial gains as they flow through, they really do start to impact our gross margin pretty significantly.

Speaker 8

Perfect. I appreciate the details. Best of luck here in the second quarter.

Speaker 2

Thank you, Bobby.

Operator

Thank you. The next question comes from Michael Lasser at UBS Securities. Please go ahead.

Speaker 10

Hey, good afternoon. This is Dan Silverstein on for Michael. Hi, Dan. Thanks for taking our questions and congrats on the progress. Firstly, just wanted to ask, given trends in the industry are pretty volatile month

Speaker 4

to month, is there a

Speaker 10

materialize a bit differently than planned? Materialize a bit differently than planned?

Speaker 3

We really are trying to manage our cost structure pretty aggressively when we do see trends that are on the downside. But knowing that we have a gross margin rate of, call it, high 30% range, a lot of that ends up being variable. And then there's a portion of our G and A structure that can be fairly variable, advertising being one of them. So we haven't given out an exact flow through on it, but to maybe think about it in the 25% to 35% range is a fair starting point.

Speaker 10

Makes sense. Thanks. And then just one more, drilling down on DTC, which was flattish year over year. What magnitude of improvement does your sales guide embed for that channel this year?

Speaker 3

I don't think we've gotten down to giving guidance on channel level growth. But clearly, we have a lot of plans in place to get ourselves back to growth in e commerce. This was a quarter where we did not see growth and we've had a number of those over the last couple of years. So the plan really is to get ourselves back on a firm footing and to see a positive trajectory in the e commerce channel.

Speaker 10

Got it. Okay. Well, thank you and congrats on the new wholesale doors as well.

Speaker 2

Thank you. Thanks, Dan.

Operator

Thank you. There are no further questions. I will turn the call back over for closing comments.

Speaker 2

Well, I think just to close, I'd like to make a couple of thank yous. I want to thank the Purple associates that have hung in through a very difficult couple of years, and I think we're starting to see some very encouraging growth. We're cautious about the short term, but confident and convinced that this brand is going to be a major contributor to the category. So I'd also like to thank our wholesale partners and appreciate the analysts that pay attention to what we're doing. Thank you.

Operator

Ladies and gentlemen, this concludes your conference for today. We thank you for participating and we ask that you please disconnect your lines.

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Earnings Conference Call
Purple Innovation Q1 2024
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