Purple Innovation Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 5, 2024

There are 12 speakers on the call.

Operator

gentlemen, and welcome to the Purple Innovation Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow after the formal presentation. It is now my pleasure to introduce your host, Cody McAllister of ICR. Please go ahead, sir.

Speaker 1

Thank you for joining Purple Innovation's Q2 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 Q2 2024 earnings release, which was furnished to the SEC today on Form 8 ks as well as our filings with the SEC referencing 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 P.

Speaker 1

Martini, Purple Innovation's Chief Executive Officer.

Speaker 2

Thank you, Cody. Good afternoon, everyone. With me on the call today as usual is our CFO, Todd Bogan son. We're also joined this afternoon by Chief Operations Officer, Eric Haynor. While our volume remained challenged in the 2nd quarter, we're encouraged by the overall performance.

Speaker 2

We're making real strides in becoming cash flow positive and delivering improved profitability in what continues to be a very challenging market. We remain focused on the things within our control and are managing our costs, continuing our investments in innovation and marketing and ensuring our company's business model is more durable and suited for the market, we expect to remain challenging for the balance of the year and maybe beyond. Our adjusted EBITDA improvements in the 2nd quarter are driven by a focus on better sourcing and improved supply chain operations, and we expect to maintain these gains over time. As a result of the progress we've seen, we're reaffirming our adjusted EBITDA outlook for 2024. However, given the deteriorating industry trends that led to a shortfall in our 2nd quarter revenue, we're lowering our top line guidance range by $50,000,000 We remain confident in our longer term market opportunity for Purple and our 2nd quarter performance reinforces our belief that our path to premium fleet strategy is moving the company towards our goal of sustained profitable growth.

Speaker 2

On today's call, I'll share some highlights of our 2nd quarter performance, followed by an update on the progress of our 5 strategic initiatives, of which Eric will discuss the manufacturing and supply initiatives that his team has been implementing and the success of their efforts to improve gross margins. Lastly, Todd will discuss our quarterly financial performance and our updated 2024 full year guidance outlook in more detail. Q2 marked our 3rd consecutive quarter of year over year top line expansion with total sales up 2% in the period. While we continue to navigate a challenging sales environment, we're seeing encouraging signs that our new products and new brand messaging continue to gain traction with consumers and capture market share. That said, we continue to see variation in performance by channel.

Speaker 2

Direct to consumer revenues in total were down with showroom gains offset by e commerce softness, while our wholesale channel experienced growth. Showroom revenues increased 10.6% driven by an increase in average selling prices from both strategic price adjustments early this year and a sizable mix shift into our higher priced Luxe collection from our Essentials and Premium collections. Importantly, we observed a consistent month over month increase in mattress average selling prices, indicating strong and growing consumer acceptance of our new product offerings and showrooms. Over half of our showroom locations opened more than 12 months had positive sales in the quarter. In our e commerce channel, revenue was down 5.7% for the 2nd quarter as our efforts to improve personalization and streamline the website have taken longer than initially expected.

Speaker 2

Encouragingly, e commerce gross margins improved meaningfully year over year, helped by price increases, lower discounting and a range of initiatives to lower product costs while maintaining quality. We also were more efficient with our media while still supporting omnichannel traffic. Meanwhile, the partnerships we've cultivated with our retailers to expand and showcase our premium assortment led to a 7.2% year over year increase in wholesale channel net revenue. This performance was highlighted by solid growth in our top accounts as well as doors we've added since last year. As we look to the back half of twenty twenty four, we remain focused on 5 key initiatives to drive sustainable and profitable growth, which are: 1st, prioritizing productivity in our existing wholesale and showroom doors 2nd, improving our marketing effectiveness 3rd, driving e commerce conversions 4th, bringing new product and innovations to the market and 5th, driving gross margin improvement through manufacturing and supply chain optimization, which Eric will discuss shortly.

Speaker 2

1st, we're prioritizing the productivity of our existing wholesale and showroom doors. In our wholesale channel, we continue to improve the quality of our partnerships and expanded our co op advertising relationships with several key accounts. Looking ahead, we're continuing to invest and expect to launch more marketing partnerships in the future, which should drive door productivity. In our showroom channel, as we previously discussed, we're focusing on increasing the productivity and profitability of our existing fleet. The work we're doing includes establishing a more focused selling environment with new demand driving tactics such as mattress carryout services and increased in store pillow inventory.

Speaker 2

Additionally, we rolled out a new consumer financing partnership at the end of May that more closely aligns with industry standards. The new financing should help drive customers to trade up and increase attachment rates of accessories. Along with these top line enhancements, we continue to improve showroom operating costs through labor and other store expense optimization activities that are enhancing profitability. 2nd is improving our marketing effectiveness. Our marketing will support profitable growth in 2 ways by enhancing creative and by improving media efficiency.

Speaker 2

In terms of enhancing creative, the premium branding we launched last year in connection with our new product offerings has been outperforming the previous branding and we believe there's potential to further evolve the marketing creative to attract more consumers. Purple Marketing grabbed attention, educated, entertained, drove curiosity and inspired sharing, and we believe there's opportunity to bring more of those elements into our premium branding. Next, we're focusing on media efficiency through deeper understanding of our customers, their media usage and their shopping behavior. We're directing spend to underpenetrated high sales potential geographies, adjusting the cadence of our ad spend to align with consumer demand periods and shifting some of our upper funnel spend closer to key wholesale distribution points. Additionally, we recently moved Digital Media Management back in house to increase agility and performance.

Speaker 2

Our 3rd initiative is driving e commerce conversion. As we discussed on our last earnings call, our focus in Q1 was on improving e commerce profitability. And in Q2, we turned our attention to driving conversion improvements through personalization and streamlining of the website. We've not seen meaningful results yet and we continue to focus on these efforts. 4th, we remain committed to bringing new products and innovation to market.

Speaker 2

As a company born from innovation, we believe that to engage customers, we need differentiated and effective product benefits that reward customers when they train up. Our path to premium sleep strategy is working and is allowing us to weather these difficult times. We'll continue to invest in innovation to help grow the category and get more people sleeping well. Our customer research and low return rates indicate this direction is sound. Our research and development initiatives are generating new and more cost effective technologies and intellectual property, which not only helps demonstrate our commitment to leadership in the sleep category, but positions Purple for the next stage of growth.

Speaker 2

We expect multiple new product launches across our major product categories over the next 12 to 18 months as we continue to drive our path to premium sleep strategy and look forward to furthering Purple's position as the premier sleep innovator. I'll now turn the call over to Eric to discuss with you our 5th key initiative.

Speaker 3

Thanks, Rob. It's a pleasure to be speaking with everyone today. Over the last year, our team is focused on driving cost savings through supply chain initiatives and manufacturing efficiency, which has led to a significant breakthrough in gross margin in the Q2. Gross margin was up more than 1,000 basis points year over year and 5.90 basis points sequentially, exceeding our recent improvement trajectory and meeting our 40% year end target midway through 2024. When you normalize that for the premium product launch impact in 2023, the gross margin improvement was still noteworthy, up 3 50 basis points year over year.

Speaker 3

It's a meaningful structural improvement in our volume dependent input cost that we believe we can sustain going forward. In order to deliver these cost changes, the operations team pulled on 4 primary levers. First, we delivered direct material cost savings from our supplier diversification efforts becoming less dependent on sole source materials. 2nd, we generated strong efficiency gains in our plants. 3rd, we're driving improved scrap and yield results from our continuous improvement efforts.

Speaker 3

And finally, our scheduled delivery program for outbound freight has given us both cost improvements and improved delivery reliability. As I look forward, we're optimistic about additional opportunities we see ahead of us. We still have more supplier diversification work that expect will deliver savings later this year and we continue to optimize our outbound freight network. Additionally, our lean manufacturing efforts are already manifesting themselves in plant performance improvements. While there are some headwinds such as inbound freight from overseas suppliers and freight mode mix on some of our outbound delivery costs, we do expect these are going to be manageable and they're not going to limit our ability to improve our cost of goods.

Speaker 3

We've made great strides to figure out how to run the company profitably at this size and we believe there's room for continued improvement on all of our input costs inclusive of landed materials, conversion labor, plant yields and outbound freight. One last thing I'd like to highlight is that in Q2, we completed deployment of a systemic planning capability that's already given us improved visibility and control over inventory management. We expect this will provide some nice gains in our inventory cash requirements. All this ongoing work is going to greatly our bottom line and shareholder value as the market rebounds and our growth accelerates. I'll now turn the call over to Todd to take us through the financials and our expectations for the back half of twenty twenty four.

Speaker 3

Todd?

Speaker 4

Thanks, Eric. For the 3 months ended June 30, 2024, net revenue was $120,300,000 an increase of 2% compared to $117,900,000 last year. The increase was largely due to the growing positive response to our new product lineup. By channel, wholesale net revenue increased 7.2% in the period, driven primarily by strong demand for our new product line. Direct to consumer net revenue was down 1.8% in the 2nd quarter with e commerce declines of 5.7% being offset by a 10 0.6% increase in showroom net revenue.

Speaker 4

The double digit growth in showrooms was driven by the addition of 4 net new showrooms over the past 12 months, along with higher mattress ASPs compared to last year as we continue to successfully sell customers on the benefits of our higher tiered product set. Gross profit was $48,900,000 during the 2nd quarter compared to $35,500,000 during the same period in 2024, with gross margin at 40.7% versus 30.1% last year. To note, when adjusting for launch costs in the prior year period, our gross margin still expanded by 3.50 basis points. On a sequential basis, gross profit improved $7,200,000 or 17 percent and gross margin rate improved 5.90 basis points. The significant improvement in gross margin was largely due to the operational efficiency improvements implemented over the last 12 months that Eric just covered for us, along with comparability to the year ago period, which contained significant non recurrent costs related to our new product launch.

Speaker 4

Operating expenses were $63,500,000 compared to $75,700,000 in the Q2 of 2023. The decrease was driven by an $8,300,000 decrease in G and A expense related to the non recurrence of specialty costs from 2023, along with a $4,200,000 reduction in advertising spend. As a percentage of net revenue, operating expenses improved more than 1,000 basis points to 52.8% compared to 64.3% in the Q2 of 2023. As a result, adjusted net loss in the Q2 2024 was $13,800,000 compared to an adjusted net loss of $23,900,000 last year. Adjusted EBITDA was negative $4,100,000 versus negative $21,500,000 a year ago.

Speaker 4

And 2nd quarter adjusted loss per share was $0.13 compared to an adjusted loss per share of $0.23 in the Q2 of 2023. Now turning to the balance sheet. At the end of June, we had cash and cash equivalents of $23,400,000 compared with $26,900,000 at December 31, 2023. Note that our cash balance does not include an incremental $7,300,000 received from an insurance settlement in early July. Net inventories on June 30, 2020 2024 were $69,700,000 down 11.2% compared to June 30, 2023 and up 4.2% compared to December 31, 2023.

Speaker 4

Turning now to our outlook for the balance of 2024. We outlined our initial guidance for 2024 on our Q4 call in March. We discussed how achieving our targets was not predicated on market conditions improving. That said, it did not contemplate industry demand slowing further following 2 years of double digit declines. This change is the primary driver for us adopting a more conservative top line view for the remainder of 2024.

Speaker 4

As a result, we're lowering our full year 2024 net revenue outlook from a range of $540,000,000 to $560,000,000 to a range of $490,000,000 to $510,000,000 In addition to current market events, our updated outlook reflects lower e commerce sales as we continue to refine our go forward strategy and prioritize profitability over growth for this channel in the near term. However, due to our strong gains and operational efficiency, we do not expect the lower top line to impact adjusted EBITDA and we're reaffirming adjusted EBITDA to be between $20,000,000 and negative $10,000,000 for the full year, including our expectation to achieve adjusted EBITDA profitability in the 4th quarter, even at these lower expected net revenue levels. For your modeling purposes, we expect 3rd quarter profit to be impacted by deleverage from lower than expected volumes, which will be more than offset by incremental sourcing, production efficiency and other cost savings in the 4th quarter. And now, I'll turn the call back over to Rob for his closing comments.

Speaker 2

Thank you, Todd. Thank you, Eric. While we remain in a very difficult demand environment, we're committed to focus on the areas we can control and to continue to adapt our business model to ensure we can weather the current market conditions, create the runway to enable this strong brand to accelerate growth when market conditions improve. We expect to exit the year with stronger gross margins, improved cost management and effective marketing and innovation investments that will produce positive cash flow and enable continued investment in growth. There is no question about this brand staying power.

Speaker 2

People want and love Purple. Purple has the highest satisfaction rate in the category with 98% of customers loving their Purple mattress, a testament to the integrity of our innovative product. That strong satisfaction and brand affinity leads to consumers talking about our brand. Our unaided brand awareness is 2nd highest in the category with many of our customers coming to Purple from friends and family recommendations. This category needs innovators and brand investors.

Speaker 2

We have been and continue to be committed to growing the category through product innovation, marketing awareness and omnichannel availability. I'd like to end by thanking our partners, suppliers and customers as we continue to navigate this young company through very difficult market conditions. I'd also like to thank all our Purple associates for their commitment to help more consumers sleep well. Operator?

Operator

We will now begin the question and answer session. And our first question for today will come from Bobby Griffin with Raymond James. Please go ahead.

Speaker 5

Good afternoon, everybody. Thanks for taking my questions and congrats to the team on the nice improvement in gross margins.

Speaker 2

Thanks, Bobby.

Speaker 5

Ezra, I want to start, could you maybe just talk a little bit about the progression of the quarter and kind of what you saw throughout the quarter from a demand perspective? Did it get better as we move through the quarter and into July early August? Then kind of as a second part to that, I know we only have I know we rolled out the new financing tool at the end of May, so we only have 2 months. But have you seen anything noteworthy in those 2 months post that new financing offering within the showrooms?

Speaker 2

Yes, Bobby, let me answer both those and I'll answer them in reverse order. I think the financing is clearly driving trade up and attachment in our showrooms. ASP for mattresses is up 8% across the business and up staggering 32% in showrooms quarter versus year ago. Now be careful with that 32% because that was when we were liquidating, getting ready for the launch. But at least half of that is absolute trade up in dollars.

Speaker 2

That's being driven by financing. It's not working as well for us in e commerce and we're still trying to figure out what that is where we still offer 2 different partners. So that's on us and executional. But yes, we do believe that it will drive it will help enable the path to premium sleek strategy because that's built on trade up and it will improve attachment. And in showrooms where we have the most control of it, it is working.

Speaker 2

On the first part of your question was on the shape of the quarter and it was relatively steady through the quarter. It got a little softer as the quarter went on and more volume concentrated around the holidays, which has been a continuation of what we have seen. Our e commerce business was weak in volume, but strong in margin. And I think we've got we're just sharing that concern in the year to go on the top line.

Speaker 5

Okay, very good. And then maybe one for you, Todd, just on 4Q moving to positive adjusted EBITDA, would that translate into positive free cash flow as well or do we still have a little bit more work to get the business towards positive free cash flow?

Speaker 4

Yes, it will translate into positive free cash flow. We have a number of things that Eric and team are working on around inventory management, which provides an opportunity for us from a working capital perspective and that positive EBITDA really does drop through to cash very quickly for us.

Speaker 5

Okay, very good. And is there any just quickly just for housekeeping, it looks like CapEx is running roughly $5 ish million or so year to date. Is $10 ish million a good estimate of where it will end this year? Is there a little bit more spending in the back half?

Speaker 4

No, it should be pretty ratable. So at 10,000,000 dollars that is a fair estimate for the year.

Speaker 5

Okay. I'll jump back in the queue and turn it over to somebody else. But appreciate the details and congrats on the gross margin side of things.

Operator

Thank you, Bob. Thank you. The next question will come from Brad Thomas with KeyBanc Capital Markets. Please go ahead.

Speaker 6

Hi, good afternoon. And that's a good segue to talking about the wonderful gross margins in the quarter. I was hoping maybe we could talk a little bit about how you're thinking about gross margin playing out in the back half of the year and how, if it all is different, to think about the long term opportunity here for gross margin?

Speaker 3

Thanks, Brad. This is Eric. I'll take the especially how we think we're going to deliver it in the long term prognosis. As we talked, we got the 4 levers that we're pulling on, which is our material costs by diversifying suppliers, efficiencies in our plants, eliminating scrap and optimizing our freight. And we have run out of ideas there.

Speaker 3

So we've got more that's dropping, particularly in Q4 and we have expectations that we'll continue to have areas to optimize that going forward. Yes. And as it plays out for

Speaker 4

the year, what that will mean for us is we are going to see a little bit of headwind on margin in Q3 just due to deleverage as we're adjusting our production volumes to be more in line with our revenue guidance that we gave today. But that is more than offset by some of the opportunities that we have, especially around supplier diversification, operational efficiencies as we get into Q4. So that puts us in a place for that 40% plus is very much a sustainable rate for us that we can grow from over the long term.

Speaker 6

I appreciate it. And if I could follow-up on the sales outlook, if we're doing the math right, it looks like the second half guidance goes to where you're projecting revenues to being down somewhere in the neighborhood of 5% to about 12%. For 1, are we doing the math right? And for 2, can you just help us get a little bit more flavor for what it is that's driving that level of deceleration of the business?

Speaker 2

Brad, I think it's 2 things. 1, our comps are tougher in the back half because of the launch last year. But the bigger driver is we're just not seeing people come to buy mattresses. And we did 120 in the 1st two quarters. The low end of the range would see a modest improvement from that and the high end of the range would see a bit more medium improvement from that.

Speaker 2

I just don't see the signals that this thing is about to get healthy in the short run.

Speaker 6

That's really helpful perspective, Rob. And just a follow-up on that. If the environment stays tough like this for another 6 months, can you help us think a little bit about what revenue or marketing strategies you may be employing in the future to try to gain some additional traction here?

Speaker 2

Let me start with something that we didn't put in the script, but I think as you guys work on your models, what we're protecting the profit in the year, we are maintaining our marketing investment and we're maintaining our innovation investment. So that those are levers that haven't been pulled to protect the bottom line and we don't want to. As the year unfolds, we'll obviously have to do whatever we have to do. But I think in general, we need people investing in this category at the rates that we are and we're going to try to hold our ground and best position the company to perform in this market today and be ready for a market that gets better at some point.

Speaker 6

Very helpful. Thanks, Rob.

Speaker 2

All right. Thank you, Brad.

Operator

The next question will come from Matt Koranda with Roth Capital. Please go ahead.

Speaker 7

Hey, guys. Just maybe wanted to get a finer point on the Q3 commentary that you gave there, Todd. You mentioned it sounded like volume down potentially year over year. Any finer point on just the revenue split that we should assume for the 3rd Q4? And then you said deleverage on gross margin in the 3rd quarter.

Speaker 7

I would assume you mean sequentially on the deleverage commentary. Any commentary around the magnitude of that deleverage that we should expect in the Q3 and then what we have to make up for in the Q4 to hit that profitability number?

Speaker 4

Yes. So first, you are correct. It was meant to be a sequential comment. So we were at 40.7%

Speaker 1

in Q2.

Speaker 4

The deleverage should be fairly modest from that. So I would expect to see a little bit lower gross margin rate as we go into Q3, but then more than offset as we go into Q4. And to put a finer point on the volume, it's really production volume that we're talking about. The sales volume should actually be sequentially up in Q3 versus Q2. But what flows through the P and L obviously is the value that we're producing against, which we've adjusted to reflect that lower revenue guidance relative to what we had originally been expecting as we were planning out our production for the year.

Speaker 4

So that's the dynamic that's playing out as we go into Q3 and that kind of writes itself as we go into Q4.

Speaker 7

Okay, got you. And then just, Rob, I guess you mentioned a willingness to continue to spend on sales and marketing as we head into the back half of the year. So we're not necessarily aiding profit by cutting into those. Can you just speak to where you're seeing opportunity to lean into marketing? Are we seeing anything in digital?

Speaker 7

What's the just the state of play there? And how we think about sort of the whether we're increasing that line item sequentially in the back half of the year?

Speaker 2

Yes. I don't Matt, I don't think we see enough to increase it. We are going to hold it. And we are Kira is working on, as I said in the script, trying to get a little more break through into our media. We know it's performing better than what we've been running lately, but it's not back to that level of kind of viral leverage that Purple had a number of years ago.

Speaker 2

I don't know that we can get back to that in this market, to be honest, but we can do better. The second thing we're doing is trying to put it closer to point of consumption. That's the partnerships with retailers that's spending closer to the showrooms while continuing to invest heavily in digital. So, it's just you're constantly trying to make that significant investment work harder. We are an over investor.

Speaker 2

We're trying to build the category and try to build our business in the process.

Speaker 7

Okay, got you. Maybe just one more quickly on the balance sheet. Todd, you mentioned there was a $7,000,000 positive, I think, after the quarter closed. So that's not included in the cash in the second quarter, given that we're sort of inflecting to EBITDA positive in the Q4 and you mentioned free cash flow should be positive. Is it a fair assumption to say that 2Q might have been the trough in cash for the year?

Speaker 7

It just seems like a reasonable way to do the math, but wanted to hear your thoughts

Speaker 8

on that.

Speaker 4

No, you're thinking about it right. So yes, getting to a point where when you do the pro form a of adding that $7,000,000 insurance settlement into it, if it had been there at the end of Q2, our cash balance would have been about $31,000,000 As we look at opportunities around working capital, as we get to the point of being EBITDA positive and cash flow positive in Q4. We certainly plan to see cash return to healthy rates and be sustainable if not growing over the course of the rest of the year.

Speaker 7

Okay, very helpful. I'll leave it there.

Operator

Thanks. Thanks, Seth. The next question will come from Seth Basham with Wedbush Securities. Please go ahead.

Speaker 9

Thanks a lot and good afternoon. My first question

Speaker 1

is a follow-up on marketing. So if you could just give us some more color on the new co op marketing programs that

Speaker 9

you're doing, what's different about them? Are you adding more funds? Are you getting more discretion to how those funds are being spent? That would be helpful.

Speaker 2

Yes, both those things, Seth. We put more money available to invest trying to harness what our customers do. They spend a lot of money and our advertising can't fit into theirs and we've seen good progress of that. So it's both of those. It's putting more money out there at that point.

Speaker 2

It's in fairness, it's the same dollar being moved closer to the point of consumption and then having more latitude with how they use it. If we get a positive return for both of us, then we want to keep investing in it. It. I think it's clear that our transactions trade up the category. Our advertising swings the doors for our partners.

Speaker 2

And ultimately, there's no substitution if a consumer wants purple, right? And I think part of what we've got to do is build our way out of being positioned as a bed in the box category or in that niche and being seen like the category leader is as a category builder. And we're working hard to make sure we do that.

Speaker 1

That's helpful. And do you think you're sacrificing some advertising and or trafficsales on the e commerce channel given what you're moving to the wholesale channel?

Speaker 2

Yes, maybe, and it's something we're watching very closely. Our absolute traffic level is down a bit. Our engaged traffic is up and conversion is where we're struggling. So the money is there and the traffic is there digitally. We've got to figure out how to convert it better.

Speaker 2

But we are watching that because we don't want to swing one direction or 2. We've got omni channel brand that needs to be competitive in every channel. So we're trying to get that balance right.

Speaker 9

Right. Okay. And in terms of the personalization and website streamlining efforts, can you give

Speaker 1

us some color on what

Speaker 9

you did there and what next step forward is to get more progress?

Speaker 2

Yes. I mean, Seth, we a year ago when we launched this new line, we brought some great product to market. But I think what we're learning is that within in an unassisted sale online, it's not working as hard for us as it is in the assisted channels, both ours and our customers. I talked about the ASP, it's up 8% in total, 15% in wholesale, 32% in showrooms and it's flat on e comm. Now some of that's the shape of the mix.

Speaker 2

We do more essentials business on ecom than anywhere else as it should be, but I want to see that needle moving and it's not yet. So as I said in the script, we've worked a lot on personalization. I can't translate it for you and what it's doing for the business yet.

Speaker 1

Got it. So as you think about the outlook for the

Speaker 9

revenues going forward even beyond 2024, do you think we could shift to see DTC talent being less than half the company's sales?

Speaker 2

No, I don't. We want the business to be sixty-forty. It was 56-forty 4 in the first in the second quarter. We've never had wholesale above maybe 46, 47 in total and we don't think it will be there. This is a unique brand that is best serviced, where it's experienced in retail and that's both our showrooms and wholesalers.

Speaker 2

But we don't see it swinging sixty-forty wholesale. Got it.

Speaker 9

All right. Thank you very much.

Speaker 8

Thanks, Seth.

Operator

Your next question will come from Brian Nagel with Oppenheimer. Please go ahead.

Speaker 8

Hi, good afternoon. Thanks for taking my questions. So I guess the first question I want to ask, obviously you're talking a lot about just sort of now more challenged backdrop. We're hearing this similar sentiment from other companies in your space around consumer. The question I have is, as you look at the purple, particularly with the initial success of some of these new products, assuming that the backdrop remains challenged, are there levers that you could pull to drive the business here?

Speaker 8

Or are you really at the mercy of the backdrop?

Speaker 2

No, we're not going to be at the mercy of the backdrop. I think what you and Eric referenced this, we're controlling what we can control and we're going to continue to manage this business as if this is the category we have to deal with. I think probably in my tenure that's a little more aggressive and less waiting for the market to get better because I don't know when it's going to get better. But what I don't want to do is put off growth, put off profitability or put off the positioning of this brand to do well in this market. If it gets better, great, we'll be ready, but we're going to make sure that we compete in this size market now.

Speaker 8

That's helpful. And then I guess the second one is probably somewhat related, but obviously congrats on you like a lot of you you had nice gross margins in the quarter and that's a testament to the kind of repositioning of the brand. But from a sector perspective, are you seeing more promotions out there? Is that a component now of this more difficult backdrop?

Speaker 2

Well, I think it's encouraging. We're not seeing deeper promotions or discounts some of the progress in margin. Number 1, we have to stay competitive. And we've seen either flat or modestly down discount levels. What we are seeing is a concentration of volume behind those deeper promotional periods.

Speaker 2

And I think you've heard other players report that. I think the consumers just both savvy and stingy and we got to earn their business and they're smart enough to know that every 3 day weekend is a mattress holiday.

Speaker 8

Much appreciated. Thank you.

Speaker 2

Thanks, Brian.

Operator

Your next question will come from Jeremy Hamblin with Craig Hallum Capital Group. Please go ahead, sir.

Speaker 10

Thanks for taking the question. I want to come back to the revenue guidance cut. And if you look at the $50,000,000 change, wanted to get a sense of how much of that is coming out of what you previously expected wholesale to be versus DTC?

Speaker 2

Jeremy, I don't think we've broken it that way, but we can get close for you. I mean, 8 of that 50 already happened in Q2. So it's about 42 in the back half. And it is we're seeing nice progress in showrooms. It's split mostly between ecom and wholesale and about equal.

Speaker 2

Is that same rent to own? It's about from what our forecasts were.

Speaker 4

It does. I think we might be seeing slightly more pressure on e comm as we look to improve some of the conversion things that we talked about. But it is largely being driven by our read of the overall market, which impacts both of those channels equally.

Speaker 10

Great. Helpful. And then just looking ahead a bit here, as we think about plans over the next few quarters here in trying to reinvigorate top line, what do you anticipate in terms of wholesale door growth or how aggressively you go after wholesale door growth given some consolidation here in the industry? And then secondly, how does that make you think about your own potential purple showroom growth as we move forward into like 2025?

Speaker 2

Yes, Jeremy, our long range view on our own showrooms really hasn't changed. It obviously slowed down as we became a bit cash pinched. As Todd said, I believe we're working our way through that and I want to see us get back into the business of growing those showrooms. They're by far the stickiest sale we make. They're the highest value sale we make.

Speaker 2

And we also know that a meaningful amount of traffic goes to a showroom and then visits a wholesale partner and purchases later. We're in non mattress purchasing locations, if you will, but very high traffic locations. So a lot of what comes a typical mattress store might close at 30% or 40%. We are a fraction of that because it's a different location. So we want to get back into that business and part of what I said on the earlier question is keep the business 60% DTC.

Speaker 2

Beyond that, the changes in the landscape of wholesale, I don't want to predict what's going to happen there. It's you've got significant consolidation happening in a couple of places, obviously, Tempur Mattress Firm and then Ashley Resna as well. Here's what I do know. We grow the transaction size. We're very profitable for our partners.

Speaker 2

Our consumers have a 98% satisfaction but if you're interested in the benefits of grid, you got to come to us. And so that should make us a healthy omni brand regardless of who owns the retail. And so I think that's going to dictate why this brand can grow long term with an omnichannel trade up strategy.

Speaker 10

Got it. Let me ask the question slightly differently. In terms of thinking ahead to 2025, would you expect your wholesale door count to be up?

Speaker 2

Yes. I mean, we're up 168 doors from same quarter a year ago. But again, door productivity is the most effective way in my opinion to grow doors. Chasing doors for door sank is a declining way to go at this. If we create profitable business for our customers, satisfied consumers and we trade up the transaction, the doors are going to find us.

Speaker 10

Got it. Thanks so much for taking the questions and best of luck.

Speaker 2

Thank you, Jeremy.

Operator

The next question will come from Keith Hughes with Truist. Please go ahead.

Speaker 7

Thank you. You had talked earlier about the reduction in marketing, I think it was about $4,000,000 Can you talk about what are you looking at for marketing spend in the second half of the year versus prior year?

Speaker 2

Versus prior year, I think that is what that reduction is, right? It's $4,000,000 on the half?

Speaker 4

Yes. It will be a little bit more centered around Q3. We have a fair amount of marketing that was very top of funnel that came with the launch last year. And so a lot of that we won't be wrapping around on because it frankly wasn't as productive as what we'd like

Speaker 2

to see.

Speaker 4

But generally, if you're looking at about that $4,000,000 to $6,000,000 range for the back half, that is right in there.

Speaker 8

And what would that be?

Speaker 2

Keith, year on year, we haven't changed the commitment from what we started with by more than $1,000,000 Right.

Speaker 3

That's right. Okay.

Speaker 7

And the $4,000,000 to $6,000,000 what kind of percentage change is that year over year in the second half?

Speaker 8

Roughly.

Speaker 4

Probably to the tune of around 10%. Production, okay. Okay. Thank you.

Speaker 2

Thank you. Thank you, Keith.

Operator

The next question will come from Michael Lasser with UBS. Please go ahead.

Speaker 11

Good afternoon. This is Dan Silverstein on for Michael.

Speaker 2

Hi, Dan.

Speaker 6

Hey, team. Just two questions. Just firstly, what does the

Speaker 11

new financing agreement allow you to offer customers that you couldn't provide before? And what can you flex in terms of promo offerings to drive incremental engagement?

Speaker 2

Dan, I want to be clear on this. We think this doesn't really put us in an advantageous position. It gets us to be competitive and it allowed us to offer it allows us to offer 0% at kind of a competitive level to what the market is at. It changes by price points. I'm not dodging the answer.

Speaker 2

It's just a bit confusing. But it's a fully competitive offer with kind of the mattress retailers that are out there that offer financing as part of their transaction. It's not the longest I've read, but it's right in the middle.

Speaker 11

Got it. Okay. And then just zooming out a bit, how do you view your moderated outlook for sales in the back half relative to the broader industry? And if there's anything you can share in terms of metrics on aided or unaided awareness or NPS scores today versus a few years ago, just to give us a check on where the brand's health is today ahead of a recovery for the

Speaker 2

category leader. We invest in advertising above our share of market sharply by about 50%. And we don't have that same viral nature that Purple had when it kind of first, no pun intended, came out of the box, but when it was first being sold, but it is still a very well regarded brand. And I think the brand is healthy and honestly 2% sales growth in the quarter, I think, is going to show up in the middle or better when everybody else kind of comes out with their numbers. As far as the category goes, this the ultimate delayable purchase.

Speaker 2

And until people start moving again, I don't think you're going to see a return to the higher level of units that we saw COVID and going into it. Thank you. Thanks, Dan.

Operator

This concludes our question and answer session as well as our conference call for today. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Purple Innovation Q2 2024
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