Purple Innovation Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
March 13, 2025

There are 8 speakers on the call.

Operator

Thank you for joining Purple Innovation's Fourth Quarter twenty twenty four Earnings Call. A copy of our earnings press release is available on the Investor Relations section of Purple's website at www.purple.com. Before we begin, I'd like to remind you that certain statements made in this presentation are forward looking statements. These statements reflect Purple Innovation's judgment and analysis as of today and are subject to a variety of risks and uncertainties that could cause actual results to differ materially from current expectations.

Operator

You should not place undue reliance on these forward looking statements. For more information, please refer to the risk factors outlined in our filings with the SEC. Additionally, today's presentation will reference non GAAP financial measures such as adjusted gross margin, EBITDA, adjusted EBITDA and adjusted earnings per share. A reconciliation of these measures to their most comparable GAAP measures can be found in the earnings release available on our website. With that, I'll turn the call over to Rob DeMartini, Purple Innovation's Chief Executive Officer.

Speaker 1

Thank you for joining Purple Innovation's fourth quarter twenty twenty four earnings call. A copy of our earnings press release is available on the Investor Relations section of Purple's website at www.purple.com. Before we begin, I'd like to remind you that certain statements made in this presentation are forward looking statements. These statements reflect Purple Innovation's judgment and analysis as of today and are subject to a variety of risks and uncertainties that can cause actual results to differ materially from current expectations. You should not place undue reliance on these forward looking statements.

Speaker 1

For more information, please refer to the risk factors outlined in our filings with the SEC. Additionally, today's presentation will reference non GAAP financial measures such as adjusted gross margin, EBITDA, adjusted EBITDA and adjusted earnings per share. A reconciliation of these measures to their most comparable GAAP measures can be found in the earnings release available on our website. With that, I'll turn the call over to Rob DeMartini, Purple Innovation's Chief Executive Officer.

Speaker 2

Thank you, Stacy. Good afternoon, everyone, and thank you for joining us. With me on today's call is our CFO, Todd Vogenson. The fourth quarter was a significant milestone for Purple as we achieved adjusted EBITDA profitability for the first time in eight quarters and produced positive cash flow. These encouraging results were the culmination of a purposeful actions taken throughout the year, including disciplined execution, operational improvements and cost savings initiatives.

Speaker 2

Specific highlights of the quarter include gross margin reaching 42.9%, an improvement of nine seventy basis points compared to last year. A significant improvement in showroom profitability through disciplined operational management and the successful launch of our Purple Renew mattress in 01/1970 Costco retail locations, complementing the online business and expanding our market presence. Looking back, 2024 was a year of significant transformation for Purple. We continue building on our path to premium sleep strategy that was launched in 2023 and elevated us to a leading premium mattress brand, while improving our stability through higher price points and expanded distribution. During the year, we took actions to strengthen the durability of the business, so we can confidently navigate the ongoing uncertainty of the market, where we are seeing challenged consumer demand and increased industry consolidation.

Speaker 2

From a cost perspective, we successfully consolidated our manufacturing operations as part of a broader restructuring initiative alongside several other operational and cost savings improvements in the second half of the year. These changes have allowed us to streamline our operations, enhance efficiency and reinvest in technology and marketing to drive growth. Beyond cost savings, we drove continued improvements in our sales channels throughout the year. Our showroom channel experienced the most improvement with four quarters of sequential revenue growth and full year four wall profitability for the first time since 2021. This success was primarily driven by strong sales execution and disciplined labor cost controls.

Speaker 2

While our e commerce and wholesale channels were more challenged in the year, we're encouraged by signs of progress. In e commerce, we saw sequential revenue growth in the second half with strong results in our marketplace channels, including our Amazon pillow business. In our wholesale channel, we're pleased with the improvements in channel profitability and continued expansion in non traditional revenue, driven by interest from partners such as Costco and Mattress Firm's Event business. Again, these strategic actions and improvements strengthen the durability of our business model, enabling us to continue navigating volume challenges in the industry and we're confident in our ability to drive the profitability required to support long term market share gains. Looking ahead to 2025, we've already achieved some early successes that position us for market share growth over time.

Speaker 2

At Las Vegas Market in January, we unveiled our new Rejuvenate two point zero mattress line and introduced our expanded pillow collection to our wholesale partners. Both launches were well received, generating excitement and securing new points of distribution. Additionally, sales through our Costco partner doors have exceeded expectations year to date and we anticipate continued growth and expansion of that partnership moving forward. As we think about how we drive sustainable and profitable market share, we've outlined a clear plan that enables us to continue competing effectively as we sharpen our focus on three critical pillars of success: pioneering new technologies, promoting our differentiation, and prioritizing gross margins. First and foremost, we're focused on pioneering new technologies to maintain our competitive advantage and strengthen our differentiation.

Speaker 2

Purple has always been on the cutting edge of comfort science. Our products are powered by technology born from the medical space that we've since improved upon and brought to the consumer market. Unlike memory foam or other mattresses, our patented flexible gel material with structural geometries provides unique benefits that set us apart from everything else on the market. Our goal is to maintain that competitive advantage by launching new technology about every two years, continuously reintroducing the greatest sleep ever invented. As I previously mentioned, we announced our new Rejuvenate two point zero luxury mattress line in January, which represents a significant leap forward in gel grid technology.

Speaker 2

This is one of the biggest launches in our company's history and is the first time that we are introducing a new type of grid technology to the market. Our new technology successfully layers a plush pillow top gel grid called Dreamlayer on top of our classic GelFlex grid, a unique combination that preserves the benefits of sleeping on gel layer while providing a rich comfort experience. This new launch keeps us at the forefront of comfort technology and continues to differentiate us in the market, while driving superior comfort and support for an even more premium sleep experience. The new REJUVENATE two point zero collection launches in the second quarter through our direct channels and is followed by a full wholesale rollout expected to be completed by the third quarter. The strong positive feedback from current and future retail partners at the unveiling in January has led to a substantial increase in slot commitments, with total REJUVENATE slot count growing by 50%, marking a major step forward in our path to premium sleep strategy.

Speaker 2

Furthermore, we significantly expanded our distribution of pillows by launching our renowned Dreamlayer and Freeform pillows into our wholesale channels and expect additional placements on one or both pillows in about 2,000 of the 3,000 current Harmony doors. We've also introduced our new Grid Cloud Pillow, which leverages the success of our Harmony Pillow at an attractive $149 price point to expand our pillow line and reach new customers. Second, we're focused on driving sales and promoting our differentiation to consumers, which includes articulating the sleek benefits of our technology. Purple started as a brand built on differentiation, which we have effectively communicated through our original viral Goldilocks and subsequent advertising. In recent years, the category has relied extensively on discount messaging to attract consumers with less focus on product benefits, a real disservice to the consumer.

Speaker 2

Our goal is to refocus messaging to lead with our product differentiation. If we can effectively articulate the unique qualities of sleeping on our Joe grid layer, we can bring better sleep and improved health to more consumers. Refocusing our messaging also positions us to break through the category's discounting noise and because we have real differentiation, we expect our messaging to be more effective than the competition. As a first step in promoting our differentiation, we recently launched our aches and pains product advertising with over 7,000,000 views since mid November. In the coming quarters, we expect to deliver more product focused marketing.

Speaker 2

In our selling channels, refocusing our messaging on promoting our differentiation should drive more and better quality sleep traffic, while improving conversion both online and in stores and increase our share of retailer sales in the wholesale channel. While our technology is clearly differentiated when experienced in person, the complexity of the science has proven difficult to effectively articulate online. We know that the closer we are to the customer, the stronger our sales are, which is why our highest converting sales are in our own showrooms where we can directly demonstrate and educate, followed by our wholesale doors where retail associates can speak to our technology. Not surprisingly, our e commerce channel converts at a much lower rate and will benefit the most from improving how our differentiation can be better understood by consumers through more effective marketing and enhancements to our website. Looking at our channel specifically, let's start with showrooms.

Speaker 2

Our showrooms play a crucial role in providing customers with a hands on experience allowing them to fully engage with and understand our products and technology in a personalized setting. Additionally, our showrooms are evolving into highly effective sales channels as we continue focusing on sales initiatives that drive demand. Moreover, our showroom channels continue to push us into higher end as customers increasingly embrace the Rejuvenate business and trade up approach, which enhances the channel's profitability. Our showroom strategy has been critical in reinforcing our position as a premium and innovative mattress brand. Shifting to our wholesale channel, where we have an indirect but engaged connection with consumers, we're actively educating the retail sales associates at our wholesale partners about the differentiation of the technology and how to better articulate its unique properties to drive effective sell through through our premium product lines.

Speaker 2

We continue to focus on improving wholesale partnerships and looking for new points of distribution. I previously touched on our Costco partnership and we have also been rolling out pillows at HomeGoods in recent months, which have been performing well. Additionally, we continue to evaluate wholesale relationships with a focus on partner alignment and shared profitability. Moving now to our e commerce channel, because our e commerce is our most passive connection to consumers, the greatest challenge we're facing is effectively communicating our technology differentiation to drive sales. We have a lot of work to do to improve conversion in the channel, starting with how we speak to online customers.

Speaker 2

For example, leading with the advantages of our technology rather than leading with a promotional message. We're also improving the user experience online, including thoughtfully curating the mattresses we display and we have seen early signs of improvements to e commerce conversion. Purple.com also serves as an important research tool for our customers who buy offline. Lastly, prioritizing gross margins. Over the last several quarters, we've executed key initiatives that have been driving healthy gross margin gains.

Speaker 2

We ended the year at our target rate of 40% and we expect to expand margins by at least 200 basis points in 2025. Prioritizing gross margin improvements enables us to deepen our investments in innovation, which in turn allow us to bring new technologies and better sleep to more consumers at a faster pace. We expect continued gross margin gains to come from driving cost savings through our plant consolidation, supplier diversification efforts and improving scrap and yield results through continuous improvement efforts. These efforts have been and will continue to be instrumental in optimizing our operations and strengthening our financial performance. We remain on track to complete the consolidation of our manufacturing facilities this quarter.

Speaker 2

We also have begun shifting production on some pillows in house and initiatives still in its early stages with significant scaling planned this year. All of these efforts will drive meaningful cost savings and improve operational agility over the year. The impact of these restructuring efforts is already being realized. The consolidation, in addition to incremental actions taken during the first quarter of twenty twenty five, is projected to yield an annual EBITDA savings of $25,000,000 to $30,000,000 We began seeing operating expense improvements late in the third quarter of last year and those savings continued into the fourth quarter. While we expect a small gross margin benefit in the first quarter, the full run rate savings will materialize in the second quarter.

Speaker 2

Importantly, these savings are not just improving our financials, but also enabling us to reinvest in innovation and marketing, further strengthening our position as a leader in premium sleep technology. As we enter 2025, we're encouraged by the progress we've made and we will expect tailwinds from the REJUVENATE two point zero launch in addition to further cost savings opportunities that will drive more meaningful profitability in the second half of

Speaker 3

the

Speaker 2

year. We expect total sales to be in the range of $465,000,000 to $485,000,000 with adjusted EBITDA in the range of flat to up $10,000,000 which Todd will provide more details on shortly. We remain optimistic about the long term opportunities for Purple and believe our path to premium sleep strategy is guiding the company towards sustainable and profitable growth. On a separate note, we're closely monitoring the potential impact of recently announced U. S.

Speaker 2

Tariffs. Our exposure is limited given the small level of goods that we import from overseas and we believe the impact to be $2,000,000 to $5,000,000 However, we are confident in our ability to respond to the situation through supply chain repositioning and pricing actions if necessary. Before I turn the call over to Todd, I wanted to briefly address the industry changes that are now occurring with the Somnee Group International, previously known as Tempur Sealy International and Mattress Firm. We want to assure you that Purple remains in a strong competitive position as we offer a differentiated and premium product powered by our patented grid technology. Our commitment to innovation, advertising and elevating the category ensures that we continue to meet wholesale customer needs while driving value within the industry.

Speaker 2

Mattress Firm is an important customer and a great partner for Purple and we are committed to ongoing success with them. Now, I'll turn the call over to Todd to discuss our financial performance in more detail.

Speaker 3

Thank you, Rob, and good afternoon, everyone. As Rob mentioned, the broader macroeconomic landscape continues to be challenging, but we are optimistic going into the new year given some positive results for the fourth quarter and year end 12/31/2024. Today, I'll walk you through the key financial metrics for the quarter and highlight the areas where we saw both headwinds and progress. Starting with the top line, net revenue for the fourth quarter came in at $129,000,000 which was down 11.6% versus $145,900,000 in the prior year. As we cycled the sell in of our major product launch in 2023.

Speaker 3

On an encouraging note, revenue improved sequentially from the third quarter and grew steadily throughout the fourth quarter, gaining strong momentum around Black Friday and culminating in a solid year end finish. Nearly 50% of quarterly revenues were generated in December, fueled by robust holiday demand. By channel, direct to consumer net revenue for the quarter was $79,800,000 down 2.9% versus last year. Within DTC, net revenue for showrooms increased 4.2% compared to last year. Showrooms continue to deliver strength in consumer financing with the number of finance orders up 17% year over year and the average order value on those finance orders up 57% to non finance orders.

Speaker 3

E commerce continued to deliver on sequential revenue improvements through the second half. However, compared to the strength we delivered last year from the new product launches, we did experience softer results on a year over year basis with e commerce down 5.3% for the quarter. Similarly, we saw weakness in our wholesale segment performance relative to last year. Net revenue was $49,200,000 down 23% in the fourth quarter versus 2023, but wholesale did show sequential improvement each month during the quarter. This performance also reflected the impact of lapping the launch of our new product line in 2023.

Speaker 3

Our gross profit for the fourth quarter was $55,300,000 compared to $48,500,000 during the same period last year. Gross margin rate for the quarter was 42.9%, which was up nine seventy basis points compared to the reported gross margin rate last year. Our fourth quarter adjusted gross margin was 44.9%, which grew eight ten basis points versus the adjusted gross margin last year. This represents our third consecutive quarter of adjusted gross margins over 40% as we continue to implement programs to not only sustain, but structurally grow our gross margin over time. The improvement this quarter included continued growth from sourcing initiatives and the profitable liquidation of inventories.

Speaker 3

Now turning to operating expenses. Operating expenses were $63,000,000 down 2.6% versus $64,700,000 last year. This decline was driven by the benefits from the company's restructuring activities in the third quarter of twenty twenty four and disciplined cost control, offset partially by an increase in advertising investments during the quarter. Our adjusted net loss for the fourth quarter was $8,000,000 an improvement over last year's adjusted net loss of $15,800,000 Adjusted EBITDA for the fourth quarter was $2,900,000 an improvement from negative $9,800,000 last year, demonstrating the benefits of our restructuring initiatives and ongoing gross margin programs. And fourth quarter adjusted loss per share was $0.07 compared to an adjusted loss per share of $0.15 in the fourth quarter last year.

Speaker 3

Now to briefly touch on our full year results. For the twelve months ended 12/31/2024, net revenue was $487,900,000 down 4.4% compared to $510,500,000 last year. Our full year revenue was impacted by continued industry softness as well as headwinds from cycling last year's successful launch of our new product line. By channel, DTC net revenue was $283,700,000 down 4.4% versus last year. Our showroom performance was strong, up 5.8% for the year and improving sequentially over the last four quarters.

Speaker 3

E commerce was down 7.8% for the full year and wholesale net revenue was $204,200,000 down 4.5% year over year. Gross profit came in at $181,100,000 up 5.4% versus $171,800,000 in the prior year with gross margin rate for the year at 37.1%, up three fifty basis points versus last year. On an adjusted basis, our gross margin was 40.3%, up three ten basis points versus last year. Operating expenses were $273,300,000 in 2024, down 4.6% compared to $285,500,000 in the prior year, driven by savings from our corporate reorganization in August, a reduction in year over year advertising and cycling $11,400,000 in special committee fees in the prior year, all offset partially by incremental costs from restructuring and impairment charges in 2024. As a result, adjusted net loss was $61,700,000 versus an adjusted net loss of $72,200,000 in the prior year.

Speaker 3

Adjusted EBITDA came in at a negative $20,800,000 cut more than half from last year's level of $54,700,000 of loss. And adjusted loss per share was $0.57 compared to an adjusted loss per share of $0.69 in the full year of 2023. Now turning to the balance sheet. At year end, we had cash and cash equivalents of $29,000,000 compared to $26,900,000 at 12/31/2023. Importantly, our positive EBITDA performance in the fourth quarter, in addition to solid inventory management, led to positive cash flows of $6,000,000 during

Speaker 4

the

Speaker 3

quarter. Net inventories on 12/31/2024, were $56,900,000 down 15% compared to last year and down 5% compared to 09/30/2024. As part of our ongoing capital management strategy, Purple successfully secured an increase of $19,000,000 in our existing term loan commitment. As with our existing term loan, the increased amount includes the ability to pick our interest. This amendment will provide us with enhanced financial capacity and greater flexibility to support our strategic growth initiatives.

Speaker 3

Now as we head into the new year, we're focused on strengthening our foundation through our restructuring efforts and through innovations powered by our gel grid technology. We've taken significant actions to drive down our fixed cost structure and to be more efficient with our processes. As a result, incremental volumes will flow through at a much faster rate than historically, which we expect to drive positive EBITDA and cash flow in 2025. While we anticipate continued challenges across the industry, we remain confident in our path toward profitability and we are well positioned to take advantage of any upside should the market recover. Based on our current costs and margin structure, we would expect that any revenue improvements versus our plan would flow through it at approximately 35%, demonstrating a business model that is scalable and provides upside opportunity.

Speaker 3

Now let's turn to our outlook. First, while we don't normally provide quarterly guidance, since we are almost 80% through the quarter, we will be providing guidance for this particular quarter. So

Speaker 5

for the

Speaker 3

first quarter of twenty twenty five, we expect total revenue to be in the range of $102,000,000 to $107,000,000 and adjusted EBITDA in the range of negative $6,000,000 to negative $9,000,000 As Rob discussed in his remarks, for the full year, we expect total revenue for 2025 to be in the range of $465,000,000 to $485,000,000 and adjusted EBITDA of flat to up $10,000,000 which includes an incremental $10,000,000 from further restructuring actions on top of the $15,000,000 to $20,000,000 that we communicated last year. We expect revenue to grow sequentially throughout the year and revenue growth and positive EBITDA in the second half driven by the REJUVENATE two point zero launch. Despite ongoing macroeconomic pressures, we remain optimistic for the new year, supported by positive results for the fourth quarter and 2024 year end, and we're confident in our long term ability to execute on our path to premium sleep strategy. And with that, I'll turn the call over to Rob for closing remarks.

Speaker 2

Thank you, Todd. Before opening up to questions, I'm sure you've all seen that we issued a news release announcing that we've received inbound expressions of interest. And in keeping with our commitment to evaluate all pathways available to maximize shareholder value, our Board has initiated a review of strategic alternatives for Purple. We've established a special committee of independent directors to evaluate potential opportunities. We believe we're embarking on this review from a position of strength.

Speaker 2

Purple is a leading independent premium mattress brand with a durable business model, evidenced by our positive performance in the fourth quarter and we've enhanced our financial position through the expansion of our credit facility, which supports continued growth initiatives. Accordingly, we believe we're well positioned for market share gains over time, independent of the conclusion of this evaluation. As the Special Committee conducts its review, the Purple team is fully focused on driving our three critical pillars of success pioneering new technologies, promoting our differentiation to customers and prioritizing gross margins to continue building on the momentum we've recently achieved. We appreciate your understanding that we cannot provide additional information on the review or speculate about its outcome. As such, we will not be taking questions about it during our question and answer session.

Speaker 2

With that, I want to thank you all for joining today's call and I want to thank our associates who have navigated successfully a very difficult time. We remain focused on controlling what we can and executing our strategy. We're committed to driving profitability and positioning Purple for long term success. Thank you.

Operator

We will now begin the question and answer session. Our first question comes from Matt Koranda with Roth Capital. Please go ahead.

Speaker 4

Hey, guys. Thanks for taking the questions. I guess maybe just the math on the 2025 outlook as it pertains to the cost savings that you highlighted. So I think you guys said $25,000,000 to $30,000,000 in total cost savings with some of those kicked in. In the third quarter, you fully realized at least the fourth quarter with those savings.

Speaker 4

So I guess that would imply there's some lower number that we should be factoring in for the full year 2025 in terms of what we should flow through. So maybe, Todd, if you could just help us kind of understand the math that's embedded in terms of what you assume is realized in 2025?

Speaker 3

Sure. So I'll split it into two parts. There's the cost of sales related savings, which you can assume is about $7,000,000 to $10,000,000 annualized. The bulk of that is really going to start in Q2. So we'll get about three quarters of those savings across 2025.

Speaker 3

And then the remainder is operating expense savings. We have generated a quarter and a half of savings, let's say, call it $4,000,000 of savings in 2024. The bulk of the rest of that is going to get realized over the course of 2025.

Speaker 4

Okay. Got it. And then can you talk a little bit about how the REJUVENATE, the new product, is scheduled for launch this year and how that might factor into the phasing of revenue seasonality during 2025?

Speaker 2

Yes. Matt, thanks for the question. We'll do, I'll use this language, a hard launch on April 15 in our 59 showrooms. And that makes up a meaning. Rejuvenate is about 30% of that business's mix, sometimes a bit higher than that, but at least 30%.

Speaker 2

It will launch on ecom at the same time, although it's a very modest, very modest piece of the ecom mix. And then it will launch at wholesale partly driven I mean, it's available on fourfifteen, but I think what we learned from the Restore launch is that it takes our wholesale partners three to five months to get it fully launched and that's mostly I think because they're coordinating it with other competitive launches. They want to reset the floors once. So, our wholesale team has a specific schedule that strings out from April 15 and we're hoping by mid summer we'll be at least starting to floor everything across the whole wholesale market.

Speaker 4

Okay. That's helpful, Rob. Look, I know we're probably not supposed to ask about strategic alternative stuff, and I don't want you to speculate about the outcome. But, but, I think I want to ask a question that everybody is wondering, which is just around timing. Why is now the right time, to go through this?

Speaker 4

Maybe if you could just address that, I think that would be helpful for everybody.

Speaker 2

Yes. I think the Board does this on an ongoing basis as part of their regular duties, looking at options, looking at opportunities. Because we've had some inbound interests, we felt now was the right time to formulate the special committee and ask for the help from Jefferies to really investigate all potential outcomes and options, including none, right? I mean, one of the outcomes is we don't do anything differently. But we did feel like that now is the time, given that interest and given the consolidation in the industry, you've seen it, Matt.

Speaker 2

I mean, there's been six or so transactions and marriages of one kind or another just over the last six or eight quarters. So, we felt it was the right thing to do for all shareholders. And I trust the special committee will evaluate those choices and then recommend a path forward that benefits all shareholders.

Speaker 4

Okay. Fair enough. I'll turn it over to someone else. Thanks, Rob.

Speaker 2

Thanks, Matt.

Operator

And the next question comes from Bobby Griffin with Raymond James. Please go ahead.

Speaker 6

Hey, guys. Thanks for taking my questions and good afternoon.

Speaker 2

Hey, Bobby.

Speaker 7

Rob, I

Speaker 6

want to go back to your comments on wholesale. I forget how you phrased it. If you might have mentioned looking for new partners or expanding. Priorly, we talked a little bit about productivity. I just wanted to maybe dive into, is that a little bit of a pivot?

Speaker 6

And now you guys are in the position with the manufacturing change that you think there is a door growth opportunity, maybe just connect, some of those dots?

Speaker 2

Yes. I don't think it's a pivot. I still am very focused on our 3,500 ish traditional wholesale doors of making them more productive. And it's self serving because the better we do with a wholesaler on a throughput, the more likely they're going to ask us to come into more doors. And there are plenty of customers where we're in all their doors, but there are some big customers who are in a percentage of their doors.

Speaker 2

So if the door productivity is there, the new doors will come. The alternative distribution is just realizing that because of the relatively high retail margin structure in this category, the alternative retailers offer a pretty nice piece of business and everybody gets a fair margin and the consumer gets a fair value. And I think the product we have at Costco is a good example where they make a fair margin, it's profitable for us and the consumer gets a great value and that's how Costco built their business. HomeGoods is a little bit of a different animal. They're kind of a push retailer.

Speaker 2

But what we're recognizing is that 3,500 doors in wholesale is a relatively modest door count relative to our best competitors, and that there are other places we can look to get volume. We don't want to chase the door count just for the door count. It's the most expensive way to get the business. But we do have some pretty interesting new door opportunities in the pipeline. And I would we could grow doors this year, traditional doors maybe 200 to 300.

Speaker 2

I think that would be a realistic number. But I also think rejuvenate opportunity in existing doors is they're very expensive beds, I'll be the first to tell you that. But when the consumer values sleep and is willing to pay for that outcome, it's a very profitable opportunity for our customers and it's accretive to us as well.

Speaker 6

Okay. That's helpful. And then maybe on the shape of the year, from the EBITDA perspective, understand you have the savings build out through the years we talked about with the manufacturing kind of starting there in 2Q. Does the guide assume basically the industry is the same as it is today throughout the year? Or are you also assuming along with the savings a little bit of an improvement in the industry to get to the positive EBITDA in the back half?

Speaker 2

Bobby, we are definitely not assuming improvement in the industry. I mean, I think it does build through the year partly because our volume is naturally shaped that way and then partly because those cost savings realize as we get deeper into the year. But we've held advertising investment pretty steady with volume and at kind of our planned, I'll call it healthy rate. But I'm not optimistic in the short run about the market. We've seen, you heard Todd talk about the first quarter.

Speaker 2

It's definitely not a super strong quarter. So we're concerned about it.

Speaker 6

Okay. Fair enough. I appreciate that detail. And then maybe lastly, Todd, just you guys did generate cash flow here in the fourth quarter. If we do kind of hit the EBITDA guide, what opportunities are there with inside working capital?

Speaker 6

What does it look like from a cash flow from op or a free cash flow type yield on that EBITDA guide?

Speaker 3

Yes. The team actually is doing a terrific job on inventory management. We put in a new MRP system to help manage inventory earlier this year and that is really yielding some benefits for us. So even though we're looking at revenue growth in the back half, we would see there being working capital opportunity across the year that should at the very least offset our CapEx requirements. So you can look at that being $5,000,000 to $10,000,000 of benefit across the year from working capital.

Speaker 6

Okay. That's helpful. I appreciate the detail guys. Best of luck here in a tough industry.

Speaker 2

All right. Thank you, Bobby.

Operator

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

Speaker 2

Hi, good afternoon. Hi, Brian.

Speaker 7

So a couple of questions here. First, very short term. Just on the current trajectory of the business. A number of consumer companies and retailers have talked about a softening in demand in early 'twenty five. Again, we have the guidance for Q1, but are you seeing have you seen that happen where the consumers actually pulled back further here to start the year?

Speaker 2

I think we have. I mean, President's Day was lukewarm at best. It's usually a pretty decent period. And I think the consumers is I don't know what the right word is, maybe paralyzed right now more than we've seen recently just because they don't know where we're going, collectively. Will it last?

Speaker 2

I don't know. Maybe, I hope not. But I will say that in our full year plan, we are being very cautious that we've got to get there on a cost basis because we don't know when demand is going to come back. So we have seen the consumer be a little hesitant lately.

Speaker 7

Then a follow-up to that is, as you're launching the new products, particularly the more innovative products, what type of consumer response are you seeing there?

Speaker 2

The new REJUVENATE line? Yes. Well, we have I mean, in fairness, the consumer hasn't seen it yet. We took it to Vegas. I mean, we did some consumer testing and it scored the product performs very well.

Speaker 2

And it was in my main script, this dream layer that I think most people know that the Rejuvenate product that was out there was fundamentally the IntelliVed company that we bought with those beds wrapped with a new purple cover. But we hadn't yet had the chance to do any innovation. This dream layer, typically the high end beds, your pillow top beds, very cushy on top if you will. But that's been that was a hard thing to marry with grid and have it feel like purple. Jeff Hutchings and his team have done a phenomenal job.

Speaker 2

We're launching an incremental price point on the low end. So, the new range will go from probably promoted prices of about $4,800 up to the $7,900 at the top. So it's four beds instead of three. It's got a more achievable price point. Again, still very expensive, but more achievable.

Speaker 2

And we're quite optimistic. The trade response has been great. The consumer testing has been great. And that line in its old form is probably the second biggest contributor to the showroom business turning positive last year because of what it's doing to the mix of their business. So we're optimistic.

Speaker 2

They are expensive, but they're fantastic beds. And if I always ask people, nobody wants to pay for tomorrow night's sleep, but how much would you pay for a better night's sleep last night?

Speaker 7

That's helpful. And then the final question I'll ask. Just on the gross margin, a nice trajectory there. We got the guidance that you laid out for 25%. I guess maybe just two part question.

Speaker 7

The kind of building blocks to continue to drive gross margin from here and then maybe some longer term outlook. I mean, as we look at the model, what do you think we're playing for now at a gross margin rate?

Speaker 2

Well, as we predicted, well, Todd, go ahead. You'll answer this better than me.

Speaker 3

So in terms of building blocks for gross margin, the big things as we look into 2025 are going to be around the consolidation. So, actually getting the benefits off of consolidating down to one manufacturing plant, and we're well on our way on that. We also have a number of continuing opportunities on sourcing initiatives and production efficiencies. That is part of how we got to about the 40% plus run rate across the last three quarters and it's a lot of what is going to be the incremental benefit we get as we go into 2025. So as we look across the course of the year, we'll start getting the benefits off the consolidation in Q2.

Speaker 3

You'll probably start seeing more of the sourcing and production efficiencies as we get towards the back half and gross margin should continue to grow sequentially as we go across the year from Q1 forward.

Speaker 2

Okay. I appreciate it. Thank you very much. All right.

Speaker 4

Thank you.

Speaker 2

Thank you, Brian.

Operator

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

Speaker 5

Hi. Will on for Jeremy. Thanks for taking my questions. I guess first, I'm curious if you have any additional commentary on Somni Group, I guess, specifically where your relationship with Mattress Firm stands today? And then may still be too early, but wondering if you've had any initial discussions to extend your contract with Mattress Firm going forward?

Speaker 2

We have not will. That will happen, I would expect relatively soon. But they've been making some management changes to try to line up their team, whether it's from the existing team or the new team. And I think they'll be reaching out to vendors shortly. As I said in my prepared remarks, I mean, they are an important customer and we're going to treat them like that and do our best to grow a good profitable business with them.

Speaker 2

And I do think we're well positioned because the category needs people who do what we do. We innovate and we invest in advertising. And I think one of the challenges this category has had is there hasn't been enough of that. So, Tempur as a brand and the owner of a mattress firm, I know respects investment and advertising and investment and innovation. So they should see the same thing from us.

Speaker 2

They should expect it from us. And, we expect that that will keep us in a healthy place with them.

Speaker 5

Thanks. That's helpful. And then just a quick one. I'm curious on your tariff exposure. I know you manufacture in The U.

Speaker 5

S. And have noted very little China exposure. We're curious if you source any of your materials from Canada or Mexico. And I guess, if so, what actions would you or have you taken to minimize any of that tariff impact?

Speaker 3

Yes. So we do have just a little bit of, inventory that we're purchasing from Mexico. At this point, between China and Mexico, our overall exposure based on the current proposals that are out there, whether they're on again or off again is in the $2,000,000 to $5,000,000 range. So we feel like we've got a manageable exposure and we have good relationships and good supply chain set up with the current vendors that we have. So I wouldn't say there's any massive changes planned in how we're managing things at this point.

Speaker 5

Thanks. That's all for me.

Speaker 2

Thank you. Thank you, Will.

Operator

We are done taking questions at this time. This concludes our question and answer session. I would like to turn the conference back over to Rob DeMartini for any closing remarks.

Speaker 2

Just want to say thank you to our associates. As I said in my script, it's been a difficult couple of years and they've fared well and stand up to the challenges. And I want to thank our wholesale partners because they help us build a great brand. So with that, I'd say thank you and that concludes the call.

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Earnings Conference Call
Purple Innovation Q4 2024
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