Purple Innovation, Inc. (NASDAQ:PRPL) Q4 2023 Earnings Call Transcript
Purple Innovation, Inc. (NASDAQ:PRPL) Q4 2023 Earnings Call Transcript March 12, 2024
Purple Innovation, Inc. beats earnings expectations. Reported EPS is $-0.15, expectations were $-0.19. Purple Innovation, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, ladies and gentlemen. Welcome to Purple Innovation Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] It is now my pleasure to introduce your host, Brendon Frey of ICR. Please go ahead.
Brendon Frey: Thank you for joining Purple Innovation's fourth quarter 2023 earnings call. A copy of our earnings press release is available on the Investor Relations section of Purple's website at www.purple.com. I would like to remind you that certain statements we will make in this presentation are forward-looking statements. These forward-looking statements reflect Purple Innovation's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting the company's business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements included in our fourth quarter 2023 earnings release, which was furnished to the SEC today on Form 8-K, as well as our filings with the SEC referenced in that disclaimer.
We do not undertake any obligation to update or alter any forward-looking statements, whether 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 DeMartini, Purple Innovation's Chief Executive Officer. Rob?
Robert DeMartini: Thank you, Brendon, and thank you, and good afternoon, everyone. With me on today's call is CFO, Todd Vogensen. After our prepared remarks, we'll open the call up to your questions. While it has taken us a few quarters longer than we originally anticipated, we're extremely encouraged by the response to our new product lines from both consumers and our wholesale partners. Encouragingly, the green shoots we saw in the fourth quarter have continued into 2024. Our fourth quarter performance represents an encouraging finish to what was a transformative year at Purple Innovation. Sales increased year-over-year for the first time in eight quarters, in line with our guidance and despite lower advertising spend and industry seasonality, sales also increased sequentially from quarter three.
The fourth quarter marked the continuation of positive trends in each of our distribution channels, in total and relative to recent industry growth rates. This was the third consecutive quarter that wholesale, showrooms and e-commerce, all registered sequential growth. Supported by the outperformance over the Black Friday/Cyber Monday holiday weekend, showroom sales for the quarter were up mid-teens year-over-year with more than 60% of locations comping positive, and e-commerce sales were slightly positive compared with Q4 last year as this channel further stabilized after 10 quarters of year-over-year declines, and our advertising initiatives gained traction. Wholesale also performed well over the holiday period with the channel nearly flat to Q4 last year.
Our improving top line performance, combined with enhancements we've made to our manufacturing, supply chain and product engineering drove a meaningful sequential improvement in our bottom line, including positive adjusted EBITDA for the month of December. As I said, 2023 was a transformative year for the company. We embarked on our path to premium sleep strategy, aimed at establishing Purple as a formidable challenger brand in the premium sleep category. And despite sluggish industry trends, we made significant progress against this goal, capturing market share and building momentum for 2024. To recap the year, we executed the largest, most innovative new product launch in company history. We introduced nine new mattress models across our new three-tiered offering, including our premier and luxury collections, Restore and Rejuvenate, with Rejuvenate elevating our price points into the $5,500 to $7,500 range.
We simultaneously began the process of repositioning Purple as a premium brand with the launch of a new campaign Sleep Better, Live Purple which communicates how our proprietary GelFlex Grid delivers deep, uninterrupted sleep. Following a period of reduced advertising investments ahead of the transition, we elevated our spending in the second half to support the launch and enhance consumer awareness and interest in the differentiated benefits of the Purple brand. At the onset of 2023, we expected the mid-May launch of our new products and new marketing would coincide with an uptick in industry demand after nearly 18 months of double-digit declines. While industry unit growth has yet to rebound, we made steady progress as the year unfolded as evidenced by the sequential quarterly improvements in our top and bottom line results.
Our investments in product innovation, brand building and marketing, including enhanced point-of-sale materials have paid dividends across our distribution channels. With respect to wholesale, we increased our total number of floor slots by approximately 10% in 2023. More importantly, the collaborative approach we've taken with our retail partners to grow both of our businesses through higher-priced, higher-margin products has forged stronger relationships that we believe will lead to door productivity gains going forward. We remain grateful for the trust of our retail partners and the growing opportunities we have together. In our showrooms where we control the presentation and selling process, the launch had the most immediate impact. Our sales teams have done a good job upselling consumers into our Restore and Rejuvenate mattresses, driving an increase in average mattress selling price, post launch.
These improving trends helped offset the softer industry-wide traffic and returned the majority of our comp stores to positive territory in the fourth quarter. With our price points moving higher and industry transactions shifting more towards brick-and-mortar, we're encouraged with the stabilization of our e-commerce channel showed in the first half of 2023 and the quarter-over-quarter growth it achieved in the second half. Our new product and marketing strategies had a positive impact on purple.com site traffic and more recently, we've seen an uptick in conversion, thanks to some of the adjustments we've made to the user experience. Below the revenue line, we also made important progress to ensure the company is positioned to drive profitable growth.
Our Chief Operating Officer, Eric Haynor and his team have done a good job optimizing our manufacturing facilities and gaining efficiencies throughout our supply chain. This has allowed us to stabilize adjusted gross margins around 37% on current volumes, providing a clear path to 40% gross margins as we expand our top line and benefit further from the operations team's continued work. Meanwhile, our Chief Marketing Officer, Keira Krausz and her team evolved our marketing mix throughout 2023 to more efficiently reach and convert consumers across all channels. Based on recent learnings that are being applied to our forward plan, we expect to leverage marketing and advertising in 2024 by being more productive with our spend. As you recall, Eric and Keira both joined Purple in 2022, along with Chief Innovation Officer, Jeff Hutchings.
In 2023, we rounded out our leadership team with three important hires, adding Scott Kerby as our Chief Owned Retail Officer; Tricia McDermott as Chief Legal Officer; and Todd as our Chief Financial Officer. I'm extremely pleased with the experience and the caliber of the management team we've assembled at Purple and believe the work they and our entire organization have done has built the foundation for profitable growth in 2024 and beyond. And we have a clear plan in place centered on five key initiatives designed to ensure we're on the right path towards this overarching objective. First, we're focused on improving productivity of existing showroom and wholesale doors. While showroom expansion has been an emphasis for the last few years, in 2024 will slow door growth and prioritize the profitability of existing showrooms through new top line and cost initiatives.
One of the bigger opportunities we're focusing on is accelerating sales by leaning into third-party consumer financing to drive higher average tickets as customers both trade up and into our higher-tier offerings and bundle products like our new smart bases. We'll also rethink how we approach selling in our stores and shift to a more intentional selling environment with a focus on conversion, especially for consumers that are already in their purchase journey. From a cost perspective, we'll look to restructure current arrangements, including leases and overhead, to better align with the current level of revenue per store and enhanced channel profitability. In addition to being profitable growth vehicles on a stand-alone basis, our showrooms, especially the ones in high-traffic areas, serve as a form of advertising that's driving both traffic into our partner stores and overall demand for our mattresses.
Our recent consumer research indicates that those consumers who didn't make a purchase on their first visit to one of our showrooms, approximately 25% then went on to shop at a wholesale partner store in a subsequent visit. The in-store education and the premium experience provided by our showrooms creates a high-quality, high-intent potential purchase, either directly or through one of our wholesale doors. With respect to wholesale, while we've made great strides over the past year with our partner relationships, we're aiming to create even more synergies to drive increased door productivity in 2024. We will look to leverage co-op dollars with our partners and provide more marketing support, while also conducting monthly and quarterly joint business reviews to solve for revenue growth together.
Additionally, we'll look to continue our efforts around product education for retail sales associates to ensure they understand the benefits of our unique Gel Grid technology and help continue to grow enthusiasm for the Purple brand alongside our direct efforts. Our second area of focus is on improving e-commerce mattress conversion. In 2024, we will continue to test different messaging and different mediums to drive better conversion results. While our recent site improvements and shift in media strategy have sequentially improved both the quality of traffic and conversion rates, we believe there are significant opportunities to improve both the quality of traffic we are driving to our website and the conversion of that traffic into customers.
Third, as we mentioned last quarter, driving gross margin improvement will also be a significant initiative in 2024. Several actions planned or already underway include select price increases on certain mattress models in some of our ancillary products, steadily increasing the mix of our higher margin, higher average selling price Premium and Luxe mattresses, reducing reliance on air freight and several initiatives to improve our manufacturing and sourcing efficiency. Fourth, we'll look to improve marketing efficiency. In 2023, we strategically spent a larger portion of our marketing dollars on brand awareness to support the launch of the new product lineup and new brand position. With our product and new brand now in market, we will still invest behind awareness building, but we'll shift our spend towards more efficient marketing tactics as we focus on customers already in the mattress market with consideration and conversion ad spending.
We'll also plan to return to our highly effective experiential and demonstratable product advertising, starting with a reintroduction of our egg drop video. And lastly, bringing new products and innovations to market remains a core focus of the company in 2024. Purple was built on innovation and intellectual property that improves our consumers' comfort and sleep. With a strong innovation engine led by Chief Innovation Officer, Jeff Hutchings, I'm pleased to share that we currently have a strong pipeline of new products that are expected to come to market over the next 12 to 24 months and several technological innovations currently in development. This continued focus on our innovation heritage not only creates excitement for the brand, but it also cements our leadership in grid-based technology and drives new margin improvements as we leverage our frequently copied, but never duplicated intellectual property in new and exciting ways.
To support the initiatives I just outlined in January, we refinanced our debt and added liquidity to our balance sheet. Along with our existing cash position, we are confident this new facility provides us with the financial flexibility to execute our path to premium sleep strategy and to invest in growth. I'll now turn the call over to Todd to discuss the 2023 financials in detail as well as our outlook for 2024. Todd?
Todd Vogensen: Thanks, Rob. We were pleased to end 2023 with fourth quarter results that were in line with our expectations, and we look forward to building on our momentum throughout 2024. Now jumping to our recent performance. For the three months ended December 31st, 2023, net revenue was $145.9 million, an increase of 1.1% compared to $144.3 million in the prior year period. The year-over-year increase was largely due to the growing positive response to our new product lineup, partially offset by the continued industry-wide softness for home-related goods. By channel, direct-to-consumer net revenue increased 4.3% versus the prior year period. Within DTC, e-commerce increased 0.5% as our focus on driving higher quality traffic to our website gains traction.
Showroom net revenue increased 17.5% driven partially by the addition of five net new showrooms over the past 12 months, along with higher ASPs compared to last year. The increase in DTC was partially offset by a 2.7% decrease in wholesale net revenue, while down year-over-year, our wholesale channel performance in the fourth quarter was better than the industry trends mentioned earlier, driven by growing consumer adoption of our new product line. Gross profit was $48.5 million during the fourth quarter compared to $49.9 million during the same period in 2022, with gross margin rate at 33.2% versus 34.6% last year. Gross margin in the fourth quarter of 2023 was impacted by costs associated with the launch of the new product line, including the industry standard price reductions on the sell-in of new mattress floor models to wholesale partners and incremental air freight costs associated with the purchase of materials for our new products.
Note that we've completed the new product rollout in the fourth quarter with the launch of our new line at our largest customer, as a result, Q4 is the last quarter we expect these types of adjustments. Net of these costs, adjusted gross margin was 36.7% in the current year quarter. Adjusted gross margin improved by 210 basis points compared to last year due primarily to manufacturing efficiencies from higher production volumes in 2023 and increased average selling prices of the company's expanded product line. Operating expenses were $64.7 million compared to $61.9 million in the fourth quarter of 2022. The increase was largely driven by growth in advertising spend to support the launch of our new product line and the cost of five net new showrooms in 2023, partially offset by a $4.1 million decrease in G&A expense related to lapping special committee costs from 2022 and an insurance recovery on special committee costs in 2023.
As a percent of revenue, operating expenses were 44.3% compared to 42.9% in the fourth quarter of 2022. As a result, adjusted net loss in the fourth quarter of 2023 was $15.8 million compared to an adjusted net loss of $8.1 million last year. Adjusted EBITDA was negative $9.8 million versus negative $0.8 million a year ago and fourth quarter adjusted loss per share was $0.15 compared to an adjusted loss per share of $0.09 in fourth quarter of 2022. Now to our full year results. For the 12 months ended December 31, 2023, net revenue was $510.5 million, down 10.9% compared to $573.2 million in the prior year. Overall, full year net revenue growth was negatively affected by difficult market conditions for the home-related goods category, coupled with several headwinds associated with the conversion and launch of our new product line.
These headwinds included the industry standard practice of the discounted sell-in of floor models and increased discounting on legacy products. By channel, DTC net revenue declined 10.2% year-over-year, primarily due to decreased e-commerce channel demand, which was partially offset by growth in Purple showroom revenue driven by the addition of five net new showrooms in 2023, the annualization impact of adding 27 net new showrooms through 2022, as well as higher ASPs driven by the consumers' adoption of the new higher-tiered product within the channel. Wholesale revenue declined 11.9% due to the softening industry-wide demand and the previously mentioned transition factors. Gross profit was $171.8 million in 2023 compared to $208.1 million in 2022, with gross margin rate at 33.7% versus 36.3% in 2022.
The decrease in gross profit over the prior year was primarily due to the impact of the new product launch in May, including new floor models being sold to wholesale partners that reduced pricing, higher labor and freight costs and decreased manufacturing efficiency. Excluding the product transition costs, adjusted gross margin for 2023 was 37.2%, a 90 basis point improvement over 2022, reflecting increased average selling prices of the company's expanded product line. Operating expenses were $285.5 million or 55.9% of net revenue in 2023 versus $250.8 million or 43.8% in the prior year period. The increase in operating expenses was primarily driven by showroom expansion, along with an increase in advertising spending from 12% of revenue to 14% of revenue to support the new product launch and $9 million in incremental special committee costs from earlier in the year.
As a result, for the full year of 2023, adjusted net loss was $73 million compared to an adjusted net loss of $31.4 million last year. Adjusted EBITDA was negative $54.7 million versus negative $0.2 million a year ago, and adjusted loss per share was $0.70 compared to an adjusted loss per share of $0.38 in 2022. Now turning to the balance sheet. Net inventories totaled $66.9 million at December 31, 2023, compared to $73.2 million at December 31, 2022, and $72.1 million at September 30, 2023, representing decreases of 8.6% and 7.2%, respectively. At year-end, we had cash and cash equivalents of $26.9 million compared with $41.8 million at December 31, 2022. Our decrease in cash consisted of, cash used in operations of $54.7 million and capital expenditures of $15.2 million, primarily related to additional manufacturing facility investments and showroom expansion, all partially offset by proceeds from the company's stock offering in February of 2023.
As Rob mentioned earlier, in January 2024, we amended and restated our two primary outstanding debt facilities, an ABL credit agreement and a term loan agreement with the company's previous lenders. At the same time, we established a new upsized term loan of $61 million with approximately $22 million of incremental available capital, resulting in approximately $48 million of cash and cash equivalents subsequent to the January transaction. Turning now to our outlook for 2024, we are confident that the foundation we have built in 2023 has the company positioned for continued improvement in the year ahead, while we're encouraged by our recent progress, we recognize that the macroeconomic environment remains challenging with limited near-term visibility.
Taking all this into account, we're expecting 2024 net revenue to be in the range of $540 million to $560 million, reflecting mid to high single-digit percentage increase versus 2023. We also expect negative adjusted EBITDA to be between $20 million and $10 million and capital expenditures to be $10 million to $12 million. In terms of how the year unfolds, we expect quarterly revenue and adjusted EBITDA performance to improve sequentially as we progress throughout the year with positive adjusted EBITDA and cash flow in the second half of 2024. While we don't plan to give quarterly guidance throughout the year, since we are more than three quarters of the way through the first quarter, we are providing specific details in this instance. For the first quarter, we expect net revenue to increase by a low to mid-teens percentage to approximately $120 million to $125 million and negative adjusted EBITDA to be approximately $15 million to $10 million.
Also, you will have noticed today that we issued a press release on an agreement that we've reached with Tempur Sealy. We'd be happy to answer any questions on this press release as we go through our question-and-answer period. And now I'll turn the call back over to the operator for questions.
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