Purple Innovation, Inc.

Good morning, ladies and gentlemen, and welcome to Purple Innovation's third quarter 2020 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. It is now my pleasure to introduce your host, Brendan Frey of ICR. Please go ahead.

Thank you for joining Purple Innovation's third quarter 2020 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 third quarter 2020 earnings release, which was furnished to the SEC yesterday 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 references to non-GAAP financial measures, such as EBITDA, adjusted EBITDA, adjusted net income, and adjusted earnings per share. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures is available within the earnings release, which can be found on our website. With that, I'll turn the call over to Joe Megabeau.

Thank you, and good morning, everyone. With me on the call today is John Legge, our Chief Operating Officer, and Craig Phillips, our Chief Financial Officer. Following our prepared remarks, we'll be happy to take your questions. It was another very strong quarter with demand for the Purple brand at an all-time high. Our teams did a great job capitalizing on our opportunities as we manufactured and sold more mattresses in Q3 than in any quarter in the company's history to deliver record revenue. Our top line performance was driven by incredibly strong gains in our DTC channel, coupled with a resurgence in our wholesale business as our retail partners experienced improved traffic following Q2 store shutdowns and limited operating hours. During the quarter, we also executed key operational, strategic, and financial initiatives in support of our long-term growth strategies. A few of the many key highlights for Q3 compared to Q3 2019 include net revenue increasing 59% to a record $187 million, growth margins expanding 220 basis points, net loss of 1.2 million with adjusted net income of $17.2 million, adjusted EBITDA growing 97% to $30.1 million, and cash increasing 213% to $98 million, even as we made important investments in the business. We also began work on our new 520,000 square foot manufacturing assembly and fulfillment center in Georgia, acquired the rights to an IP licensing agreement signed prior to the formation of PRPL, strengthening our IP portfolio, and signed a new five-year, $100 million senior secured credit facility, including an available $55 million line of credit, creating a more optimal capital structure, and significantly lowered our borrowing costs. I'm also thrilled to report that we just received the J.D. Power Award for highest customer satisfaction with Mattress Online for our second year in a row. Looking at our performance in more detail, DTC revenue increased 98% to $134 million with strong increases over the prior year period in each month of the quarter. We kicked things off with a very successful 4th of July holiday period creating a lot of momentum that carried into August before accelerating during an even stronger Labor Day sale. In terms of product performance, across our DTC channel, we experienced fantastic growth. For mattresses, demand was once again strongest for our hybrid Premier product line, underscoring the progress we have made advancing the premium nature of the Purple products and brand. The combination of product mix and price increases implemented in early July drove a 14% increase in average mattress order value year over year. At the same time, our non-mattress categories posted growth rates greater than 100%. Demand is reaching new heights as we've moved quickly to capitalize on the recent focus on home in both the bedroom and home office, which I suppose are sometimes the same, by upholding our marketing, merchandising, and selling programs for our premium seat cushions, pillows, and sheets. With consumer demand still leaning heavily online alongside reduced channel marketing costs, we shifted our marketing strategy to better reach those new to online customers. We pulled back on more expensive lower funnel channels and are now able to efficiently cast a wider net in both traditional media and digital prospecting. With this larger addressable market, we were able to substantially increase traffic to our site while maintaining healthy conversion rates. This approach once again drove significant growth and meaningful expense leverage. Turning to wholesale, revenue is $53 million, marking a return to growth with an increase of 7% compared with a year ago and up 165% from Q2 this year. Our sales in this channel rebounded strongly from Q2 levels as retail traffic steadily improved and consumers shopping our brick-and-mortar accounts increasingly chose the purple brand. This was evident by the strong sell-through trends we witnessed at both existing accounts and recently launched retailers in the third quarter, especially during the key July 4th and Labor Day sale periods. As we discussed on our last call, the strong demand for our brand and products is outstripping capacity and in Q3 likely reduced our wholesale performance. We were also challenged with both foam and coil supply shortages that reduced production levels below our intrinsic capacities. The addition of MAC7 in June helped alleviate some constraints, but until production at our new facility is up and running and supply shortages are alleviated, our ability to significantly expand with existing customers and add new accounts is constrained. We recently made the decision to allocate a portion of production in order to bring on our first international wholesale relationship. I'm excited to announce that as of yesterday, Purple products are available at Sleep Country, Canada's leading omnichannel mattress and bedding retailer with over 265 doors throughout the country. This includes the launch of an all-new mattress, the Purple Plus, which adds a premium cover that is cool to the touch and even more breathable, along with an advanced new premium comfort foam under the Purple Grid that, along with the high air dissipation supported by the grid, further pulls heat away from the body. It's a great new mattress. And in support of our expected growth in Canada, We have expanded our partnership with Leggett & Platt, who will provide Canadian assembly capacity, augmenting our in-house assembly capacity. We look forward to further expanding our wholesale door count in 2021 once MAX 8 and 9 come online at Purple South. To provide an update of the status of our new facility in Georgia, I'm now going to turn it over to John.

Thanks, Joe. Since I last spoke with you in August, we have been extremely busy preparing Purple South to commence operations. Right now, we are fully engaged in the build-out of the facility and are close to completing the foundations that will eventually house the six mattress MAX machines at this location. We are pleased with the progress we have made on MAX 8 and 9 and expect to have MAX 8 online within about 90 days, along with our first of four new assembly lines. MAX 9 is being built in parallel, and we expect to bring it online shortly afterwards. These two additional machines will increase our current production capacity by roughly 25% to 30%, allowing us to better meet near-term D2C and wholesale channel demand, with future growth further supported by two more MAX machines slated to be added later in 2021. On the logistics side, we are and continue to prepare our warehouse management system, physical location solution, and hardware in preparation for first quarter distribution and fulfillment activity. Finally, we have ordered additional injection molding machines used for seat cushion and pillow production that will double our current capacity. This will allow us to better meet the growing demand for these two categories. We are very excited to be making progress on this critical infrastructure investment that when completed will significantly expand our U.S. manufacturing and create many new jobs. I'm pleased to say that the staffing of the local management team is on track and proceeding as planned. and we'll be further tapping into the area's large talent pool as we continue to build out the workforce. With that, I'll turn it back to Joe.

Thanks, John. Along with the activity near Atlanta, the organization is gearing up for a strong finish to the year. The momentum the business has experienced since early April has not let up, and we are expecting another strong holiday season. Our focus is on meeting both DTC and wholesale demand, continuing our omnichannel strategy of supporting our customer, wherever they choose to engage with our brand. We've already discussed the imbalance between demand and capacity that we are facing until we bring on the additional max machines. For the fourth quarter, we are still dealing with constraints on our supply of foam, which we use in the core of the Purple Mattress. This shortage is related to upstream chemical supply challenges facing all foam manufacturers. We are also now facing coil shortages, where our specific fabrics used for the coil sleeves have only recently been reallocated for PPE product which has limited our capacity of our hybrid mattresses. That said, we currently believe we have ample finished goods and inbound supply to meet our holiday needs and are aggressively pursuing alternative sourcing options should demand exceed our expectations. As we navigate this challenge, our teams are also executing key initiatives that will set the company up to start 2021 from a position of strength to continue our market share growth. As John just outlined, we are rapidly building out our new facility and remain on track to begin manufacturing and fulfillment activities in the Southeast early in the new year. With MACs 8 and 9 online, we will be able to resume our wholesale expansion strategy in earnest, which includes selectively increasing our door count with existing partners and adding other leading furniture and bedding retailers in regions of the country where our brick and mortar presence is under-penetrated. Our fourth quarter plans also include accelerated investment in new creative and website design, that will serve as the foundation of our 2021 brand positioning. Throughout this year, we evolved our messaging in order to better support the premium nature of our products, as well as our unique innovations with the Purple Grid and our hyper-elastic polymer and the very real benefits they provide. The work currently underway will continue to advance these themes as we capture more of the premium end of the market and look to attract new consumers to the brand. As to the website, we continue to make improvements, as well as the larger replatforming effort which we chose to delay initial rollout until early 2021 to avoid any unnecessary risk through the holiday months. We do continue to evolve the existing platform, and we believe these efforts have set us up for a strong holiday, starting with our new kids corner, featuring our new lighter and more affordable kid mattress paired with our kid pillows and kid sheets. We have historically seen strong kid demand for our brand, which is unique in the category. We have a beautiful holiday gift guide with elevated branding, which includes our just released purple pajamas, literally made from our soft stretch sheets in partnership with Sleepy Jones. Our soft stretch sheets are so comfortable, you can now wear them. And we continue to lean into bundles, which offers a great value for our customers and continues to drive up order value and units. The fourth quarter marks the resumption of our brand showroom expansion, which we paused at the outset of the pandemic. We recently opened two showrooms that feature our latest evolution in store design. The new design looks amazing with elevated presentation and continued focus on meeting our customers' needs. The first new showroom is in Austin, Texas, and the second is in Tyson's Corner, Virginia. We have two additional showrooms under construction that will launch in Q4, one in the Midwest and one in the Pacific Northwest. This will bring our showroom count to nine by the end of the year. All of our showrooms are performing very well and are now exceeding pre-pandemic sales volume. We anticipate starting the new year with similar momentum of around five new showrooms opening in Q1. Finally, we are continuing to invest in new product development that we anticipate launching in 2021. With our healthy balance sheet, we are also expanding our investment into research capabilities, and we have many exciting programs underway, ranging from new and improved manufacturing processes to to improved materials and novel new gel formulations, as well as entirely new consumer technologies. I'll now turn it over to Craig, who will review the financials in more detail.

Thanks, Joe. As Joe outlined, we had another very strong quarter from both a revenue and adjusted profitability standpoint. As you will hear later during the quarter, we had a significant non-cash adjustment related to the fair value of outstanding warrants driven by the increase in our stock price as well as a loss in the extinguishment of debt associated with the replacement of our previous debt agreement. As the three months ended September 30, 2020, net revenue was $187.1 million, up 59.4%, compared to $117.4 million in the prior year period. Revenue increase was driven primarily by strong growth in mattresses in our DTC channel, along with higher demand for pillows, sheets, and seat cushions. Our wholesale business also returned to growth following a difficult Q2 when COVID-19 severely disrupted our partner store operations. For the quarter, DTC channel net revenue increased 97.5% year-over-year, while wholesale channel net revenue grew 6.9%. Gross profit dollars were $88.3 million during the third quarter of 2020 compared to $52.9 million during the same period in 2019 with gross margin at 47.2% versus 45% in the third quarter of 2019. This gross margin increase of 220 basis points year over year can be attributed primarily to the higher proportion of DTC channel revenue, which carries higher gross margins in our wholesale channel. DTC revenues comprise approximately 72% of net revenue for the quarter, compared with approximately 58% in the same quarter last year. Additional positive contributions to the gross margin improvement came from a modest product mix shift as we continued to increase our non-mattress revenue, a July price increase on several of our models, and improvement in our overall return rates in our DTC channel. This was partially offset by headwinds from higher freight expense and incremental overhead associated with our new Atlanta facility. Operating expenses were 34.2% of net revenue in the third quarter of 2020, versus 35.7% in the prior year period. This improvement of 150 basis points is achieved through ad spend efficiencies, open headcount, and leveraging our expense base on higher net revenue, partially offset by an increase in marketing costs aimed at driving demand and increased brand awareness, as well as the addition of company-owned retail showrooms in the fourth quarter of 2019. Marketing and sales expense is a percentage of net revenue decreased to 27.4% compared with 29% last year, primarily due to efficiencies in our advertising spend created from enhanced marketing strategies and lower rates in certain marketing channels in which we advertise. For the third quarter, we reported an operating income of $24.3 million, compared to $11 million in the third quarter of 2019, an increase of 120.9%. Net loss for the quarter was $1.2 million compared to net income of $8.4 million in the year-ago period. The third quarter 2020 included an $18 million non-cash expense associated with the change in fair value of warrant line billings, a $5.8 million loss on the extinguishment of debt related to the retirement of the company's previous debt agreement, and the $0.6 million non-cash expense associated with the tax receivable agreement. The third quarter 2019 included a $1.4 million non-cash expense associated with a change in fair value of warrant liability. Excluding these items, adjusted net income was $17.2 million or $0.27 per diluted share based on a fully diluted share count of $64.4 million compared to adjusted net income of $7.3 million or $0.14 per diluted share based on a fully diluted share count of $53.7 million. Adjusted net income has been adjusted to reflect an estimated effective income tax rate 25.2% for the current year period and 25.6% for the comparable prior year period. EBITDA for the quarter was $2.5 million compared to $10.5 million in the third quarter of 2019. Adjusted EBITDA, which excludes non-cash expenses associated with the change in fair value of warrant liabilities, tax receivable agreement expense, and stock-based compensation, as well as expenses primarily related to loss and extinguishment of debt, a technology vendor impairment, legal fees, interim CFO and consultant costs, severance, previous period sales tax liability, and COVID-19-related expense was $30.1 million versus adjusted EBITDA of $15.3 million in the same quarter last year. Moving to our balance sheet, net inventories totaled $50.8 million at September 30, 2020, compared to $47.6 million at December 31, 2019. As of September 30, 2020, the company had cash and cash equivalents of $98 million compared with $33.5 million at December 31, 2019, with an increase of 192.6%. As we announced on September 3, we entered into a five-year, $100 million senior secured credit facility. The new facility consists of a $45 million term loan and a $55 million revolving line of credit. down the full amount of the term loan at closing and utilize the proceeds to retire our previous credit agreement. We have not drawn on our line of credit. Our borrowing rates are based on the company's leverage ratio and our initial rate of LIBOR with a floor of 0.5% plus 3% is 850 basis points lower than our previous rate. Based on our strong cash position at the end of September, continued demand for our products and our new $55 million line of credit we feel we are well positioned to continue investing in our business, which includes our new Atlanta manufacturing facility, company-operated showrooms, purple branding, and innovation initiatives. Due to the continued uncertainty in the overall economy, we are continuing to refrain from providing guidance at this time. However, I do want to highlight a few important points about our fourth quarter. As Joe commented, the mattress industry is currently experiencing a shortage of foam and coil supply, which has impacted purple as well. To reiterate, we are working diligently to secure enough supply in order to meet consumer demand, but based on current market conditions, it is possible the shortage may impact our ability to do so, and therefore may impact our ability to meet realized demand. For the fourth quarter, as we have seen in comparable periods in prior years, we expect to see contribution margin headwinds from advertising rates that are traditionally higher during the holiday season. As our wholesale partners continue to see expansion in their business, We also expect a continued increase in wholesale demand where we experience lower margin rates. Additionally, we are continuing to invest in our new Atlanta manufacturing facility that will dramatically increase our capacity next year. However, until that facility is fully operational and producing at rates similar to our Grantsville facility, we will continue to see margin headwinds from this investment. Also, the incremental website and creative spend Joe touched on as well as higher co-op marketing expenses our retail partners utilize dollars not spent earlier in the year will likely push our marketing and selling expense for the fourth quarter above our target of 30%. For the year, though, we expect to be at or below that target level. These factors will cause our adjusted EBITDA margin to trend closer to the fourth quarter a year ago versus the margins we've experienced in the previous three quarters of 2020. However, with our strong momentum coming out of Q3, we expect year-over-year quarterly growth rates similar to Q3 in revenue at adjusted EBITDA balanced with the planned Q3 investments in people, capacity, showrooms, and infrastructure just discussed. I also want to spend a moment discussing our share count. From October 1 through October 26 of this year, approximately 8 million public warrants were exercised resulting in the issuance of 4 million Class A shares and generating proceeds to the company of approximately $45.6 million. On October 27th, we announced that we were redeeming the approximately 11 million outstanding public warrants, which are exercisable on a two-for-one basis, and the 2.6-month incremental loan warrants, which are exercisable on a one-for-one basis. For the warrant agreement, any exercise of warrants between the notice date, October 27th, and the redemption date, November 30th, must be executed on a cashless basis. As of November 9, 2020, approximately 1.7 million public warrants and all 2.6 million incremental loan warrants had been exercised since October 27, resulting in an additional 3.1 million Class A shares being issued. Considering the impact of these exercises, we had approximately 60.9 million Class A shares outstanding as of November 9, 2020. If all of the remaining aforementioned public warrants are exercised on a cashless basis prior to the redemption date, we estimate we will issue an additional 2.9 million Class A shares. This would increase the total outstanding Class A shares to 63.8 million as of November 30th. It's important to note that there are still approximately 8.5 million sponsor warrants outstanding which are exercisable on a two-for-one basis but are not redeemable. And I'll turn it back to Joe for his closing comments.

Thanks, Craig. We are on track for finishing off an outstanding year of growth and enhanced profitability despite the initial challenges presented by COVID and operating under capacity constraints for much of 2020. Our performance in these conditions highlights the growing awareness and desirability of our differentiated products and the strengths of our omnichannel distribution strategy, particularly our advanced digital capabilities. Importantly, the work our teams have done over the past 12 months has significantly strengthened this foundation and put the company on a clear path to maintain our pattern of profitable growth. While there is still health and economic uncertainty in front of us, we believe that the positive momentum already demonstrated early in the year remains in place. So regardless of recent positive consumer shifts resulting from the pandemic, we believe our intrinsic business is well set up for continuing to take share into 2021. I want to thank all of our nearly 1,500 employees for their relentless hard work and dedication and the commitment they've shown to maintaining our operational excellence under difficult circumstances. At this time, we will open up the call to questions.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please ask one question and one follow-up question and re-queue for additional questions. Our first question is from Bobby Griffith with Raymond James. Please proceed.

Good morning, everybody. Thank you for taking my questions, and congrats on another great quarter.

Thanks, Bobby.

Thank you. The first thing I wanted to ask about was just the sequential change in gross margin and understanding the mix-up in wholesale from in 3Q versus 2Q of this year. When we think about modeling out 4Q gross margin, and you've talked about another mix-up in wholesale, so could we use that change in 3Q as a good kind of starting point? It looks like, I don't know, for every 5% change. change in wholesale mix, it's roughly 60 or 70 bps worth of gross margin pressure, or is there other items in there that I should keep in mind when we're trying to kind of pinpoint where gross margins should be in the fourth quarter based on our wholesale estimates?

Did you ask Craig that?

Yeah, it was for Craig or you, Joe, whoever you think.

Sure, I'll kick off since I jumped in, but Craig can fill in. So as you're trying to model out Q4, I think you need to realize it's not just a gross margin story. As you stated, we are anticipating a continued shift back toward, call it, normal channel mix. where our wholesale, which in Q3 was more like sub-30%, around 28% wholesale, where in Q4, getting back to more of that third of business being in wholesale is current trends, which is where we've always said we like to be. So that does create some gross margin pressure, of course, But I think the other things to keep in mind as you think about Q4, Q4 has seasonality that just – and it's consistent if you look back at our prior two Q4s in 18 and 19. Q4 just looks different than other quarters. It's a more promotional quarter. Marketing expense is typically higher as compared to Q2 and Q3 where we saw very – attractive marketing costs. Things are also shifting back to much more normal marketing expense in Q4 on top of the increased dollars that are in the marketplace. So where we've been sub 30% of net revenue in advertising and selling in the last couple quarters, we expect to be back into that more 30% mark. And the other thing is we're back into investment mode. We've got a healthy cash, healthy balance sheet. We're investing in building out, as we've said, our new manufacturing facility. We've ramped back up investment into getting the new site platform built out and some of the creative and design around that, as well as reinvesting in R&D and our research capabilities as some of which is leaning into growth and some of which is catch up on things that we had deferred early in the year, which just makes prior quarters look a little more attractive. So the key is everything's healthy and normal. There's nothing about Q4 that is really surprising, at least to us. It's just a very different kind of quarter than we've seen in prior quarters. Craig, I don't know if you want to add to that.

Yeah. I'd say the – I think your question was more around gross margin, and if it was, I'd say the only real difference – I don't think you're thinking about it incorrectly, but one of the probably biggest differences on the gross margin level will be the operating costs in Atlanta as we really start to ramp that up heavy to get an operational – that'll put pressure on the margin.

Okay.

The shift from DTC more into wholesale, that shift –

uh economics won't change from from the shift in prior quarters okay that's helpful and then maybe just to follow up and i just want to make sure we're all on the same page from a capacity standpoint but the the plan is to have the the eighth and ninth machine up and running here i think you guys mentioned 90 days or and then the ninth a little after the 90 days and then What's the number of machines that will be added after that in the Georgia facility? So I'm just trying to get a sense of where the goal is of how many machines will be up and running by the end of 2021, because that will help us engage where we should try to put our revenue estimates at based on what we estimate for each machine's productivity.

Yeah, so the facility itself can hold six. uh machines and uh you know there's a number of things that we're doing up front and in parallel so uh you know for instance part of retrofitting the facility is is digging and reinforcing some fairly large pits to contain them and we've already built and uh and and poured you know built up and and poured in for all six pits so we're setting ourselves up to be able to build out in parallel As of we look at this year, we're modeling a little more conservative pace, so we're expecting to get committing to, say, one a quarter or might accelerate a little faster than that. So four more max machines from an operational to the point that they're contributing to the year next year. We may have a fifth online right toward the end of the year, but not in a way that it would be part of the modeling for the year.

Okay, that's helpful. Congrats on the quarter and I appreciate all the details and great to see some of the investments coming back given the growth outlook. So best of luck in the fourth quarter. Thank you.

Thank you so much.

Our next question is from Brad Thomas with KeyBank Capital Markets. Please proceed.

Hi, good morning, Joe, Craig, and John. And let me add my congratulations on a great quarter here and what's shaping up to be a really great year. I was hoping to dig into just the sales trends a little bit more. I was wondering if you could give some color on how the different channels had performed through 3Q and what you were seeing out of each channel, you know, thus far in 4Q.

Sure. Well, first of all, hey, thanks for joining. Channels meaning sales channels, you said? wholesale versus sales channel.

How, how, how did it exactly, how did you see it performed by month and, and, and how it was going so far, uh, through October and the start of November and the same for wholesale, just, just as we try and get our arms around the trajectory of these businesses, um, got it, got it. Yeah.

So, I mean, as we said in the prepared remarks, I mean, DTC was continued to remain very, very healthy in, uh, in Q3. Um, such that it also, as we mentioned, put pressure on our wholesale ability. We still, through much of Q3, had our wholesale partners on some level of allocations as we just continued through the quarter to be supply constrained. We, going into Q4, are on the capacity side feeling much more comfortable confident that we've got what we need for a healthy Q4, both in terms of getting the new max machines and the labor back up and working through some of the upstream supply challenges that we have had. So it's one of many reasons we expect wholesale to continue to grow into Q4 is we're better able to service our partners. In terms of sort of tailwinds going into this quarter, I mean, these things don't change overnight. So the strong performance we've had and strong traffic levels we've had have continued into the quarter. And I think everyone's waiting to see exactly what holiday is going to look like. Something that we did see in Q3 is just, I'd say... Demand seemed to be spread out a little more. The peaks of holiday tended to be a little less, and the customer demand seemed to be more balanced, which we view as a very good thing. But exactly what that looks like heading into Black Friday, Cyber Monday, we are prepared for it however it goes. Everyone seems to have gone a little promotional earlier this year, and we've joined in with that. partly driven by just challenges and fulfillment networks. Um, but so far, uh, what we saw through Q2 is, is driving, driving on.

Very helpful, Joe. Uh, and if I could follow up on, um, the new purple plus model and the brand architecture in general, you know, it's been my belief that you all still a tremendous opportunity ahead of you to refine the assortment that you have. And, um, and add more premium models. I guess, could you talk a little bit more about what sort of testing and R&D you did on Purple Plus? I know it's new to the market. But when you think it will be available in the United States and how you're thinking about continuing to expand and add more premium products over time?

Yeah, the Purple Plus, it's a great new mattress. One thing to consider with it is we really tried to put the customer at the center of everything we do. And that was a mattress specifically built in partnership with Sleep Country for the Canadian market. And one of the things that has performed very well for Sleep Country is is premium foam core mattresses. So it was designed to be a premium mattress that wasn't a hybrid, um, which again is a different kind of design consideration than, uh, than what we've done in the States. Um, in that regard, it's a phenomenal mattress. Uh, you know, it's, it's a much more premium cover. It's, uh, it's just elevated design. The cover is, as I mentioned in the, uh, in the prepared remarks has a cooling, uh, a cooling capability, uh, that, that just feels wonderful to touch. And, uh, we found a novel new, um, foam that, uh, we put underneath the, uh, the purple grid, um, that is really sort of a balance between, it's a novel new technology we found that's a balance between some of the best of both latex and memory foam. It has the bounce that you would want from latex and it draws heat away, but has some of the shaping capabilities that memory foam and pairing that up with our grid was just a magical combination. So it's got elevated features, elevated design. It's a much more creamy mattress overall. But the key is it was designed as a premium foam core mattress, which is exactly the right product for sleep country in Canada. That said, will we bring it down to the States? I think let's see how it goes in Canada, but there's no reason we couldn't. In the States, we are much more focused right now on more U.S.-focused mattresses. premium expansions. And as I mentioned, we are leaning very heavily into our product design and research programs right now.

Very helpful. Thank you so much, Jim. Thanks. Take care.

Our next question is from Curtis Nagel with Bank of America. Please proceed.

Very good. Thanks so much for taking my question, guys. So, yeah, just maybe a quick one first in terms of just how many doors you have at the moment. It doesn't sound like there were any changes. So, you know, somewhere, I guess, above 1800 or around 1800, you know, should that be roughly the same in full queue and kind of how do we think about, you know, expansion, you know, into next year?

Yeah, sure. We, uh, so, so we, I think we ended last quarter just shy of 1700, although on the earnings call, I think we were already over 1800, which is what we announced. Um, we, with the addition of sleep country, uh, which we just launched this week, actually, it gets us closer to 2100 doors. Um, at that point, at this point, we, uh, um, we expect that'll carry us through the end of the year. Um, really, as it's always been, until we get additional capacity built out, we sort of hold the line on that kind of expansion. Once MAX 8 and 9 come online, we continue to have interest with both our larger existing partners as well as some regional plays in areas where less penetrated. That said, we continue to say what we've said all along, which is we are a retailer first and foremost, leading with digital channels and aiming for somewhere between that two-thirds owned to maybe as much as 60% owned versus retail. And we're going to do everything we can to keep that balance. But we also have done extremely well with our wholesale partnership. And as capacity grows, we will continue to lean into wholesale as appropriate.

Very interesting. Yeah, and then, Joe, your comments on the owned stores I thought were really interesting. I think you said that they were exceeding pre-COVID levels, which is encouraging. I guess, would you be able to kind of frame where that productivity is per box, and how should we think about owned store growth in 2021? Sure.

Yeah, it's still something that's in early days. We, I mean, our original plans were a little more aggressive this year. As we had said, we were aiming to open about five a quarter. And given the pandemic, we put that entire plan on pause for obvious reasons. This quarter, we're back into business and we're thrilled that we're opening four more. Again, as I mentioned, we just opened Tyson's Corner in Austin, and it's a completely revamped showroom design, and we're very, very pleased with how it's come out. Right now, our expectation is to get back to the pace we originally said, which is about five a quarter. So, again, these are brand showrooms really trying to bring the brand story to life in key metros. The economics remains, as we've said, very good. We've just lapped a first year on some of them. The specific economics we haven't talked about, and partly as we've been testing a lot and revising as we go, which has been sort of our test and learn conservative approach here. But I'll reiterate, we're seeing industry standard economics here right in line with other specialty mattress retailers. And we're very, very pleased with the results. And just to be clear, they are producing profitable results.

Got it. Thanks very much. I appreciate it.

Thank you.

Our next question is from Brian Nagel with Oppenheimer. Please proceed.

Hi. Good morning. I, too, want to add my congratulations on another very nice quarter. Thank you so much. So the question I have – And look, I understand not giving guidance here, given the fluidity of the environment, but I just want to, on sales, and clearly another very strong sales period here in Q3 and good commentary in Q4, but we're all looking at this COVID crisis very much continues, but hopefully we're looking towards some end of the site now with some of this vaccine news. Either in your data or as you talk to your wholesale partners, are you seeing any indications that you know, the consumers may be starting to back away from this category and refocus elsewhere? Or does underlying demand for the mattress category remain as good as it's been?

Yeah, it's, well, of anything, I'd say demand appears to be very strong right now, which I think just focused on home and health and sleep in general. So I think there's some good strong tailwinds there. I think who has won in that consumer demand has shifted a bit over the last two quarters. Those who have the ability to reach and service the customer through digital channels have been able to arbitrage that demand better, and certainly we believe we've We've done very well in leaning into that. But we remain optimistic that this is a category that's healthy with sufficient demand and sufficient opportunity for growth. Craig, if you want to add anything there.

No, I agree. There's still opportunity there. You've covered it well.

The second question I have, there's a lot you've been talking here about the supply constraints and certain components of the mattresses. I guess I'm looking at this. Given what a purple mattress is and that so much of it's manufactured in-house, does that put you at somewhat of an advantage against the backdrop of supply constraints versus others who are outsourcing much more of the components of their products?

I'm sorry, that cut out a little on my end. Can you say that one more time?

Let me rephrase it, too. So we're talking about the supply constraints and the impact that's had upon your business. But so much of your product is manufactured in-house, vertically. Does that dynamic, against the backdrop of supply constraints, does that dynamic put Purple at an advantage versus other mattress companies who are outsourcing a much larger portion of their product?

Well, we certainly believe so. I mean, we think part of how we have been able to manage through the ever-shifting and uncertain environment we've been in is the fact that we are deeply vertically integrated and can manage our cost structure and our output on nearly a day-by-day basis. The majority of the raw materials in our IP is stuff that isn't where we've been supply constrained and we're able to source those materials domestically and have ample supply, which again is part of being vertically integrated that where we need to stockpile raw materials to protect and ensure that we can manage through any shortages in the industry, we have those opportunities. So overall, absolutely, we believe this is a competitive advantage of ours. That said, there are some components that are important ingredients in our mattress that we don't manufacture, such as coil. And in our purple mattress, our entry-level mattress, it is a foam core mattress. and then even our coil mattresses are encased with foam rails to provide terrific edge support. So, I mean, there is some foam in our mattresses. It's not the primary feature, but there is some foam. And the foam challenges that have been out there, we've felt, mostly where we've had opportunities to lean in and expand. Similarly, coil, which it's mostly around the fabrics that surround the coils, have been in short supply, primarily in support of PPE. The fabrics that we were using, we had chosen a quieter fabric by design. We felt it continued to make our mattress more premium. And we were somewhat insulated on those fabrics as we weren't using the same old fabrics that everyone else was using. But even just the demand for PPE has gone even deeper, and even the fabrics we're using now we're finding are suddenly being sucked into other PPE needs. So even that's been something that has recently been a challenge, but nothing that we haven't been able to work through. So, yeah, I'd say very much. We believe it's part of our moat and part of what makes our business attractive. Well, thank you.

Congrats again. Thank you.

Our next question is from Seth Basham with Wedbush Securities. Please proceed.

Thanks a lot and good morning. My question is around the near-term outlook that you have. First, on the top line, just making sure I understand your perspective here, to reach similar growth rates in the fourth quarter versus the third, so 59% year-over-year, do you have high visibility to that with the supply constraints that you're considering? And if you're able to secure additional components, could there be upside to that perspective?

Yeah. John, do you want to jump in on that?

Sure. Thanks. Thanks for the question. Yeah, we are able to react accordingly based on additional supply capabilities. So we build according to our build plan on a daily, weekly, monthly, and quarterly basis. And if we see our position on materials improve, we'll increase our build plan and react accordingly.

Got it. Okay. And now with capital, we have the ability to forward buy if we need to to stockpile those resources that are scarce, where a year ago we didn't have that ability. Okay.

Certainly. So there's some component constraints. If you secure additional components, potentially you could see higher revenue. You have the capacity to drive a little bit more production than the 59% revenue growth implies.

Yeah, I think it's possible. But again, that's a short-term scenario. We're talking about less than two months left in the year. So being able to buy way in advance and stockpile inventory, the raw material inventory, that's a little bit tougher in the short term.

Understood. Okay. And secondly, as it relates to EBITDA expectations for the fourth quarter, at one point, Greg, you said that you expect the margin to be similar to the fourth quarter of 2019. And in your press release, you commented that you expect the growth rate to be similar to the third quarter, so 100%-ish. You get to $10 million in one case and $12 million in the other, a little bit different. Can you just tell us which one we should be thinking about here?

Sorry, Chuck, I understood the last part of that. So can you just repeat it one more time? I'm trying to follow along with the schedule I'm running here.

Your fourth quarter EBITDA expectations, should we be thinking about double year-over-year on dollar basis or similar margin rate to the fourth quarter of 2019, which you referenced at one point?

Similar growth rate is what we said on an EBITDA basis. So the growth rate from 3Q to 3Q, similar growth rate in the fourth quarter that we saw or comparable that we saw in the fourth quarter. Sorry, in the third quarter. So, I mean, you're in the ballpark, but you also need to consider that we said that it would be the similar growth rates, but there were some additional considerations that need to be looked at. We outlined those. We're adding capacity, so there's a little bit of inefficiency there. Ad spend is different from third quarter. But, yeah, the growth rate in fourth quarter, as we said, should be similar to the what we saw for third quarter.

Fair enough. And last related question, thinking about the EBITDA trajectory going forward, when you think about these additional costs that you're incurring in the fourth quarter to invest in growth, how should we think about your growth-related investments in the first half of 2021? Will we continue to see pressure on EBITDA during that period or could we see much improved results?

Well, much improved. That's how you define much. We should begin to see more efficiency out of Atlanta as we open and start producing and having output from that facility. And as we said, we're always trying to improve our efficiency in the existing locations in Grantsville and Alpine. So we don't expect there to be as much pressure going forward. But there's no way Atlanta will be as efficient as the existing facility that has six machines and three or four assembly lines running with full fulfillment capabilities.

Understood. Thank you very much.

Our next question is from Susan Anderson with B Riley FBR. Please proceed.

Hi. Nice job on the quarter. I was wondering if you could talk a little bit more about the expansion in an international market. So it sounds like now you're in Canada. I guess how many more wholesale doors can you be in there? And then also, is there opportunity to expand into other countries?

Yeah, sure. Happy to take that. Thanks for joining. So in Canada, we are in a two-year exclusive arrangement with Sleep Country, both online and in showrooms. So we've really locked arms with Sleep Country for Canada for the moment. given their incredible presence there. On the premium side, they've got about half the market share. So we feel very confident that we've picked the right partner, and this really sets us up for long-term opportunity in Canada. But that's... Our current arrangement there, we did launch fleet-wide with them. So we are in all of their – I believe it's, as of now, about 280 doors. So that gets us going to Canada. As to beyond, as we talk about other countries, absolutely. This has always been part of our stated strategy. Given our manufacturing constraints, our job one has been to service our demand we have locally here, which we believe there's still a lot of upside. Um, so, you know, we've, we've taken a very cautious approach in terms of expansion. Uh, we expect in 2021, um, in addition to continuing to build out our presence in Canada that, uh, you know, we'll begin the process of starting to build the, uh, the, the, uh, infrastructure we need for more international expansion, but we really don't see any meaningful expansion happening until 2022 and beyond.

Great. That's helpful. And then just to follow up on the OPEX, so with the higher marketing and investments in fourth quarter, I guess we should expect some additional deleverage of expenses from third quarter to fourth quarter. Is that how we should think about it?

Yeah, certainly when you're comparing a quarter where wholesale still wasn't fully back to normal, there was still very attractive marketing rates, and you didn't have the seasonality that just is part of Q4. Q4 has more days of promotion. Q4 has a much more competitive marketing environment. So, yeah, and by the way, this will be true likely in every year comparing Q3 to Q4. So that seasonality is just part of the business, and we've seen that each of the last two years. On a year-over-year basis, we are fully expecting to get leverage. So we continue to see our business improve top to bottom, and we think Q4 will not be an exception on that.

Great. That's helpful. Thanks so much. Good luck next quarter.

Thank you so much.

Our next question is from Atul Maheswari with UBS. Please proceed.

Good morning. Thanks a lot for taking my questions. Joe, can you provide some thoughts on how revenues could play out in a post-vaccine world? What do you think is really the normalized growth rate for the company going forward? So if I ask this question the other way, Purple, grew revenues by 50% prior to the pandemic that was in 2019. Is that something that's achievable as the environment hopefully normalizes at some point next year?

Yeah, we, uh, you know, what our exact growth rate is, we're not giving a specific guidance on, but are on a trajectory basis. Um, the, uh, I mean, what we believe happened over Q2 and Q3 was just channel shift. The demand remained and the limiting factor in our growth has been and continues to be fundamentally how many mattresses we can make. So, you know, we have not seen any waning in demand either on an end consumer basis or in opportunities for wholesale partners to engage. We have a long list of regional partners terrific players out there, furniture stores and others, who would love to be able to put our product on their floor, and we'd love to be able to support them. That's why we're investing in this additional half a million square feet in Georgia, and as we build up that capacity, we will continue to lean in. Similarly, we've got great national players who, you know, we are not penetrated all the way, and there's a lot of opportunity for expansion with our existing players. So our number one job right now is continue to build out this capacity, continue to get our Purple South facility outside Atlanta up and running, and do everything we can for our partners and our customers to service that demand. But we see good tailwinds still.

Great. Thank you. And as my follow-up, Joe, as you look forward to the next few years, Can you rank which of your long-term initiatives really have the most potential? So what is it that you're most excited about? And then how do you manage the execution risk associated with simultaneously working on all of these initiatives?

It's a terrific question. Thank you. Yeah, long term, it gets us much more excited. There's a lot of just operational efforts right now to build out capacity and service our customer. The name of our company is Purple Innovation, and we were founded on innovative product with our patent portfolio of nearly 300 patents now. And there's a lot of untapped potential we have in our labs right now in both the sleep category, which we see tremendous opportunity for innovation and advancement, and beyond. In the example we talked about how we're up over 100% in our non-mattress categories, which includes some sleep like our remarkable pillows, which we put a lot of design into. as well as like our seat cushions, which is an example of how our capabilities extend well beyond the bedroom. So on product expansion and category expansion, we continue to believe we have tremendous opportunity given our core capabilities. And as we just spoke in the prior question, we've been basically just a domestic company, and the international opportunities we have we believe are significant. There's very little about our product given that we are a product-first company that isn't something that can be quite easily extended into markets outside the U.S. This isn't a marketing play or a brand play. It's a product play with differentiated premium better product, and we believe there's tremendous opportunity for growth beyond the U.S. as well.

Excellent. Good luck with the rest of the year. Thank you so much.

Our next question is from Jeremy Hamblin with Craig Hallam Capital Group. Please proceed.

Congrats on the strong results here. I wanted to ask some questions about the wholesale business. It looks like you've seen a pretty steady recovery there, but I think productivity per door still looks like it was negative in Q3. But I think based on the commentary that you had here for Q4, it looks like that might shift to getting back to positive on a kind of sales per wholesale door. Can you just comment on that, you know, part one? And part two is when you think about the sleep country relationship, you know, they generate, you know, kind of higher sales per door than your, than your current largest partner. So how do we think about the expectations around productivity for those doors?

Yeah, this is hard to back into. There's a lot of nuance here, in part because not all doors are equal, as you're suggesting, the sleep country. Also, how we post our P&L is not exactly the same as flow through. So, for example, one of the things we saw going into Q2 is a lot of orders that had come in, some of which got deferred into Q2, some of which was burned down of inventory on hand. So there's some timing that goes into the quarters on this. All in, we added Q2 to Q3, I think about 200 doors in. So, you know, but all in, we also saw that we saw the return to growth in wholesale revenue. So, you know, call it a mix of seeing a rebound in existing doors plus some new doors coming on. And again, accounting for some of the timing that goes into how those load-ins occur. Uh, but, but all in we're, we're back to growth and, you know, we're, we're back to expansion with sleep country coming on. So we, we feel like we've hit that pivotal point where, you know, this is getting back on track and we see the right momentum. Um, we, we do, and then in sleep country, the other challenges as, as of right now, as part of our launch, we've, we've got two beds on the floor versus say, like most of our mattress firms where we have, uh, typically four beds on the floor. that does impact, uh, the, uh, sales per door as well. Um, sleep country does produce more per box, um, on average, just looking at their overall numbers. And, uh, you know, we've got good price points with sleep country and are selling our full assortment, um, through their digital channels and are available for sale at any of their stores as well. We just don't have all four on the floor, um, or five really on the floor up there, excuse me, uh, with our new purple plus mattress. Um, So we just launched literally yesterday, so it's a little early to say what we're going to see there, but we think there's tremendous potential.

I got it. And then as a follow-up, with quite a bit of capacity coming online in 21, in terms of you've been somewhat restrained by capacity limitations in adding wholesale doors this year, But as we look forward into 21, you know, it sounds like, you know, you could be in a position to potentially add like 1,000 wholesale doors. You know, can you kind of reflect on that and, you know, give us a sense for, you know, I mean, demand continues to be very strong and you're making these adjustments on capacity where I think you're, you're catching up to demand. But, you know, can you give us a sense for what kind of the wholesale door ad potential is for 21?

Yeah, certainly the idea that we could add, as you said, a thousand more doors is absolutely in the realm of possibility. There's, as I mentioned earlier, sufficient existing demand out there from our existing partners. I mean, just from our existing partners, we've got more than a thousand doors right there. So for sure, we see lots of opportunity there. The key is just balancing it against our sort of baseline demand growth we're seeing in DTC and our existing doors, as well as building out just a healthy capacity for Part of our capacity expansion plans is, and part of being a good supplier to our partners is making sure that we've got predictable capacity. And when you're running all machines, all shifts at maximum capacity all the time, it doesn't allow for high tolerance if unexpected things happen or there's sudden shifts in demand, which happens all the time in the real world. So part of, Our capacity plans is to actually build a little more surplus into our overall capacity where we can both flex in to additional equipment and additional lines, as well as allow for tolerances as we need to do maintenance beyond what's normally planned. So just as modeling out the expansion, we're expecting on average slightly less productivity per machine, not because we're not getting the output we can, but because we've been operating in a way that just isn't healthy for the long term. We've got to have a certain amount of surplus that we can lean into appropriately and protect our ability to support demand at any given moment in time.

Thanks for taking the questions, guys. Best wishes.

Sure. Thank you.

And our final question is from Matt Caranda with Roth Capital Partners. Please proceed.

Hey, guys. Thanks for squeezing me in. A lot of questions have been asked and answered, but I did want to dig into the guidance for fourth quarter just one more time and maybe attack it from just a different angle here. So it sounds like the right number on EBITDA is around $11 million, and I'm just trying to get there with the revenue guidance that you guys provided of just below $200 million. Even if I boost sales and marketing north of 30% of sales and keep other expense items sort of flat versus 3Q, that seems to imply that gross margins would be in the low 40s or somewhere around like 600 basis points of deleverage sequentially. I'm just wondering if you guys could comment on sort of the right way to think about the margin profile, both gross margin and OpEx, to get to that $11 million level, and even that.

Yeah, and let me start by saying we are not giving formal guidance for Q4. We've given a directional nudge, which is basically more of the same on a growth rate basis. We continue to see a healthy business here, and we continue on a year-over-year basis to see both leverage and consistent growth rates So I want to make sure we're clear on that. Craig, do you want to perhaps jump in?

Yeah, so there's a couple of ways to look at this. So there's a way to look at it as growth in volume and growth in channel. And there are a lot of components. And again, we're not giving guidance. But what we're trying to do is look at it as the growth rate that we saw in third quarter is going to be very similar to what we expect to see in the fourth quarter. but also considering those factors in the fourth quarter that we spoke to also, such as it's a more promotional quarter, it's a more expensive ad quarter. So it's not going to cost us any more or less to make the product, and we're going to distribute and fulfill the same way. So the gross margin pressure that we're going to see is going to come from the fact that we're putting a lot of investment into the Atlanta facility, which is going to be some gross margin pressure, but not they're not extraordinary. And then on the marketing and advertising side, there's going to be pressure from higher ad spend. And as we talked about some of the investment in brands, so there are puts and takes, and we're trying to, to help you understand for your modeling purposes that, yeah, the growth is going to be there. There will be a shift in the channel mix. And there are going to be some headwinds in gross margin from Atlanta and from, from ad spend and marketing and advertising. So, Um, those are the components that we want you to understand as you're building those, but that was the best way that we can feel to, to help give, uh, give at least some indication.

Yeah. And the channel shift is, is meaningful here. I mean, we, we, this quarter was, was, uh, 28% getting back to close to a third. You're talking, you know, close to 500 bits or so of, uh, of shift right there. And, you know, we saw it going into COVID on, you know, the enhanced margin and profitability as this dramatic shift happened away from wholesale into DTC. We're now, as we've been saying along, expecting that things will get more back to normal and we're seeing things go back to normal, which remains a very healthy business.

Okay. That's helpful guys. And then just, Maybe if we could break apart the gross margin pressure that we're seeing from the wholesale mix shift, which I think is maybe understood, versus the deleverage from Atlanta and the ramp up and the cost incurred there, maybe that would be one way to help us understand that gross margin directionally.

We haven't. publicly announced where we are on a channel makeshift. Somebody referred to it earlier in the call, and I don't think they're completely off the reservation on what that amount is. They're certainly within the range. And then the pressure from Atlanta, it'll be a little more significant than it was in the third quarter. But again, we haven't broken down gross margin on how much of the pressure is coming from Atlanta.

Yeah, it's a significant expense out there. The press release, the Georgia release said it was around $21 million of investment. Obviously, a lot of that's CapEx, but we've got full-time labor out there now that is building out, and some of that just rolls into OpEx, and it's just part of the startup costs of getting this going.

Okay, this last one real quickly on the marketing and sales front. I just wanted to be clear. It sounded like you said it was headed back into sort of the 30% of revenue range. Any reason that we would go to the levels that we saw last year in Q4? I think they were relatively elevated in 4Q of 2019. Just help us understand that dynamic and then maybe why would we be stepping on the gas on marketing if we're potentially supply-contrained?

Well, I wish the implication there were true, that we could just turn off advertising and sales just comes in. I think most CFOs ask that question to any marketer every quarter. We continue to need to fight for mindshare. We're a young brand. I mean, we by no means are we suggesting that we are a commonly known brand as people come into the consideration set. And this is a category. I mean, given that the majority of our revenue is mattress, this is a category that on average people are buying every seven to 10 years. So, you know, there's new people entering the market every year. And as a young brand, many of them have never heard of. So we fight the good fight every day to get more and more consumers educated as to who we are and our premium product offerings. And that's never going to end. The reality is what it takes to do that last quarter is less expensive than what it takes to do in Q4. There's just more noise, more advertising out there, which is seasonal. And then on top of that, we've had very attractive marketing rates as dollars were pulled out of the market over the last two quarters. It's been phenomenal. But we're getting back to a more normal marketing environment. And that's just, again, that quarter over quarter increases marketing costs. But year over year, we still expect to see marketing leverage. So as you look at Q4 last year, we fully anticipate leverage over last year.

Great. Very helpful, Joe. Thanks, guys. Sure.

See every send of the question and answer session. I would like to turn it. Back over to Joe for closing remarks.

Thank you so much. We have built a very effective foundation, and our ability to keep successfully executing and maintaining growth is something our whole team is very proud of. We have not only had to figure out how to shift from being a startup to becoming a mainstream manufacturer, but have also had to figure out how to operate in a very challenging environment. The outpouring of satisfied customer feedback keeps us going every day. I'm also thrilled that we've been able to continue to invest domestically in our people, having hired over 500 employees since the pandemic began. Looking forward, we remain very optimistic. We believe our core business is very healthy, and regardless of how this uncertain future plays out, we believe we are well equipped to continue to innovate and take share. To all of our customers and partners, as well as our employees, stay healthy, be safe, and sleep well.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. And thank you for your time.