Purple Innovation, Inc.

Good afternoon, ladies and gentlemen. Welcome to Purple Innovation third quarter 2021 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 start zero on your telephone keypad. As a reminder, today's conference is being recorded. It is now my pleasure to introduce your host, Cody McAllister of ICR. Please go ahead.

Thank you for joining Purple Innovation's third quarter 2021 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 judgments 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 2021 earnings release, which was furnished to the SEC today on Form 8K, as well as our filing with the SEC referenced in that disclaimer. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise. Today's presentation will include reference to non-GAAP financial measures, such as EBITDA, adjusted EBITDA, adjusted 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 evening, everyone. With me on the call today is Bennett Nussbaum, our Interim Chief Financial Officer. After our prepared remarks, we will be happy to take your questions. First, my apologies for the last-minute change of schedule for this call. As we disclosed in our earnings release within the last hour, we are pleased to announce that we have entered into a new agreement with Mattress Firm that creates significant new mutually beneficial opportunities to sell our full assortment of sleep products with Mattress Firm, while also allowing for new opportunities beyond Mattress Firm. This new agreement has been months in the making, and we just closed late last night and needed today to tie up all the financial details before our call. I will speak more about our partnership later during the call. I would also like to thank Bennett for joining as our interim CFO. We continue to actively search for a full-time CFO, but in the meantime, Bennett has truly joined the team, bringing a wealth of relevant experience and is helping to build a strong foundation for a full-time CFO once he or she joins. Moving to the business, the third quarter was one of the most challenging periods the company has experienced. As a result of the hard work and resiliency shown by our teams, as we address the production challenges that severely constrained our manufacturing capacity for over two months, along with another month of backlog as we caught up. During this period, given our inventory issues, we significantly reduced our marketing spend by more than $10 million from the same quarter last year, which materially impacted our DTC business for the quarter. With this disruption behind us, we had hoped to quickly re-accelerate back to prior sales velocity but the pace of recovery proved slower than anticipated. We are now ramping back up our marketing spend, taking pricing opportunities, and are proactively managing our cost of goods sold. I'm going to spend a few minutes reviewing the drivers of our third quarter performance and our expectations for the remainder of this year. Then I'll spend time discussing our initial thoughts on 2022 and the key building blocks for achieving our financial objectives over the next three to five years, after which Bennett will review the financials in detail and outline our updated outlook. Our priority in the third quarter was returning our production capacity to pre-incident levels. After completing these critical tasks, we quickly ramped up production and exited our backlog position by the end of August as planned. The lack of inventory for much of the third quarter, combined with tough year-over-year comparisons, led to net sales being down 9% to $171 million compared to Q3 2020. By channel, wholesale revenue increased 10% compared with Q3 2020, continuing the positive trends we experienced in our existing and new wholesale partner doors during the first half of the year. This was offset by a 16% decline in DTC revenue, primarily driven by our intentional 25% year-over-year reduction in advertising spend for the quarter due to our capacity constraints as previously mentioned. Also, our digital business was up against an almost triple digit increase in the year ago period. And as communicated in prior calls, we expected the DTC wholesale mix to normalize as consumers continued to return to stores post pandemic. And we're beginning to see that. Compared with a more normalized third quarter of 2019, DTC revenue was up 66%, underscoring our multi-year progress, expanding our industry leading position online, and contributions from our accelerated showroom rollout. During the third quarter, we opened seven additional showrooms and all 23 of our current locations are performing ahead of our internal expectations. I'll speak more to our showroom strategy shortly, but it is quickly becoming another key differentiator for Purple and an important high margin growth vehicle. From when we exited backlog through today, we have been busy expanding our market presence in brick and mortar retail. Unfortunately, it has taken us months longer than anticipated to get back to expansion and growth with wholesale. Both wholesale and DTC demand were adversely impacted by the production issues we experienced in the second and third quarters of 2021, as our ability to manufacture and deliver our products was interrupted. In addition, in response to production delays, we temporarily reduced our marketing spending, which also impacted demand, particularly in the DTC channel. But while delayed, we are making meaningful progress now. Over the past two months, we opened 270 new wholesale doors and have another 210 doors contractually committed to open in Q4. What has been particularly promising is more than 80% of these new doors are taking all five of our mattress models on the floor with our new elevated displays that we first presented at Las Vegas Market last August. The new accounts include over 200 Ashley furniture locations, 27 living spaces, and three Nebraska furniture marts, among others. We are very pleased with our early partnership and results with Ashley and anticipate expanding meaningfully into their fleet of home stores. As I mentioned at the start of the call, we have also entered into a new agreement with Mattress Firm, our largest wholesale partner. Our original agreement from September of 2018 was signed just before I arrived and predates much of the current leadership team at Mattress Firm. When we originally signed, we were a young company, new to wholesale with a much less certain future. Over the last three years, Purple has grown substantially and Mattress Firm's national scale and reach has helped contribute to that. As we look forward together, we realized that our initial contract could be improved and after many months of working through the details, We now have a contract that creates significant additional mutually beneficial opportunity to expand sales of Purple's full assortment of sleep products within Mattress Firm and eliminates prior restrictions on Purple's growth outside of Mattress Firm, which allows us to pursue our strategic growth plans. We are pleased to continue our relationship and grow both our businesses. For our DTC business, in hindsight, we waited a little too long to start reinvesting and growing traffic again. which coupled with significantly higher media rates versus last year, has resulted in DTC re-acceleration slower than anticipated. With that being said, we remain confident in our ability to continue to grow our direct-to-consumer channel, and under the leadership of our new CMO, Patrice Varney, we have identified actionable opportunity to increase our brand awareness and expand reach through a new advertising campaign and more top-of-funnel reach. For the last 18 months, we have concentrated our resources on lower funnel performance marketing. We are now starting to lean more heavily and increase spend into brand campaigns aimed at reaching a wider audience and educating consumers on the numerous benefits of our comfort technologies. We are confident the additional investment on top of funnel, excuse me, We're confident that the additional investment in top of funnel programs will provide the business good momentum heading into 2022 and improve the efficiency of our bottom funnel spend going forward. Although this investment will likely create some EBITDA headwinds in Q4 as we need to rebuild momentum from our Q3 cutback and the response curve from top of funnel advertising just takes longer. As to costs, consistent with the inflationary supply chain and labor issues that are prevalent across most industries today, we have also been impacted. Our overall COGS, including direct materials, freight, and labor, have increased more than 25% since the beginning of the year, which has substantially outpaced the price increases we have taken throughout the year. Amidst the production challenges, we met several opportunities to better manage against rising costs, including further opportunities to increase prices. We anticipate increasing prices again early in the first quarter of 2022 to help offset those cost increases. All combined with online spending moderating, particularly for home-related categories, following record growth during the height of the pandemic, combined with the impact on our trends from the slower than anticipated recovery during the third quarter, we are adopting a more conservative top-line view for 2021. We now expect full-year revenue to increase approximately 13% over 2020, within a range of 720 million to 740 million, which includes the impact from what we estimate to be no less than $60 million in lost sales due to the isolated production challenges we faced as a result of the incident and follow-on actions we took subsequent to that. Excluding this, full-year growth would be closer to 22%. Our outlook for adjusted EBITDA is now in the range of $15 to $25 million, reflecting the reduction in sales, the planned increase in fourth quarter marketing, plus pressure on gross margins from inflationary pressures throughout the supply chain and projected channel mix. We believe the additional marketing investments are important for the long-term health of the brand and the business. While the second half of 2021 has proven to be more challenging than we anticipated, the With demand trends improving this month and anticipated next month, we remain very optimistic for 2022 and expect to have growth across all our major channels, digital, showroom, and wholesale. We have made important advancements throughout our organization, improving our foundation for growth. will end this year in a stronger position to support the three big moves across expanded distribution, product, and increased margins that will drive sales to $2 billion to $2.5 billion and adjusted EBITDA margins to the mid-teen range within the next three to five years. Starting with the first big move, expanded distribution, I will begin with our high-margin direct-to-consumer business. We have built the leading premium digital mattress brand in the industry in less than six years, and we built this off of a Kickstarter campaign and a basic Shopify e-commerce implementation. Just over a month ago, we finally launched our new e-commerce platform, including our all-new proprietary promotions engine, and just over a week ago, we completed 100% cutover to the new platform. With the new platform, we have a new content capability and will be significantly advancing the content and usability through the beginning of 2022. After the explosive growth in digital sales we experienced in 2020, driven in part by the change in consumer buying behavior during the pandemic, the expected shift back to physical shopping this year, followed by the impact from the recent production challenges, have masked the underlying strength of this business. DTC revenue is projected to reach $475 million for 2021, about flat to 2020, and an increase of 79% compared to 2019, even as we left a meaningful amount of sales on the table this year due to the temporary shortage of inventory and reduced marketing spend. Also, we expect to be able to drive more revenue per marketing dollars as we take advantage of upsell and cross-sell opportunities given the launches of our new adjustable base and complete set of bedding accessories, including our category-leading Harmony Pillows. At the same time, we are forging enhanced direct-to-consumer customer engagement through our purple showrooms. Our new store designs continue to look amazing. The elevated presentation and ability to tell the full brand and technology story across our complete assortment is resonating with consumers. The concept is proving to be highly successful and highly profitable with unit economics that are tracking above our stated plan average sales per door of approximately 2 million and a payback period of less than 15 months on a $600,000 initial investment. We remain on track to end 2021 with 28 locations, and plan to accelerate expansion by adding more than 30 additional locations in 2022. Establishing a strong purple showroom presence in key markets is a meaningful enabler toward achieving our long-term strategic plan. While we are intently focused on accelerating VPC growth, increasing our wholesale presence remains a key component of our distribution strategy. Our primary objective in 2021 was servicing our more than 2,300 existing partner doors where demand continues to be strong. Now that we are at a backlog, we have started adding new doors with a focus on retailers that best support the premium nature of the Purple brand and are committed to showcasing our full lineup of mattresses. We have line of sight to meet our target of 400 to 500 incremental doors by the end of 2021, bringing our total to nearly 2,800 doors by year end. Based on our current plans, we anticipate we'll reach our stated goal of approximately 3,500 wholesale doors by the end of next year. Moving to the second big move, product, As I stated earlier, for the first time in Purple's history, we have successfully expanded our manufacturing capacity ahead of current demand and are well positioned to meet the increasing demand for our products, which we have been working toward for years. This is partly due to our next generation MAX machine, the HMAX, which is fully operational at Purple South in Georgia. HMAX 1 has output that is more than 50% higher than our first generation MAX machines with about half the labor and robotic extraction. We are already in construction of HMAX 2, which will come online next year. In addition, we have MAX 8 and 9 fully operational at Purple South, and MAX 10 will be online next week. MAX 11 is coming along nicely and will be online in Q1 of 2022, with MAX 12 and 13 coming later in 2022. We are also making progress with the design and build-out of our new Purple Labs facility, which will house our expanded R&D capabilities, Specific to R&D, we continue to build out the team and are actively investing in new research, prototyping, and testing equipment and capabilities. In August, we launched our new Purple Plus mattress, our fifth mattress model in the U.S. It fits between our entry-level Purple mattress and our hybrid and enabled new price points and overall assortment expansion. It has successfully traded entry-level buyers up with almost no cannibalization down from the hybrid, despite raising hybrid prices. We also launched the Harmony pillow in expanded sizes, specifically the king size and tall standard and low heights. We continue to be impressed with the incredible high customer satisfaction of this innovative pillow, and we were honored with the Good Housekeeping's 2021 Best of Bedding Award for the Harmony. We continue our efforts on our new higher-priced mattress models and look forward to speaking more about them during the first half of next year. Moving on to our third big move, improved margins. As I stated last quarter, one of the most beneficial things we've learned from working through these manufacturing challenges this year is how much opportunity we have to meaningfully increase yield and reduce labor dependencies. And with the higher cost of goods sold up more than 25%, our focus on margin improvement is even more urgent. We are working with a top shelf consultancy and have identified significant near and midterm opportunities to reduce labor costs, improve yield, and lower our supply chain costs. We are beginning to execute on some of these findings and will realize most of the benefit in 2022. In addition, we continue to roll out autonomous and semi-autonomous improvements in raw material feeds, mattress assembly, and fulfillment. Also, with increased production in our Georgia facility, we are now able to fulfill nearly all mattress models out of the East Coast, in addition to Purple West and Utah, which is improving our SLAs and is helping to offset increases in freight costs. Finally, with all of the high growth and corresponding change of purple, we have been very focused on talent and organizational capability to support these efforts. In addition to our CMO announcement on our last call, we recently hired Jack Roddy as our new chief people officer reporting directly to me. Jack brings a ton of organizational enablement and transformation experience, and we are privileged to have him join the team and help us be more successful on our high growth mission. There is a lot to be optimistic about as we head into 2022. We'll provide a more detailed view of our expectations for next year on our Q4 call, likely in March, but we are confident that with the production challenges and inventory constraints behind us, we'll be back on the annual growth trajectory we outlined in June. I'll now turn it over to Bennett Neusbaum, our interim CFO, who will review the financials and our outlook in more detail.

Thanks, Joe. Since joining Purple as interim CFO a little over two months ago, I've been very impressed by the energy and dedication displayed throughout the organization, especially in the face of some challenging circumstances. Echoing Joe's comments, I believe the company is on stronger footing, having successfully navigated the recent production issues and is now able to focus entirely on executing the long-term strategic plan. Turning to our results, With the third quarter of 2020 providing context due to the extraordinary impact COVID had on consumer behavior, I'm going to provide certain comparisons to the third quarter two years ago. For the first three months ended September 30th, 2021, net revenue was $170.8 million, down 8.7%, compared to $187.1 million in the prior year period, reflecting the difficult year-over-year comparisons. revenues were adversely affected by the production issues we experienced in the second and third quarters of 2021 as our ability to manufacture and deliver our products to both DTC and wholesale customers was interrupted. Compared to the more normal 2019 period, net revenue was up by 45.5% from $117.4 million. By channel, Wholesale net revenue grew 9.6% as our wholesale business was favorably impacted by wholesale partner expansion combined with a reopening of wholesale partner doors, partially offset by a slower than expected reacceleration of demand from our wholesale customers. DTC net revenue declined 15.9% year over year as our intentional pullback in advertising spend disproportionately impacted digital demand, partially offset by increased contribution from our purple showrooms. On a two-year basis, wholesale revenue increased 17.1% and DTC revenue increased by 66.1%. Gross profit dollars were $61.1 million during the third quarter of 2021, compared to $88.3 million during the same period in 2021, with gross margin at 35.8 percent versus 47.2 percent in the third quarter of 2020 and 45 percent in the third quarter of 2019. The decrease in gross margin over the prior year can be attributed primarily to the recent manufacturing issues, rising shipping, raw material, and labor costs, and a higher proportion of wholesale channel revenue which carries lower gross margins than the DTC channel. Wholesale net revenues comprised approximately 34 percent of net revenue for the quarter, compared with approximately 28 percent in the same quarter last year and 42 percent in the same quarter two years ago. Operating expenses were 39.6 percent of net revenue in the third quarter of 2021, versus 34.2% in the prior period, and 35.7% in 2019. The increase in operating expenses as a percent of net revenue compared with the prior year period was driven primarily by lower revenue, combined with an increase in legal and professional fees associated with increased expenses for consulting, professional staffing, and executive placement costs, and an increase in personnel costs related to the planned growth in our workforce, partially offset by a $10.1 million decrease in advertising costs. For the current year quarter, marketing and sales expense as a percentage of net revenue was 28.6% compared to 27.4% a year ago and 29.0% two years ago. While we did pull back on our ad spend for the third quarter, while inventories were constrained, We exited backlog in late August and have begun to accelerate our ad spend, as Joe referenced, to support growing brand awareness and driving DTC demand. In the third quarter, we reported an operating loss of $6.6 million compared to operating income of $24.3 million in the third quarter of 2020 and operating income of $11 million in the third quarter of 2019. that income for the quarter was $2.1 million, compared to a net loss of $87.2 million in the year-ago period, and net income of $11 million two years ago. As disclosed early this year, based on the SEC statement dated April 12 of this year, regarding warrants issued by specs, we determined that our outstanding warrants should be accounted for as liabilities and recorded at fair value on the date of the transaction and subsequently remeasured to fair value at each reporting date. For the three months ended September 30th, 2021, we recognized a non-cash gain of $5.4 million associated with the change in fair value of warrant liabilities. While for the three months ended September 30th, 2020, we recognized a non-cash loss of $104.0 million. On an adjusted basis, net loss in the third quarter of 2021 was $4.9 million, or 7 cents per diluted share, based on an adjusted weighted average diluted share count of 67.3 million. Compared to adjusted net income of $17.2 million, or 27 cents per diluted share, based on an adjusted weighted average diluted share count of 64.4 million in the prior year period. Adjusted net income for the third quarter of 2019 was $9.5 million or 17 cents per diluted share on an adjusted weighted average share count of 55.8 million. Adjusted net income has been adjusted to reflect an estimated effective income tax rate of 25.4% for the current year period compared to 25.6% for the comparable periods in 2020 and 2019. EBITDA for the quarter was $2.4 million compared to an $83.5 million loss in the third quarter of 2020 and EBITDA of $9.3 million in the third quarter of 2019. Adjusted EBITDA, which excludes certain non-cash and other items we do not consider in the evaluation of our ongoing performance as detailed in today's earnings release was $0.1 million compared to $30.1 million in the same quarter last year and $15.3 million in the third quarter of 2019. Moving to our balance sheet, as of September 30th, 2021, The company had cash and cash equivalents of $83.6 million, compared with $123 million at December 31, 2020. The decrease was driven primarily by planned capital expenditures related to manufacturing capacity expansion and showroom expansion, combined with investment in inventories ahead of the holiday season. Net inventories total $84 million at September 30, 2021, compared with $65.7 million at December 31, 2020, with finished goods making up the majority of that inventory increase as production levels normalized in the quarter. Turning to our guidance, based on the third quarter results and our performance fourth quarter to date, We currently expect 2021 net revenue to be between $720 and $740 million, representing an increase of 11 to 14 percent over 2020 results and an increase of 68 to 73 percent over 2019 results. Based on our revised sales outlook, additional pressure on gross margins from rising input costs and an even greater channel mix shift toward wholesale Our planned increase in marketing investments during the fourth quarter adjusted EBITDA for the full year 2021 is now expected to be between $15 and $25 million. We expect capital expenditures for 2021 to be in the range of $55 to $60 million as we invest in expanding production capabilities in the Georgia manufacturing facility and in additional showrooms. Year-end liquidity inclusive of availability under the company's existing line of credit is anticipated to be between 85 and 95 million dollars i'll now turn it back to joe for his closing comments thanks bennett this has been a very challenging quarter for us continuing into q4 and i'm personally disappointed with the results fortunately underneath the challenges

We are still executing on the necessary building blocks that enable our long-term strategy presented last June, and I am pleased that we have been able to continue to make progress with releasing new products, opening new showrooms, wholesale door expansion, with partners taking all of our mattress models and all new displays, new brand work, and an entirely rebuilt e-commerce platform. In addition, we have successfully launched multiple initiatives to improve margins through fundamental improvements in manufacturing processes and sourcing strategies. We are a values-driven organization with deep focus on both our employees and our customers and improving the lives of both. It has therefore been legitimately hard to have unmet customer demand because of lack of inventory of our amazing mattresses. And as we have come out of our inventory constraints, it has been equally hard to win back the confidence of our wholesale partner's which is understandable after months of delayed or missed fulfillments. Fortunately, we are seeing progress month to month, which gives us grounded confidence going into 2022. With our dedicated more than 2,200 employees now who continue to be the backbone of our business, we remain very optimistic toward our strategic goals and will remain laser focused on the product, channel, and margin opportunities we presented as the drivers of our growth strategy with which we still have complete confidence. At this time, we will open the call to questions.

Operator, are you still there?

I'm here. Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach your equipment. We'll now take our first question from Bobby Griffin of Raymond James. Your line is open. Please go ahead.

Thank you. Joe, just first, can you help me just connect the dots on the inventory constraints that you're referencing and kind of their impact? Because, you know, when you look on the balance sheet, inventory is up pretty meaningful year over year. So just trying to understand where the constraints came in and how inventory was constrained with it being up, you know, 50-something percent year over year.

Sure. And hi, Bobby. Thanks for joining. Sure. Let me try to connect the dots there. Yeah. So... You know, we, through the summer months, so, you know, end of May and to June, July, we had significantly reduced manufacturing capability. And, you know, through the end of August, we're in just a very tough backlog situation, which meant on our website, we were showing four- to six-week delivery times. It meant for our wholesale partners, we were significantly behind on POs and saw a significant reduction in orders as there's not much confidence in ordering against inventory that you're already not getting the inventory from POs issued weeks before. So there was a big halt in our business. We also, at that same time, reduced our marketing spend, as we talked about in the prepared remarks, just to try to slow demand as, again, when you're already not able to ship the mattresses purchased weeks before, driving incremental purchases on units you don't have is tough. So by the end of August, we were finally back to a place that we were manufacturing more mattresses every day than we needed to ship out the door. So that's sort of the nature of coming out of backlog. we uh the intent at that point a little bit of a bet but the intent at that point was let's see how quickly we can get our wholesale partners throughout september to get back to pre-incident levels sort of uh okay you can trust us now we've got the inventory we know it's been a rough three months uh but we've got the inventory let's go and that's we spoke about this on the last earnings call and that was really what we spent the entirety of the back half of September and into October trying to engage on. This also included a large number of wholesale doors that we either had already contractually signed, but we couldn't open because we didn't have the inventory, or wholesale doors we had in the process of negotiating that we wanted to get going on right away. What actually happened, and throughout this process, we continue to build up our inventory stores There was no scenario that if everything went back to normal that we were going to suddenly find ourselves in backlog again. So we built, as we've got more capacity than we've ever had in the company and are able to produce more mattresses per day than we've ever been able to in the company, we build up quite a stockpile of inventory in anticipation of a rapid reacceleration. What actually happened was a little more conservative. What actually happened is new store to opening said we'd love to go, but we're going to phase it over the next couple of months or we'll kick things off for six weeks from now. And existing doors, instead of sort of the floodgates opening, what we saw is sort of some testing periods where they did slightly larger orders and saw that, yes, we actually met our SLAs. In fact, right now we are hearing back from our wholesale partners after they've been testing into us, We have, with some of our partners, the highest SLA achievement of any of their suppliers right now. We have inventory and that's actually a unique asset we have, especially going into holiday. We have ample inventory sitting here domestically ready to go out the door. It just took longer to win back the confidence and get the orders going. What you would expect to see in this situation, though, is month-by-month improvement as we continue to exit this period and get back to the accelerated levels we should be at. And that's, in fact, what we're seeing. It's just happening throughout Q4. The intent is to exit Q4 at a much better rate and then hit 2022 where we should be. And you will see as we execute for that inventory levels should come back down to appropriate levels as we burn down that inventory and align with now a cleaner line of sight on our growth rate.

Okay, that's helpful. I appreciate all the details in connecting that. Secondly, you know, you called out the new mattress from contract. Congrats on getting that done. Can you maybe put some context around that? You know, how many... Stores, are you in with matches from today? What do you see the potential store count could be under this contract and some of the new things that this contract might have in there that's beneficial for both companies?

Yeah, I mean, so as with most of these contracts, these are – it's a contract that is – confidential between the two of us. However, what I will say is we have set it up in ways that are genuinely mutually beneficial. There's a lot of traffic. There's a lot of demand coming in. We've set this up with the right incentives. and the right behaviors, that this becomes a very attractive opportunity for both of us. And some of it is door expansion. And as we go more national, there are markets, key markets, that we have not yet entered with Mattress Firm, and I would anticipate opportunities to do that. But it also gets into driving more same-store sales. We've continued to to beat that drum that this isn't just about a door count strategy, but how do we continue to demonstrate with new price points, with new models, with expanding accessories, that we can drive up both ticket price and number of units per week or number of units per slot per week. And that's a big part of our efforts as well as we've been fortifying our wholesale team, a lot better presentation, a lot better presentation and a lot better representation in the field from our side. So we see a lot of opportunity even in existing doors to expand our share.

Okay. Thank you, Joe. I'll jump back in the queue and turn it over to somebody else. Thanks, Bobby.

Thank you. We'll now take our next question from Eitel of UBS. Your line is open. Please go ahead.

Good evening. Thanks a lot for taking my questions. Jill, so now that you have additional machines, you're going to be ramping up marketing, and the manufacturing issue seems to be behind you. You have the inventory, but you're still guiding to a decline in DTC sales for the fourth quarter, even with an easier compare. So does it really mean that the channel is essentially getting saturated, at least from a purple perspective? Is that a fair statement? And if most of the growth going forward is really going to come from wholesale expansion, how does that impact your ability to get to mid-teens EBITDA margins given the lower profitability of that channel?

Yeah, and your question is more called long-term, call it how do we get to where we've anticipated several years from now.

That and then just even for the near to medium term, if really most of the growth is essentially coming from wholesale, then how does that really impact your profitability?

Yeah, so we have not given guidance clearly for next year yet, but, you know, we are clearly indicating, as we said in the prepared remarks, that we anticipate getting to a full 3,500 door count next year. The short-term opportunity is wholesale expansion, and that is exactly what we laid out year by year in our investor day that we had last June on our growth strategy. It was, there's enormous opportunity for us to get national penetration, build our brand, and take share in brick and mortar. To do that ourselves, which we have modest goals for with a couple of hundred doors over the next few years, takes time. Again, we... We'll end this year at 28 of our own showrooms. We'll add about 30, a little more than 30 next year. So, I mean, that takes time. And our intent is to have a balanced channel strategy with wholesale. And this is a predominantly brick and mortar category. Part of what that means, and we will see that for next year, is margin expansion. How do we get more margin out of the products we have, as well as new product offerings with more margin built in, as well as more premium products that have more margin expansion so that we can collect more? We absolutely believe there is DTC headroom. It just has to be balanced in an omnichannel way. We have been very successful in DTC. Depending on how you do the math, you could argue that we're upwards in premium mattress, that we're upwards of perhaps 20% share of premium DTC sales right now, whereas arguably we're probably closer to 5% share. in brick and mortar and wholesale. And again, there aren't clean numbers on these, so to call those as sort of rough ratios, but likely directionally relevant to each other. So part of this is building where the bulk of the customer is. I mean, call it 80% of the addressable market is in brick and mortar, we have to be there. And that raises all tides. The stronger we are in overall share, the stronger we are in our penetration in brick and mortar, the more headroom that also creates for our DTC business, which, yes, is higher margin, alongside intrinsic margin expansion through both operational efficiencies and through product refreshes. And we see a lot of opportunity. And again, this is very much in support and no change to what we laid out last June.

Okay. Got it. Uh, that's helpful. And then as my follow up questions, Joe, uh, there's been some recent announcements from one of your major competitors that they will be entering the gel, uh, bedding space. So just trying to better understand how easy or difficult is it for someone to jump in and start producing, uh, the best that you are, that are comparable to what you are producing, uh, just so that we get a better understanding of the barriers to entry for this category.

Yeah. So, I mean, what is easy is announcing a product that doesn't exist with no clear price point strategy or skew count, which is what was announced. What is hard is actually making what is the category-leading disruptive technology we have that we continue to believe is the next generation of meaningful comfort support in sleep and other cushioning. We've been at this for 25 years. We've been perfecting our manufacturing for multiple decades. We have trade secrets along this that are decades in the making that are probably worth more than our patents. And it has taken us years and years and years of capital investment and experience to get to scale. And it's not just the manufacturing process. It's our unique polymers, our unique properties, the gels we create. And on each of our products, our mattresses, our pillows, our seat cushions are all Very different technologies, very different geometries, very different formulations, which is why we've got rooms full of material scientists and chemists, as well as innovation and industrial manufacturing and so forth. So will somebody do this someday? Of course they will. We don't believe we're the only people who can figure this out, but it is hard to do. It's really hard to do at scale. And as of this moment, on any quality product out there, we're the only ones who've figured it out, and we anticipate we're going to have a strong lead on that as the category leads here with the best technology around us for many, many years to come.

Okay. Thank you for that, and good luck with fourth quarter and for the go forward. Thank you.

Thank you. If you find that your question has been answered, you may remove yourself from the queue by pressing star 2. Thank you. Ladies and gentlemen, kindly be reminded that each one are limited to have only one question and one follow-up. Thank you. We'll now take our next question from search of Bedbush Securities. Your line is open. Please go ahead.

Thanks a lot, and good afternoon. Joe and Bennett, maybe if you could please give a little bit more color on the gross margin bridge year over year, the key drivers, and then how we should think about it in the fourth quarter and into 2022, if you care to comment.

I think for the quarter, the primary driver was the increase in raw materials, and the pricing we took came on in the fourth quarter after that. Further, in the third quarter, we had the disruption costs of trying to bring the factories back on in July and finishing wrapping them up in August. And then, of course, with lower production, the overhead spread over fewer units. In addition, as I'm sure you're aware, freight costs, inbound ocean freight, as well as full truckload domestic freight rates, have expanded very dramatically. So it's a combination of things that drove the margin down this period.

Yeah. Right. And then so some of those things are changing in the fourth quarter. You mentioned pricing. For one, your production is back up to at least pre-incident levels. So should we see a huge snapback in gross margins here? And how do we think about 2022? Sure.

No, there are some things that aren't going to change in Q4. I mean, COGS all in are still up more than 25%, and that doesn't change. You know, we raised prices all in maybe 10%. So, I mean, the cost increases have grown faster than our price increases. And I don't anticipate at this point any incremental price increases until early next year. We're pretty much locked for the balance of this year. So there are some intrinsic challenges there. I mean, we're operating an organization that we'd really set up to be at a higher revenue level right now. So there is overhead we're carrying that part of being a vertically integrated manufacturer is there are things we could do to scale back. But at this point, we don't have evidence that that, that intrinsic demand has slowed to the point that we should be running a smaller company. We're continuing to ramp up to the levels that we anticipate we'll be at next year. Um, but in carrying the slightly larger company, the increased cogs and, uh, you know, the slower than plan ramp up that we're nearly halfway through the quarter, this quarter, um, is, uh, it just creates headwinds. On top of that, there are investments in the next year we're doing. So we mentioned the increase in brand spend. One of the opportunities we've identified, and Patrice Vardy has done some terrific work on this, is when you have a very, call it mid funnel and bottom funnel or performance marketing driven strategy, you can attract the people you can reach and convert them, but it's much more difficult to acquire audiences that aren't already engaged directly with your business. And there is a lot of relevant addressable market that our advertising just wasn't reaching. And even on those we reach, you know, getting the battle on mid funnels, low funnel conversion is always the most expensive way to go. So we are investing quite a bit this quarter into higher funnel, more and more brand awareness building efforts that increase awareness, consideration, and trust with a much broader group of potential customers as there is addressable market we're just not reaching right now with our current marketing strategy. And that opens up all sorts of possibilities. It's just, as I said in the prepared remarks, that's a longer time cycle to realize the return on investment on that. And we absolutely believe to set up for 2022, this is very good and strategic investment that's in the best interest of all stakeholders. that we are holding firm on in Q4. And again, that does create some Q4 headwinds on margin that will get benefit into next year.

Got it. Thanks a lot. Sure.

Thank you. We'll now take our next question from Brian of Oppenheimer. Your line is open. Please go ahead.

Hi. Good afternoon. The first question I want to ask, just with respect to sales, and Joe, you outlined very well, thank you, the challenges that Purple's faced over the last, I guess, few months, several weeks, whatever. And then, obviously, we have the new guidance. But the question I have is, as you look at all this and step back, what gives you confidence? What can you tell us that should give us confidence that underlying demand for the product is remain strong and the weaker sales we've seen are indeed a function of internal missteps?

Yeah, it's a fair question. And I think part of this is, you know, what comps are you looking at over what period of time? And I think part of it is kind of looking under the hood on where you really see demands. I mean, there are qualitative things that are hard to dispute that we're seeing. So the pace at which we are getting interest in signing on new contracts and expanding our wholesale doors And the fact that they are not testing us out with a bed or two on the floor, which is what was happening in our heyday a year and a half, two years ago. They're taking every bed we'll give them. They're taking all five beds with elevated displays. I mean, it's almost in some of these stores, a store within a store concept. They're taking all five beds and committing all that square footage to us. It doesn't just happen unless there is intrinsic confidence they're seeing. There is underlying demand that's out there. The challenge has been in wholesale, getting the wholesale expansion back out there, or in the case of some of our existing suppliers that, frankly, got a little burned with demands that they couldn't meet and shifted local interests elsewhere. but it doesn't change the fact that the demand is there. So it's getting that alignment, the inventory we now have, getting these wholesale doors open, of which we've got thousands coming with incredible interest. DTC is performing well. Part of the challenge is just how the approach has been. I mean, as I was just saying in the last question, The marketing expenses are up year over year, call it upwards of 50%. So even spending 50% more, you're still describing similar traffic. Conversion rates are down to last year just because there's more brick and mortar opportunity. I mean, that's just kind of getting back to more normalized levels. And sort of the field day of growth in the category is over. We're getting back to more normal growth levels. What's interesting is if you don't model it out on a strictly sequential quarter basis or year basis, when we look at our business over the last six years, there is a very clear trend line that we have been hugging sometimes a little above like we were last year, a lot above last year. Other times we dip a little below, but we've been hugging a really healthy growth rate quarter on quarter, year on year as you look at it over the last six years, and we are still on that trend line. And, you know, we were up a lot last year, and that produced a lot of cash and a lot of profitability. But we basically normalized back to the trend line we've been on, and we are seeing our growth rate continue against that trend line. And, you know, that is what gives us a lot of confidence.

That's really helpful, Nick. The second question, I think it may be somewhat of a follow-up to Seth's question, but if you look at the gross margin pressures now, which you've telegraphed into Q4, you're recognizing there's a lot of unique aspects to the current consumer backdrop broadly. And also understand you haven't given guidance past 21. But should we expect, though, that some of these gross margin pressures – are likely to prove structural. They'll stick around and basically change the margin profile of the business over time.

Yeah, I mean, the question is, stick around for how long? I don't think many of these elevated costs are going away in three months. And I think some of them are going to stick around for the next year. But, you know, seeing container costs going from, you know, $4,000 or $5,000 a container to $20,000 to $25,000 a container, that's obviously not sustainable for the long haul. The question is, is it months, quarters, or a full year before that comes back? And the I don't know that anyone has the answer to that right now. So I think there are structural costs we're going to carry into next year, for sure. I don't know that they're structural indefinitely. But that's a headwind everyone in our category is facing, and this is where there are moves we can take. There's opportunities for increased vertical integration that we are moving forward with. to build more margin into our business in a very direct way. There are sourcing and economies of scale opportunities we are looking at, and some meaningful. This is the operational improvements, labor reduction, as we improve yield and performance, as well as just automation in general, all of which is underway. long-term, that's real margin expansion, which is where we remain more optimistic in sort of the three- to four-year mark. But all of that helps offset the rising costs. And we are going to have to take pricing actions. I mean, when COGS are outpacing our price increases by this degree, we and everyone in the category is taking pricing actions. And back to the demand question earlier, we are hearing from our wholesale partners high confidence that they can sustain the price increases. So... So it's a series of actions that we, I think, many in the category are taking and that we have line-of-sight opportunities in front of us.

Yeah, well, I appreciate all the color. Thank you. Sure.

Thank you. We'll now take our next question from Brett of KeyBank. The line is open. Please go ahead.

Hi, good afternoon. Thanks for taking my question. I wanted to follow up on margins and policy. initially talk about the short term and then follow up on the long term. And Joe, I was hoping you could just talk a little bit more about, you know, kind of the timing of the price actions you can take and the degree of investments in advertising and how long you may continue to make those investments. And I say that I think from the perspective of when we look at, you know, the implied EBITDA guidance for fourth quarter, it looks like the margin trends are going to be worse in the fourth quarter than what we just experienced in the third quarter, despite sales starting to re-accelerate. And so that does imply probably a tough start to 2022. And so just wondering if you could give us any more context on your ability to kind of get margins under control and how you're thinking about that initially for 2022. I mean –

I think broad strokes, you're thinking the right way. And we do have some challenges in front of us as we get back to profitability. We are going to be running a profitable business. And our entire strategy is around significant expansion of margin and EBITDA margins over where we were a year, year and a half ago. So, I mean, that is very much in line. There are some near-term challenges that we're facing, and we've been trying to articulate. Pricing actions, I think, you know, we don't have it fully worked out exactly how much that is, but we need to take pricing actions to offset our costs, and we're going to do that. At a time – I mean, wholesale, we see much less elasticity on these price actions for a whole lot of reasons that are well-documented in the industry. So as we're leaning more into wholesale anyway, it's a great time to take these pricing actions. But we also – we have new models coming next year with new margin profiles and – call it some opportunity for reassortment of existing models. So we're going to build through both pricing actions and lineup changes next year anyway, opportunities to continue to grow margin, which in the near term, it helps offset costs, and in the long term, creates opportunity for meaningful long-term margin expansion.

Great. And Joe, is there any additional work you've done around the longer-term margins uh, or just feeling like all the work that you've done, your time at the company still points to, you know, those, those margin targets that you outlined, uh, back to your analyst earlier this year.

No. Yeah. I, what I would say is my confidence in the expansion that we laid out in June has only grown as we've really dug into, I mean, we, we, we have, um, really put our manufacturing and operations and sourcing and supply chain and logistics, it's all been under a microscope over what we've been through. And as is often the case with a young growing business is there's lots of low hanging fruit and some of it is very material opportunity. So my confidence has grown dramatically. We're working with some great, very experienced consultancies. We've identified very actionable, very definable opportunities, both near-term, mid-term, and long-term to fundamentally change how we operate, how we manufacture on the floor, how we source and our sourcing strategies, our labor balancing and labor yields, automation capabilities, equipment improvements, that are all just using best-in-class manufacturing techniques. And I think I said this on the last call. We make best-in-class product, but I would not characterize us as a world-class manufacturer. And we are on a path to become a world-class manufacturer, and that will yield intrinsic benefits that my confidence grows every month in that regard.

That's very helpful. Thank you, Joe.

Sure. Good hearing from you.

Thank you. We'll now take our next question from Susan Osby-Riley. Your line is open. Please go ahead.

Hi, it's Alec Legg. I'm for Susan. My question is just related to how you're balancing inventory between your existing wholesale customers, your new customers, and then also within your own DTC channel.

Yeah, we... So, balancing inventory the way we used to have to, which is we didn't have enough to go around, and how did we try to be as fair and reasonable as possible in any allocations or distribution decisions? Right now, that's a non-issue. I mean, we have ample inventory and can lean into all channels. So, there's a different question as we sort of think about our product expansion strategy and product and price points and margins that that do better or have more opportunity in one channel or another, and we're getting big enough with a large enough assortment that we're able to make some of those choices. For example, our Ascent base, our new base, we finally got a price point and margin profile, and we've had to work with our wholesale partners to get this right, that it makes sense that many, if not most, of our wholesale partners will be showing our bed on our adjustable base at a price point and margin profile that makes sense for them. You know, doing that can, in that case, have, you know, be a little slightly harder to sell in DTC, which, you know, then you'd say, okay, well, what's our DTC offering? And we're starting to build our assortment out to have product and price points that make sense in each channel. And that is something we're putting a lot of time into. But we've got ample inventory to go around right now.

Thanks, very helpful. And then just my follow-up question. In the release, you indicated that demand at wholesale didn't ramp up as fast as you liked. I guess what were the key drivers of that, and what type of levers can you guys pull to help reaccelerate that? Sure.

So we had stated last quarter that this was always a risk. The idea that you've been a poor supplier, that you have customers who want to buy product, and we've got retail partners who want to sell those customers the product, and they place orders, and we don't fulfill those orders, does not make for a reliable, trustworthy partner. And through the manufacturing challenges, we couldn't make the product as fast as demand was out there and demand consequently wanes substantially. And that's, again, it's just basic supply and demand impacts. So the hope was that the faith in our product and our company was strong enough that we could sort of flip a switch and say, sorry about all that, let's get back to business. And we said, We weren't sure how that was going to go. We're going to do our best to get everyone one back over as fast as possible. And in reality, as is often the case, is when things don't go well, which harmed the businesses of our partners as well, they're a little more cautious on the ramp back up. And that's what happened. It was... I mean, when you're trying to fit everything into a 90-day period, just merely waiting 30 days is a third of the opportunity vaporized. And we were seeing 30 to 60-day delays on... we'll get the order in next month and we'll try it out, or we'll do a small order now. And if you actually meet the SLAs, because you haven't for months, then we'll do a bigger order next month. And we went through these sort of prove ourselves back out cycles. Long-term, that's just a blip. I mean, long-term, that just means we're a month or two or three behind on the growth trajectory. Short-term, in the quarterly view, that had meaningful impact. And That's, you know, there's nothing we've seen. We haven't lost slots on the floor. They haven't replaced us. We're not seeing any indication that consumer demand is shifting elsewhere. It's just been re-earning trust with retail partners that themselves have to hit their goals, and we're doing it. It's just taken a few months longer than we had hoped. You also asked about what we can do about it. There's a lot we can do about it. There's incentive programs. There's contests we can run. There's marketing we can do in store. There's education. And as we built up the team, I mean, just at the beginning of this calendar year, We had basically one field sales associate for every 200 to 250 doors we had. And there's not a lot you can do to really support the field at that kind of level. We've dramatically improved those ratios. We've got a structure and a process for supporting our stores now. And we're putting industry proven programs in place as we've hired more and more industry talent into our company. to begin to revitalize and fuel that kind of growth, and we're doing it, and holiday time's a great time to do that, and these programs work, and we're already seeing success with that. Operator, are we still there?

There is no response from Alex earlier. We'll now move on to our next question from Matt of Roth Capital. July is open. Please go ahead.

Hey, guys. Thanks for taking the questions. Just wanted to clarify, maybe I missed it earlier in the Q&A portion, but could you just explain why the fourth quarter gross margins are potentially going to be sequentially lower than the third quarter? I guess you had production shutdowns for several weeks in the third quarter, and I appreciate there's cost of goods headwinds and whatnot, but has it intensified so much quarter to date that we should see gross margins lower sequentially before they start that path to recovery in 2022?

Yeah, I don't think the big change in Q4 would be on gross margin. There may be a little channel shift as wholesale comes back, and the higher the percentage of wholesale, there's some gross margin impacts. I think the bigger impact would be more e to dot margins as we invest in things like marketing and showroom expansion.

Okay, got it. So sequentially flat, roughly, and then OpEx is the driver of the decline. Got it. And then, Joe, you made it sound earlier a bit like your hands are tied on price increases in the near term. And I assume you're alluding to the wholesale channel specifically, right? I'm just curious if maybe you could comment on sort of why the confidence that you can get price next year along with some of the door penetration that you guys had put out in the press release. It seems like you may potentially have to trade some price for growth in the wholesale channel in the near term just given some of the difficulty delivering, but just wanted to see if you could expand on that.

Yeah, so certainly for balance of this year, we often have anywhere from 60 day or even sometimes longer than 60 day sort of price notice periods with our wholesale partners before we see the benefit. And I mean, the other side is we're locked and loaded for holiday and there's a ton of content, creative promotions and so forth that include price points that to muck with price right now, would derail a whole lot of things. So I just, we're so close to holiday here with Black Friday kicking off for many of our peers already, and we'll be going live this week as well. So yeah, I just, this isn't the time that you start mucking with prices. But I think as soon as we get through holiday here, we can quickly start making some changes and Some of it is the confidence we have from our wholesale partners. They're good partners to us. We engage and we are hearing a lot of interest that they can take on more price change. So some of it is sort of the spot checks in the field. We've done four price changes now, so we're getting pretty good at it and understanding the elasticity curves on those. And then price changes tend to have far less elastic response in wholesale, sometimes even beneficial in wholesale as this becomes more attractive to the area sales reps. And wholesale door expansion, we feel very good about. We've got a really strong line of sight, as I mentioned. We've got hundreds of doors already contracted for this quarter, and we've already got planning well into Q1. So, I mean, there's a lot of interest and demand on the wholesale side. But, you know, we've had price changes that had no elastic response, which surprised us, and we've had other price changes that were more – responsive. You never really know on these things until you test into them, but all signs as there's headroom. And frankly, I don't think there's a better time to take price changes as everyone else is doing it too across multiple categories.

Okay. Very helpful. I'll leave it there. Thank you. Sure.

Thank you. We'll now take our last question from Kate of Trust. Your line is open. Please go ahead.

This is Keith Hughes of Truist. I guess in terms of overall pricing, you talked about not wanting to put again ahead of Black Friday. Do you have a date of when you're going to have your wholesale partners raise prices in addition to online? Is that going to be the beginning of the year before President's Day? Can you give us any sort of feel on that?

We're still doing the math right now. With some of our partners, we need to give them the new price sheet before this kicks in, and we're running the models right now. So we don't have a specific date, but it is of utmost urgency that we figure this out. So I assure you this is not something that we don't start looking at until January 1st. We are well underway on this.

Okay, and... I guess second question, back to the gross margin comment earlier coming in the fourth quarter. Can you give us any idea how much sequentially you think your input costs will go up from the third to the fourth?

Our input costs, did you say? Yes. Yeah. I mean... Right now, things seem pretty stable. I don't think if you had asked us in Q1, would we expect our costs to be up more than 25% by the end of the year? I don't know that anyone who would have predicted that kind of in-year acceleration. So there remain risks that raw materials, direct materials, labor otherwise could go up. But Right now, it's trending pretty stable. And, you know, we're far enough in the quarter, I think we have decent confidence. So I don't think there's going to be significant input changes in the Q4.

Okay, so I guess back to the question, why is the gross margin continuing to come down so much if your inputs are not getting any worse?

Yeah, well, some of it. Go ahead, Ben. I think you will see a little improvement in the fourth quarter as our manufacturing comes back to full levels. And as some of the pricing we took that became effective in the fourth quarter flows through. So I don't really expect a decrease. I'm optimistic we'll have a small increase in the margins in the fourth quarter.

Well, it looks like your EBITDA is going from zero to negative, you know, where you are in the range, 15. So is that all marketing costs that's driving that down?

That's right. The biggest impact is the incremental marketing costs. I mean, we're starting to lean into a much higher pace of showroom expansion, you know, which has some OPEX components and marketing around those. which we'll start to sort of comp over as we get into a more typical rate of expansion there, but this is something we've been heating up lately. But as I've been speaking through the call, there's some, call it some revitalization of our brand marketing expense that's long overdue, that with Patrice Varney's leadership, we feel very good about this quarter, but that is really trading a high return future sales for in-quarter expense, and marketing is the largest impact there.

Okay, thank you. Sure.

Thank you. I'd now like to turn the conference back to you for any additional or closing remarks.

Thank you so much. Reiterating my prior remarks, this has been a very challenging period for us. And while disappointing to all of us, we are emerging stronger and better equipped for success. On the recent recovery we are starting to see, we remain optimistic toward 2022. I would like to thank our customers, our partners for working with us as we got our manufacturing back on track. Fortunately, underlying demand remains strong, and our customers continue to love our products, which includes our wholesale partners. Most importantly, I want to personally thank our over 2,200 employees for their incredibly hard work and unwavering passion for Purple. To all of our customers, partners, and employees, stay healthy, be safe, and sleep well.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. Stay safe. You may now disconnect.