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spk04: Good day, everyone, and welcome to the Purple Innovation second quarter 2022 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 call, please press star zero on your telephone keypad. Today's call is being recorded, and it is now my pleasure to introduce your host, Cody McAllister of ICR. Please go ahead.
spk13: Thank you for joining Purple Innovation's second quarter 2022 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 a call on webcast, we refer you to the disclaimer regarding forward-looking statements included in our second quarter due 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 net income, and adjusted earnings per share. A reconciliation of GAAP financial measures to the most comparable financial measures is available within the earnings release, which can be found on our website. With that, I'll turn the call over to Rob DiMartini, Purple Innovation's Chief Executive Officer.
spk03: Thank you, Cody, and thank you and good afternoon, everyone.
spk11: With me on the call today is Bennett Nussbaum, Purple's Chief Financial Officer. As you saw from our earnings release issued earlier today, we reported a meaningful improvement in adjusted EBITDA compared with the first quarter on similar revenue. While we had expected to deliver quarter-over-quarter increases in both revenue and profitability, the selling environment has become more challenging over the last past several months. Given the deterioration in the overall market demand, we're especially pleased with the approximate $10 million recovery in adjusted EBITDA to near break even in the second quarter in line with our expectations. This performance compared with Q1 results we reported roughly 90 days ago reflects the work we've done since the beginning of this year to get our cost structure in the right place and be profitable at these revenue levels. With respect to revenue, like the rest of the mattress industry, we're facing a continued shift in demand away from home-related categories at a time when inflation is also pressuring consumer discretionary spending. We've seen estimates that domestic mattress volumes are down 20% to 25% a year to date. Purple has experienced a similar pullback over the first six months of the year, in addition to a shift in spending habits from online, a position of strength for Purple, to in-store, where we are still in early stages of developing our capabilities. Bennett will review the numbers in more detail in a moment, but from a channel perspective, e-commerce was in line with our expectations, which is encouraging given the recent industry trends and our purposeful reduction in advertising spend. Showroom performance improved quarter over quarter, primarily driven by the addition of six net new locations added in the second quarter, as well as new doors from Q1 ramping up. And wholesale revenue was also up quarter over quarter, driven by roughly 700 net new doors we added in 2022. As I think about my first six months with Purple, I'm encouraged with the progress we've made building the framework for sustained growth and consistent operational results. The quarter-over-quarter improvement in profitability we reported today underscores how much healthier the company now is compared with the start of the year, even as the macro environment is delaying our top-line recovery. While we still expect further positive progress quarter-over-quarter, Given the current external headwinds, we're adopting a more conservative view of the remainder of the year. We're adjusting our full-year revenue guidance to 570 to 590 million and adjusted EBITDA to a negative 15 to a negative 5 million. Despite our revised outlook, we remain confident that our four strategic initiatives, operational excellence, brand elevation, channel development, and accelerating innovation remain the right building blocks for sustained profitable growth. I'll detail some of the progress we've made this quarter and expect to see in the coming quarters with these initiatives before our Q&A session. But overall, we're encouraged with the direction companies headed. I'll now turn it over to Bennett who will review the financials in more detail, after which I'll provide an update on the strategic initiatives ahead of our question and answer session.
spk08: Thank you, Rob. For the three months ended June 30, 2022, net revenue was $144.1 million, down 21.1% compared to the $182.6 million in the prior year period. This decrease was due to a number of factors, including a challenging comparison to a stimulus-assisted second quarter of 2021, coupled with changing demand for home-related products, inflationary pressure on consumer wallets, and our intentional decrease in advertising spend, which was down 56% compared with a year ago. By channel versus prior year, wholesale net revenue declined 5.9%, primarily driven by lower door productivity that was partially offset by opening approximately 1,000 net new doors, and direct consumer net revenues declined 29.8%. Within DTC, e-commerce declined 39.2%, in part reflecting the aforementioned pullback in ad spend. This was partially offset by 150% increase in showroom net revenue, driven largely by the opening of 27 net new showrooms over the past 12 months. Gross profit dollars were $48.8 million during the second quarter of 2022, compared to $81.7 million during the same period last year, with gross margin at 33.9% versus 44.7% in the second quarter of 2021. The decrease in gross margin from the prior year can be attributed primarily to lower revenue and a higher proportion of wholesale channel revenue, which carries a lower gross margin than revenue from the DTC channel. and unfavorable cost absorption from lower than planned production volumes in prior months. Additionally, the decline in gross margin reflects the impact of elevated levels of materials, labor, and overhead costs, partially offset by benefits realized from our workforce restructuring. Wholesale net revenues comprised approximately 43% of net revenue for the quarter, compared with approximately 36% in the same quarter last year. Operating expenses were 42.3% of net revenue in the second quarter of 2022 versus 46.1% in the prior year period. The decrease in operating expenses as a percent of net revenue compared with the prior year period was driven primarily by our intentional reduction in advertising spend to improve marketing efficiency and stabilize profitability in the current environment. and the restructuring of the marketing organization that happened at the beginning of the second quarter of this year. Advertising spend for the second quarter was reduced by $24.1 million year over year and $4.8 million from the first quarter of 2022. Net loss for the quarter was $8.3 million compared to net income of $2.6 million a year ago. As previously disclosed, based on the SEC statement dated April 12th, 2021, regarding warrants issued by SPACs, we determined that our outstanding warrant should be accounted for as liabilities and recorded at fair value on the date of the transaction and subsequently remeasured to fair value each reporting date. For the three months ended June 30th, 2022, we recognized a non-cash gain of 0.3 million dollars associated with the charge change and fair value of warrant liabilities for the three months ended june 30th 2021 the company recognized the non-cash gain of 4.9 million dollars associated with the change in fair value of warrant liabilities on an adjusted basis net loss in the second quarter of 2022 was 8.5 million dollars or 11 cents per diluted share based on an adjusted weighted average diluted share count of 83.2 million, compared to an adjusted net income of $3.6 million, or 5 cents per diluted share, based on an adjusted weighted average diluted share count of 67.3 million in the prior year period. Adjusted net income has been adjusted to reflect an estimated effective income tax rate of 31.7% for the current year period, compared to a 25.4% rate for 2021. EBITDA for the quarter was a negative $8 million, compared to a positive $3.9 million in the second quarter of 2021. Adjusted EBITDA, which excludes certain non-cash and other items we do not consider in the evaluation of our ongoing performance, and as detailed in today's earnings release, was negative point $3 million compared with positive adjusted EBITDA of $11 million a year ago and negative adjusted EBITDA of $9.6 million in the first quarter of 2022. Moving to our balance sheet, as of June 30th, 2022, the company had cash and cash equivalents of $41.2 million compared with $91.6 million at December 31, 2021, and $62.7 million at March 31, 2022. The $21.5 million decrease from the end of quarter one was driven primarily by cash used in operations of $8.5 million and capital expenditures of $13 million, primarily related to showroom expansion. In addition to the $41.2 million dollars in cash at the end of the second quarter. We also have the full $55 million amount available under our credit facility and we believe our cash is adequate for the next 12 months and beyond. Inventories at June 30th, 2022 were $84.9 million, a decrease of 14% compared with $98.7 million at December 31st, 2021. and a decrease of 19.8% compared with $105.8 million at March 31st, 2022. The decrease in inventory since the end of quarter one was driven by a reduction in both manufactured as well as resale finished goods and raw materials as we right-size our production and inventories to the current demand environment. Turning now to our current outlook. Recent inventory trends and the strengthening of certain macroeconomic headwinds have caused us to take a more conservative view on the rest of 2022. We now expect net revenue to be in the range of $570 to $590 million compared to our prior range of $650 to $690 million, with the change primarily reflecting a reduction in projected wholesale volume. to reflect the aforementioned change in industry trends. For the second half of the year, we expect gross margins to improve compared with the second quarter levels and anticipate exiting 2020 with gross margins between 37% and 38%. In terms of profitability, we now expect adjusted EBITDA to be between negative 15 and negative $5 million compared to our prior guidance of $21 to $27 million. Now I'll turn it back to Rob.
spk11: Thank you, Bennett. While the current macro environment has proven to be more challenging than we anticipated, I remain confident in the progress we've made against our four strategic initiatives so far in 2022 and the benefits they'll provide in future periods. I want to close today with an update on our progress this quarter, starting with operational excellence. The work we're doing to improve execution is aimed at driving more effective and efficient capacity utilization, delivering higher product quality, and enhanced returns on the capacity investments we've made. Eric Haener, our new Chief Operating Officer, has hit the ground running since joining in June, building on the work the team has made with raw material, and operational cost improvements. Previously, many of our raw material purchase contracts were exposed to potential inflationary pressures. While not a significant factor for most of the history of this company, the inflationary dynamics of the current environment have begun to impact our raw material costs. We've been able to offset some of these inflationary impacts with a series of negotiations on our larger spend items as well as some value engineering to structurally reduce costs in our component purchases. Looking ahead, we have a pipeline of procurement and innovation projects that will enable continued input cost reductions. Operationally, we undertook a reduction in force in our plants that reflected our continued improvements in productivity, as well as the current supply and demand balance. This action has positioned us with sustainable structural plant cost position in line with current demand expectations. We also began to work to consolidate our operations from our Alpine, Utah facility into our two primary facilities in Grantsville, Utah and McDonough, Georgia. This will streamline our overheads and allow us to allocate pillow and seat cushion production closer to our customer base like we've done with the mattresses to realize greater logistics efficiencies. Our second strategic initiative is brand elevation through more effective marketing. We've discussed the evolution we're driving with Purple Advertising, expanding beyond our historical performance-centric vehicles to full funnel advertising that will build more awareness of and preference for Purple, creating new demand in all our sales channels. In the second quarter, we delivered the next step creative we've talked about in our last call, a campaign called Overnight Success. Launched three weeks ago in linear and connected TV, premium online video, and across all social media channels, Overnight Success also includes a toolkit of campaign assets our wholesale partners can tag and run to leverage Purple's brand power to increase their share of demand. Though it's early, the campaign has received a positive response from key partners, and we see new creative quickly matching and surpassing performance metrics compared to recent and historical PURPLE advertising. In addition, during the second quarter, we completed our brand positioning work, which tested extremely well in qualitative testing. This important work has created an ownable, differentiated, and highly consumer-relevant positioning for PURPLE that will serve as the foundation for all advertising and go-forward brand communications starting in the later part of 2022. Shifting to our third initiative, developing and expanding our direct channels. Starting with our showrooms, these concepts that showcase our full product line with consistent premium presentation continue to perform well while acting as a north star for our wholesale partners. We ended the second quarter with 40 showrooms after opening six net new locations during the quarter with plans to add 14 more showrooms over the remainder of the year. We're excited about this emerging growth vehicle for the company and see a clear path to a store footprint of 200 over time. Wholesale, the second and larger component of our brick and mortar retail strategy, continues to be an area of improvement this quarter. At the end of Q2, we were selling through approximately 3,200 wholesale doors, having added 77 net new doors in the quarter. As I mentioned last quarter, while our plan to selectively open additional doors going forward, our priority is now improving productivity of our existing doors to grow market share and enhance the profitability of the channel. To do so, we identified three areas where we could make impactful improvements. First, we focused on improving wholesaler incentives and strengthening our margins for our partners. We believe that we can do this without negatively impacting our margins as we increase operating efficiencies across the company. We've begun working with our wholesale partners to ensure they have a vested interest in Purple helping grow their business. Secondly, we are now working more closely aligned manner with our wholesale partners to meet merchandising timelines to make sure that we're working together to drive demand for Purple. The July 4th holiday was the first major holiday promotion where we were able to meet deadlines to lock in promotions and messaging, and as a result be included in all available trade merchandising. While more than one holiday will be required to earn our partners' trust, this was proof that we're able and willing to work together. Additionally, we've already lined up trade merchandising and promotional offers for the next two major holidays, a significant improvement from where we were just three months ago. Lastly, we need to develop synergistic approaches to wholesale product with our partners, to ensure mutually accretive product that simultaneously drives traffic and margins. We've been actively meeting with our major partners to enhance relationships and start conversations around channel-specific product. As a result, we're now developing a product roadmap that reduces channel conflict and places products in the channels where they can be most effective. Our fourth strategic initiative is product innovation. Purple was built on innovation and intellectual property that improves our consumers' comfort and sleep. I'm pleased to say that with the addition of Jeff Hutchings as our new chief innovation officer this quarter, we once again have a strong innovation engine that has historically driven our company. Our near-term focus has been on revitalizing our immediate product pipeline with fresh introductions as quickly as possible. In Q2, we developed and began deploying an improved cross-functional new product introduction process that ensures predictable, accelerated execution of our product roadmaps. Team collaboration, speed of execution, and quality of results are all at new highs, as evidenced by our first new product launch in quite some time, which is slated for later this fall. We have much more to share on the new product in the coming months, but I'm encouraged about the market opportunity we'll be able to address later this year. I don't want to overpromise here, but we are accelerating innovation and we'll be ready to share this with you shortly. In addition, we've been working hard on product innovation and developed a new three-year product roadmap that outlines our new product introductions for 2022, 2023, and the next two years beyond, and setting the stage for a consistent stream of new products from Purple going forward. Looking ahead in Q3 and Q4, we'll implement our new innovation strategy, process, and roadmap to accelerate our output of authentic innovation with a new emphasis on discipline, predictable execution, and delivery, while continue to amplify the disruptive heritage of the Purple brand. Let me close with a word of gratitude and continued dedication for the hard work of each of our employees. The last six months have not been easy, but we're starting to see the benefits of our hard work already. I'm encouraged by the responses we're getting from consumers directly and from our wholesale partners. Wholesalers want us in their doors. Despite the tough macroeconomic environment for everyone, we expanded into 700 net new doors so far this year. Our direct consumers are also responding positively, evidenced by the stabilization of our e-commerce business that we're starting to see and the fact that our comp showrooms are performing better than the overall market. We have a great product and the interest is out there. With our continued work on our strategic priorities, I'm confident we'll see quarter-over-quarter improvement that will lead us through this challenging environment and position us to capitalize on the many long-term opportunities ahead for this company. Thank you.
spk09: Brody, do we want to go to questions?
spk04: And now at this time, if you would like to ask a question, simply press the star key followed by the digit 1 on your telephone keypad. Also, if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, press star 1 at this time. We'll first hear from Brad Thomas of KeyBank Capital Markets.
spk02: Hi, thanks. Good afternoon, and thank you for all the details. My first question was going to be around a little bit more color around some of the revenue trends. And I was hoping you could share for us what the productivity has been at some of the stores that you have, some of the purple stores, what revenue rates they're trending at, and maybe a little more color on, I think it's only about 13 stores that you've had open for a year or longer, perhaps what same store sales look like at some of those showrooms.
spk03: Brad, first of all, thank you.
spk11: So, you know, our showrooms are clearly showing the same pressure that is available, you know, that this category is seeing everywhere, but at about half the rate we're seeing in a wholesale environment. So our comp store business, I don't really have a history yet, but the comp is about maybe down about $100,000 a year, maybe slightly more, but not much on that 12-month basis, and still well above kind of the minimum performance requirements that we need. You had a couple other questions.
spk02: Did you also ask about wholesale? Yeah, yeah.
spk11: Because that was just our .
spk02: Yeah, no, that's really helpful, Rob. And we viewed that very much as a bright spot, the productivity of those, you know, purple stores. So that's very helpful, you know, color. Can you talk a little bit more about the incremental wholesale doors and what you're seeing so far, you know, out of the productivity of them? You know, I don't know if I've heard it, you know, where does the door count stand today and how things been going in the doors that have opened a bit more recently for you?
spk11: Sure, Brad. So, first of all, on door count, you heard a couple of numbers and I just want to clarify it. We added about a thousand doors in the first quarter, excuse me, in the first half and retracted about 250 that was a negotiated exit from a customer where we were performing well in some stores and not in others. So the net for the quarter was a little bit over 700. And that brings the total active doors to, I believe, just under 3250, 3240, something like that. The door performance across the universe is better with our new stores, but soft in total. And that is where we're seeing the real impact of the category being off 20-ish percent. Our door productivity is not off that far, but it is off 15% on a comp basis from a year ago. Newer stores doing better, where we've launched it, I think, with a more comprehensive support plan. And our leader of the wholesale business is out addressing all of the stores. But it's the stores we've been in the longest that have limited bed count where we're having the most difficulty.
spk02: That's really helpful. And maybe just one last one here for me. Rob, you talked about how you're refining your partnership with wholesalers and trying to lean into that partnership and encourage the RSAs to pitch PURPLE as aggressively as hopefully they are willing to. You really only at this point got one major holiday weekend to look at, the 4th of July. But can you talk a little bit more about the learnings, about where you are today, and how much work you think you may have to do to improve that effectiveness of purple sell-through in your wholesale partners?
spk11: Okay, Brad, and I'm going to come at it kind of backwards. I think the root issue, and I think this is why the doors we've been in the longest are performing less effectively, is that we've got to teach the partner's retail sales associate how to sell our product. We've been pretty good at capturing the demand that we drove in the door, but if they come in open and not committed to us or any other brand, we've got to make sure that that sales associate understands the technology and in a way that they can explain in a couple of minutes to get people onto the bet. When they lay on the product, it's definitely a polarizing experience that people either like or are uncomfortable with, but we can sell from there. We've just got to make sure that they can make that shift because the product looks different and feels different than everything else they're used to. I don't think I'm reaching at all to say this is not unlike what the memory foam category faced a decade, a decade and a half ago, because it was a very different feeling product. We've got to make sure that we're training those folks so they are comfortable in speaking about that, because we do know if they are not, they will avoid the product. They'll sample something else.
spk02: That's really helpful. Thanks so much, Rob, and good luck. Thank you, Brad.
spk04: Next, we'll hear from Seth Basham of Wedbush Securities.
spk02: Hi, this is Matt McCartney on for Seth. Just a couple quick questions. Could you maybe talk about your current brand position and whether pricing might have to come down a little bit, especially in light of some of the discounting we're seeing in the market right now?
spk11: Seth, thank you. First of all, I mean, there is a fair amount of discounting in the category, and We had more in Q2 than we had originally planned. I can speak to why. But I don't think it's not a bridge I want to go over yet because we got to get much better at explaining why purple and what its advantages are. And we're running some tests right now on our e-commerce business that are showing very encouraging results when we lead with white purple instead of 200, 300, $400 off. And I think we've got to give that a chance to be translated through and try to get some of the promotional message, I don't want to say out of the equation, but less distracting to the beginning of the equation. All that said, you'll see in the gross margins a reduction in Q2. That really was driven by some specific discounting we did on the purple mattress to learn about the importance of the $1,000 price point. In fact, that promotion is still going on today. And, you know, you'll see later why we're doing that. But we just really need to understand how much business we left behind over these price increases over the last year or so and kind of evacuating that price point.
spk02: Okay, that's helpful. Thank you. Just one more for you. The reduction in advertising has been pretty drastic. Just wondering, have we reached a new steady state there? And is there any update you can share on the online customer acquisition landscape?
spk11: Yes. So there is steady state. We're planning on pretty consistent spending to what you've seen of late, certainly in Q2. And I'll tell you, first of all, I want to say this. I'm a full believer in aggressive, effective marketing and spending to drive volume. What we are seeing with a significant pullback and a combination of of better planning and better tools, we're getting very consistent quality sessions with even with that significant reduction. And you can also see it in the search is total brand search where we're consistent with the leader in the category on this. It's a brand that doesn't participate in wholesale, but you can look at Google Analytics and see who it is. the second highest search brand on the Internet over the last quarter, half year, and year. And that's held up through those advertising reductions. So we want to spend more on advertising. We just want to make sure it's working. And it looks like, you know, so far we've been able to tease out the less effective and keep in the most effective.
spk03: Great. Thank you.
spk04: Next, we'll hear from Bobbi Griffin of Raymond James.
spk05: Good afternoon. This is Alessandra Jimenez on for Bobbi Griffin. First, could we just dive a little bit into gross margins? What is baked into your assumption that second half gross margins will improve from that 2Q level?
spk11: I think in the press release, we've said we exit the year at 37, 38 in between there. So that's three points of improvement from where we are right now. maybe three to four points.
spk05: Yeah, so what exactly, you know, are you getting more benefit from pricing, efficiency manufacturing, you know, maybe some relief?
spk11: Yeah, you know, it's not pricing. At this point, the pricing is all reflected. It is a flow-through of raw material savings that we all we have already confirmed and will flow through. And then quite frankly, a little bit that hasn't been confirmed, but will flow through. And then, you know, that's a little bit off of what we said last quarter, and that's because of the volume challenges that we're facing. That is, you know, overhead absorption kind of soaking up some of that.
spk05: Okay, that's helpful. And then maybe could you talk about how the Georgia facility is stepping up to date?
spk11: Yeah, we, Eric Hainer, our new chief operating officer, is actually there this week and next. It's a good factory, and it's going to be a great asset. It was, you know, as I have previously said, I think it was brought into the equation probably a little earlier than we needed it, and it hasn't had the right leadership on site yet. I expect that to be fixed this month, and in Eric's hands, I'm absolutely confident that it will be it will challenge Grantsville for being as productive as we can be. So it's the right place to have it. As we said last quarter, even at its significantly reduced volumes, it is more than offsets the shipping burden we would have if we sent everything from Utah. So I'm convinced it's in our portfolio to stay and will be a great productive asset moving forward.
spk05: That is very helpful. And then lastly for me, maybe Can we highlight, like, what level of sustainable quarterly revenue do you think you need to generate positive free cash flow? Is that $25 million more a quarter, $10 million more? What do you think to get that positive free cash flow?
spk11: Yeah, I mean, we're close, and I kind of sit up there. We've got the crossroads right. I think $15 million more would get us over that line.
spk05: okay, that's helpful and best of luck on the rest of the year.
spk03: Thank you.
spk04: Brian Nagel of Oppenheimer has our next question.
spk10: Hi, good afternoon. So a couple questions. Hey, how are you? A couple questions. So it is, I guess, you know, stepping back and looking at the results and then probably more importantly the reduction in guidance for the balance of the year. And this comes after a prior reduction. So the question I have, Rob, is that as you're watching the business unfold here, is what's worse than expected for you, is it primarily macro, or is this also a function of those kind of internal challenges of purple that maybe were not fully recognized initially?
spk11: I think this adjustment is primarily macro. In fairness, probably the first quarter adjustment was more driven by what we were facing internally. But this is, I mean, this is definitely macro. And it's not only macro, it's specific to our wholesale door performance. And that doesn't make it any easier or harder. It's just, it's pretty isolated. Our e-commerce business is stabilized. Our showroom business, while facing some of the category challenges, is outperforming them It is the productivity of our wholesale doors, and we've got to fix that. And we do have some plans to address that. Some are in place and some are yet to come, but that's where the adjustment's coming from.
spk10: Then as a follow-up to that then, so with regard to the wholesale doors, I think this may follow up to a prior question, but are you seeing something really noticeable with regard to geography or any other segmentation of the business which should help explain kind of where the real pressure points are right now?
spk11: We're not seeing any macro trends geographically. I can say that where customers let us see our performance within their footprint and we can get the retail sales associates up against it, we're able to improve those results. And so we're aggressively encouraging our customers to share that information with us. But no macro geographic differences that we're seeing right now.
spk10: All right. The final question, again, I'll follow up to those two, but you've laid out, I think, a very compelling and aggressive kind of reposition strategy here for the brand and for the company. As you're watching this now more difficult macro environment unfold, does it change your view on either the timing or maybe the intensity of some of the initiatives you're undertaking?
spk11: I think the construct of it stays the same. I have to be a little bit more patient. And obviously, we've got to make sure the balance sheet can support it, and we believe fully that it does. But I'd like to see the change happen faster. I know how hard our people are working, and I want them to see this company grow again. We are seeing internal signs that they're happening, but I'm sitting in your camp. I'm saying, show me. And obviously, in this headwinds, it's tough to do that right now. All right.
spk10: Appreciate all the color. Thank you. Thank you.
spk04: Atul Maswari of UBS.
spk01: Good evening. Thanks a lot for taking my questions. Rob, first a question on revenue and that I had a gross margin follow-up. So the revenue guidance, if I look at it compared to 2019 on a quarterly basis, first quarter on CAGR, was up 20%, second quarter decelerated to up 12%, and now the guidance implies just mid to high single digit for the back half. So my question is, are you already seeing that material step down versus 2019 in the third quarter, quarter to date, or are you simply being conservative and assuming a sizable slowdown to come later this year?
spk11: Let me try to answer it a slightly different way because I didn't hear all of what was inside that, but then tell me if I get there. I mean, with the guidance that we're giving in total, we expect the quarters to continue to behave the way the last two did, and that is driven by macro assumptions around the category strength. I don't have the yearly 19 quarters in front of me. I've got the total year, but not the quarters. They've got to be – is that what you were comparing them to, to 19th?
spk01: Yeah, and comparing them to 19, it seems like the back half of this year would imply, like the guidance would imply a very sizable step down versus 19.
spk11: So the back half of 2022 was- Total revenue in 19 was 430, 428. So I don't see how it could be a step down in the second half. We'll have to follow up with you. I'm sorry, I just don't have that in front of me right now. But we will follow up with that.
spk01: Yeah, we'll take that offline. Okay, so my follow-up question is on gross margin drop. So granted, there is expected to be some improvement in the back half of this year. You're still ending the year at 37 to 38. It's still some ways off versus where you were in 2019. That was, I think, 44%. So what is the What are some of the key factors that have caused this gap? Is it like if you're able to provide some quantification around like maybe majority of this is coming from material inflation and a portion of that is from basically channel mix. And then what portion of this gap do you believe you can bridge over the next couple of years? And what are some of the structural factors that's going to impede you from getting to that level?
spk11: So if I look at gross margin in 19, it was at 44.1. You know, I would think there's three components, and I'll have to go offline to size these for you. But the single biggest one is channel mix. And the business in 19 was 62% DTC. We're now... You know a little bit higher than that so to me. It's channel mix it is Certainly catching up with some of the input costs that we think we have Done now and then it's absorption with the second factory And I there may be some others, but I'm sure those are the three biggest drivers The channel mix I think is ours to live with you know 6040 something like that is probably something we've got to be prepared to handle and The absorption and the input costs, we've taken the action on the input costs and the absorptions. We've got to get the volume up. And we should be able to get to those margin, you know, historical performances certainly at 19 level. And we're not throwing a towel on that whatsoever. It's just taken us longer because of the top line challenges to get that absorption number right and to get all those input costs fully flowing through.
spk01: Okay, awesome. Thank you. That's helpful, and good luck with the rest of the year. Thank you, Atul.
spk04: Next, we'll hear from Keith Hughes of Truist.
spk07: Thank you. Some encouraging signs of talking about new product launches with the three-year roadmap. First, your comments Do you plan to launch product or products in the second half of this year, and do you have any kind of approximate time when?
spk11: I don't think I'm fully ready to detail exactly when, but we are aggressively chasing new product, and we'll have both a steady stream and you're going to see it sooner than later. Okay.
spk07: And then one other fairly small question. In the adjusted EBITDA number, there's a vendor separation fee. Can you talk about what that was? And is that something we're going to be seeing any more of those?
spk08: Yeah. Go ahead, Dennis. Yeah. Actually, we've been working on our functional excellence and our operational efficiency. And we had a contractor in here who was doing a lot of good work with us. And we hired Eric Hainer. who's our new VP, our new chief operating officer. And as we look going forward, we saw that it was more effective to terminate our relationship with our outside contractor and put it in the hands of Eric. So paying this fee in the end will be a much more positive financial decision relative to continuing on with more work with our existing contractors.
spk03: Okay. Thank you. Matt Caranda of Roth Capital.
spk06: Hey, guys. Thanks. Just curious if we could talk about trends within the direct business, maybe the cadence of growth on a monthly basis year-over-year throughout the second quarter as you reined in marketing expense, and then just any preliminary sort of commentary around the direct
spk03: revenue growth on a year-over-year basis, quarter to date?
spk11: Yeah, the spend reductions were kind of feathered in starting at the very end of Q1 and through Q2. And our volume has, I mean, it was definitely challenged early in the quarter, and then it's gotten modestly stronger. But the most important signal is it's been relatively stable and predictable, and we're encouraged by that. And as I said earlier, the quality sessions we get, we define a quality session by somebody that clicks on more than just the first page when they come to the website. We've been able to maintain those at about 90% of the high watermark with about 30% of the spending. So we're encouraged by that and we'll use that to continue to invest behind you know, more quality sessions and trying to drive the conversion rate up.
spk06: Okay, great. And then just curious if you could maybe give a, I know these things are maybe hard to discuss on public calls, but there's a little bit more color around the wholesale customer exit that you mentioned. How much is that impacting sort of the cut to the revenue outlook for the year? And just, you know, roughly in terms of door count, what does that sort of imply in terms of lower door count?
spk11: Yeah, so door count is higher, net of the reduction. The reduction was about 240 stores. And I mean this respectfully, but neither us or the customer are going to miss that volume.
spk06: Okay, great. And then maybe just last one from me on the gross margin recovery. You had mentioned, you know, three points of improvement through the end of this year, and a portion of that has already been actioned. And it's just sort of timing a flow through that happens, and then some more has to be actioned. Roughly, you know, would you put it at 50-50 in terms of, you know, what's already been actioned versus what is on the come? And then when you say that the 37 to 38% exiting the year, Just help us put a finer point on what that means. Is that sort of, you know, we're going to be hitting that run rate toward the end of the fourth quarter? Or are we talking, you know, we should be modeling 37 to 38 in the fourth quarter?
spk11: I think it's fair to model that in the fourth quarter. We do have about half of that captured and the other half still ahead of us. But it's not unidentified ahead of us. We know how we're going to get there. And it is fundamentally – a combination of some of that work that Bennett referenced a few minutes ago, as well as Eric's steady hand on how to run a plant safely and effectively for high quality and just the right output when you need it. So we are confident that that will happen.
spk06: OK. Thank you. I'll leave it there. Best of luck.
spk03: Thank you.
spk04: And next we'll hear from Jeremy Hamblin of Craig Hallam.
spk12: Hi, thanks for taking our calls. This is Jack Cole on for Jeremy. You guys talked about inflationary pressures impacting raw material input costs. Just how much have these costs and maybe freight costs increased on a year-over-year basis? And then could you maybe speak a little bit more to the expectations going forward with some of those negotiations and the procurement pipeline you touched on, as it sounds like you guys do have a pretty good grip on those going forward.
spk08: Yeah. Our costs last year were up about 25% in raw materials and freight, and they've continued to escalate a little bit through the first and second quarter. And now we're starting to see them ameliorate, the increases ameliorate. We've seen a little more softness in the international freight costs. We're starting to just see some softness in domestic trade costs, and I think with the more stable oil price, we'll see a leveling for the balance of the year. That's kind of how we're thinking about it.
spk12: Thanks, caller.
spk08: That's all I have.
spk04: And our final question for today will come from Curtis Nagel of Bank of America.
spk09: Uh, yeah. Good afternoon. Thanks for taking my question. Um, so I guess just starting off with the, the own stores, right. I guess you said the plan to do with another 14 or so for the ring of the year, um, based on prior commentary, I think it implies something like a $11 million in CapEx, uh, utilized. Why not be more conservative? Like I understand that on a relative basis, they're definitely doing better and all the rest of it, but does that, you know, fixed costs and right now cashflow is negative. environment's uncertain. And then just as a follow-up, from the guidance on EBITDA, what should we imply in terms of the cash position at the end of the year? Does that imply any working of the facility?
spk03: Let me take a short question, and I'll have Bennett talk to you about the cash question.
spk11: It's a fair point, but, you know, number one, the showrooms continue to be encouraging. performing better than the category in total and very close to what we had projected kind of pre and before these headwinds. So we're very optimistic about that channel over the long haul. The second part, Curtis, is that I'm sure you can understand that store development is an engine that, you know, it wants to run and it's hard to start and stop it. And so, you know, we've got good locations The 14 have probably been kind of under development for at least six months at this time. And we're trying to keep our commitments to our partners and get our showroom business as developed as we can. So we think it's a good investment. They've been performing well even through these headwinds. And we're going to keep making that investment at about that pace.
spk08: Yeah, if you look at the cash flow, we think we have adequate cash for the balance of the year, even without drawing down the line at this point. If you look at the first half of the year, we used a lot of cash, primarily as our, in addition to CapEx, as our EBITDA was negative in the first quarter, and our payables were very high coming into the year as we spent a lot of advertising and built up inventories last year. Now, I think our payables have come down to about the level where they're going to exist. And as you can see, we've started to rationalize our inventories that have come down. So I think basically for the balance of the year, if we can run flat to a really positive EBITDA and spend just a little bit more at CapEx, we've got cash to go for the balance of the year. And that's how we're thinking about it.
spk09: Okay. Thank you.
spk04: And at this time, I'd like to turn the call back over to our presenters for any additional or closing comments.
spk11: Yeah, all I would just like to say to the team on the phone, we appreciate your interest in the company. We are very optimistic that we will get through these difficult headwinds and get this company growing again. And we're available to help you understand anything further as you see fit. Thank you.
spk04: That does conclude today's conference thank you all for your participation you may now disconnect.
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