Purple Innovation, Inc.

Good afternoon, ladies and gentlemen. Welcome to Purple Innovation third 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 conference, please press star zero on your telephone keypad. It is now our pleasure to introduce your host, Cody McAllister of ICR. Please go ahead.

Thank you for joining Purple Innovation's third 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 in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements included in our third quarter 2022 earnings release, which was furnished to the SEC today on form 8K, as well as our filings with the SEC referenced in that disclaimer. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information future events, or otherwise. Today's presentation will include reference to non-GAAP financial measures, such as EBITDA, adjusted EBITDA, adjusted net income, and adjusted earnings per share. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures is available within the earnings release, which can be found on our website. With that, I'll turn the call over to Rob G. Martini, Purple Innovation's Chief Executive Officer.

Thank you, Cody, and thank you and good afternoon, everyone. With me on the call today is Bennett Nussbaum, Purple's Chief Financial Officer. As you saw from our earnings release issued earlier today, our improvement in profitability on both the year-over-year and quarter-over-quarter basis further accelerated in the third quarter. Adjusted EBITDA of $12.1 million is a significant improvement compared to $0.6 million in the year-ago period and a loss of 0.3 million in the second quarter of this year. In fact, when compared to pre-pandemic 2019 levels, we out-earned three of the four quarters from that year on an adjusted EBITDA basis this quarter, demonstrating the progress we've made in stabilizing and now improving margins and earnings. This performance is a direct result of the hard work we've done managing costs through manufacturing and supply chain efficiencies, along with right-sizing our organizational overhead and marketing spend to align with the current demand environment. I'm pleased that we're building momentum with our operating initiatives and continue to forge a stronger financial foundation for the company. While the improvement in profitability has been clear, sustained macroeconomic headwinds again muted revenue growth this quarter. Like the rest of the sleep industry, we continue to face a 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 percent a year to date. Purple has experienced a similar pullback over the first nine months of the year, in addition to a shift in consumer spending habits from online, a position of strength for Purple, to in-store where we're still in the earlier stages of developing our capabilities. Bennett will review the numbers in more detail in a moment, but from a channel perspective, e-commerce revenue was nearly flat to the previous quarter on significantly lower ad spend, which is encouraging and gives me confidence in the work we've done both on our ad spend efficiency and our brand messaging. Showroom performance also improved sequentially, primarily driven by the addition of 11 new showrooms open during the quarter, plus the IntelliBid showroom bringing our total showroom door count to 52 at the end of Q3. Wholesale revenue was flat to third quarter last year, although down modestly quarter over quarter and inclusive of a very small contribution from our recent acquisition. Our wholesale business is certainly experiencing the category headwinds, but we're encouraged by the performance improvements we're seeing with some of our partners. When we work together on presentation and full line distribution, we're seeing encouraging results that are outpacing the impact of the category softness. We will discuss in more detail later, but we are beginning to execute a strategy with our wholesale partners that we believe will be game changing for the gel category, and for the category as a whole. Despite current industry headwinds, we're optimistic that the actions we're taking to fuel demand through our product and marketing strategies will drive share grains in the premium category and position the company for accelerated growth when market conditions improve. We took an important step towards this objective with our acquisition of IntelliBed on August 31st. For those less familiar with IntelliBed, it's a luxury sleep and health and wellness company offering a premium line of gel grid mattresses targeted to the luxury consumer. Having held licenses to certain gel technology from Purple for nearly 25 years, IntelliBed employs a very similar gel material to Purple and found success integrating that technology into their luxury mattress line with price points reaching to over $7,000. The shared technology, geographic proximity to their primary facility in Salt Lake City, and the natural extension of Purple's target market made IntelliBed an excellent fit for our organization. We view this as an opportunity to accomplish two objectives that we feel will fuel growth in the years ahead. First, we're able to consolidate our intellectual property under one roof which will allow us to more fully capitalize on growing demand for the gel grid technology as that space matures. We believe that gel grid technology has the opportunity to be the next evolution of mattress beyond memory foam. And as the pioneers of this revolutionary technology, we are well positioned to continue to lead and grow the gel segment. Secondly, IntelliBed's higher price points compared to Purple's existing offerings provide the brand with the entree to the luxury category. With mattresses ranging from $4,300 to $7,500 for a queen, the acquisition accelerated our product development schedule by several years and allows us to immediately address the market $5,000 and the higher margin segment of the sleep and wellness industry. The business is small relative to Purple today, but we see ample opportunity to expand IntelliBed products into our existing wholesale door network, in addition to adding the premium line to our showroom footprint. We don't expect to mature this side of our business overnight, but we're excited about the longer term opportunity this combination offers. Overall, we continue to be encouraged by the elements of our performance this quarter, especially the significant quarter over quarter improvement in profitability. The important progress we've made by building the framework for sustained growth and strong operational results has put us in a solid position to weather the current macroeconomic environment. While the second half of the year has started better than we expected from a profitability standpoint, the historically unpredictable nature of the fourth quarter performance coupled with the current operating environment leads us to remain cautious in our outlook for the remainder of the year. We anticipate purple brand revenue coming in at the lower end of the revenue guidance we previously gave, but with a modest contributions from IntelliBed land us in the middle. Therefore we're reaffirming our previous full year revenue guidance of 570 to $590 million. Based on our strong Q3 performance, we're raising our adjusted EBITDA and now expect to be profitable for the year. with a projected adjusted EBITDA between $2 and $7 million. While we're pleased with the improvement in profitability we experienced in Q3, we are guarded about Q4, primarily due to expensive advertising rates during the holiday period and the expectation of continued increased discounting for Black Friday and Cyber Monday promotions, which is expected to negatively impact fourth quarter gross margins. While the environment remains challenging, we are confident that our four strategic initiatives, operational excellence, elevating our brand positioning, channel development, and accelerating innovation that we outlined earlier this year form the foundation of the right plan to get the company back to sustained profitable growth. We still have a lot of work ahead of us, but I'm encouraged by our continued progress this quarter I'll further detail some of the progress we've made and expect to see in the coming quarters with our initiatives before our question and answer session. I'll now turn it over to Bennett, who will review the financials in more detail, after which I'll provide an update on our strategic initiatives ahead of your questions. Bennett?

Thank you, Rob, and good afternoon, everyone. For the three months ended September 30th, 2022, net revenue was $143.3 million, down 16.1% compared to the $170.8 million in the prior year period, and down less than 1% compared with the second quarter. The year-over-year decrease was due to a number of factors, including changing demand for home-related products, inflationary pressure on discretionary consumer spending, and our intentional reduction in advertising spend, which was down 56.8% compared with a year ago. By channel versus prior year, direct-to-consumer net revenues declined 25%. Within DTC, e-commerce declined 36.6%, reflecting the aforementioned pullback in ad spend. This was partially offset by an increase in wholesale net revenue of 1.3%, driven in part by the IntelliBed acquisitions. Showroom net revenue increased 110.4%, driven largely by the opening of 32 net new showrooms over the past 12 months. Gross profit dollars were $59.4 million during the third quarter of 2022, compared to $61.1 million during the same period last year, with gross margin at 41.5%. versus 35.8% in the third quarter of 2021, and 33.9% in the second quarter of this year. The increase in gross margin from the prior year and from the second quarter of this year can be attributed primarily to the cost reduction initiatives implemented in 2022, partially offset compared to the prior year by an increased proportion of wholesale channel revenue, which carries a lower average selling price than sales from our DTC channel. Wholesale net revenues comprised approximately 41% of net revenue for the quarter compared to 33.9% in the same quarter last year. Additionally, the gross profit percentage in the prior year period was adversely impacted by inefficiencies related to the resolution of prior year production issues. Operating expenses declined $9.6 million to $58.1 million compared to $67.7 million in the third quarter of 2021. This was largely driven by the intentional reduction in advertising spend that began in the second quarter of this year. Advertising spend for the third quarter was reduced by $16.7 million or 56.8% year over year. It is also important to note that the third quarter of 2022 includes $3.4 million of general and administrative expenses related to the acquisition of IntelliBed that will not recur in subsequent quarters. Excluding transaction expenses, operating expenses were 38.2% of net revenue in the third quarter of 2022 versus 39.6% in the prior year period, even as sales were down 16.1% for the same period. Net income for the quarter was $2.3 million compared to net income of $2.2 million a year ago. As previously disclosed, Based on the SEC statement dated April 12, 2021, regarding warrants issued by SPACs, 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 30, 2022, we recognized a non-cash loss of $0.1 million associated with the change in fair value of warrant liabilities. For the three months ended September 30th, 2021, the company recognized the non-cash gain of $5.4 million associated with the change in fair value of warrant liabilities. On an adjusted basis, net income in the third quarter of 2022 was $2.8 million, or three cents per diluted share based on an adjusted weighted average diluted share count of 86.1 million, compared to an adjusted net loss of $4.9 million, or 7 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 23.7% for the current year period compared to 25.4% for 2021. EBITDA for the quarter was $5.9 million compared to $2.4 million in the third 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 12.1 million dollars compared with 0.6 million dollars a year ago and an adjusted EBITDA loss of 0.3 million dollars in the second quarter of 2022. Moving to our balance sheet, as of September 30, 2022, the company had cash and cash equivalents, including restricted cash, of $59.1 million, compared with $91.6 million at December 31, 2021, and $41.2 million at June 30, 2022. The $17.9 million increase from the end of Q2 was driven primarily by cash from operations of $22.3 million, partially offset by capital expenditures of $8 million, primarily related to showroom expansion. We also acquired $3.6 million in cash and restricted cash from the acquisition of IntelliBed. In addition to the $59.1 million in cash at the end of the third quarter, we also have the full $55 million amount available under our credit facility, and we believe our cash is adequate for at least the next 12 months. Inventories at September 30, 2022, were $91.4 million, a decrease of 7.4%, compared with the $98.7 million at December 31, 2021. The decrease in inventories since the end of 2021 was driven by a reduction in both manufactured as well as resale finished goods and raw materials as we right-size our production to the current demand environment. Turning now to our current outlook. As Rob said, given the current economic environment, we remain conservative in our view on revenue for the remainder of 2022. We now expect purple brand net revenue to come in at the lower end of our previous revenue guidance of 570 to 590 million dollars, which, along with the contribution from IntelliBed, should put us around the middle of the range for overall net revenue. While we are pleased with the improvement in profitability we experienced in the third quarter, we are guarded about the fourth quarter, primarily due to expensive advertising rates during the holiday period and the expectation of increased discounting for Black Friday and Cyber Monday promotions, which is expected to negatively impact fourth quarter gross margins. With respect to adjusted EBITDA, based on the third quarter's outperformance and with one quarter left in the year, we are increasing and narrowing our full year range to $2 million to $7 million profit up from our prior range of a loss of $5 to $15 million. Now I'll turn it back to Rob.

Thank you, Bennett. Before we open the call to questions, I want to close with an update on our progress against our four strategic initiatives this quarter, starting with operational excellence. The work we're doing is resulting in more effective and efficient capacity utilization, delivering higher product quality and enhanced returns on capacity investments that we've made. 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 the company, the inflationary dynamics of the current environment had begun to impact our raw material costs. We've been able to generally offset 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've continued to drive continuous improvement in our productivity while balancing the supply and demand. This action has helped maintain a sustainable structural plant cost position in line with the current demand expectations. We also continue to work to consolidate our operations from our Alpine, Utah facility into our two primary facilities in Grantsville, Utah and McDonough, Georgia. We expect to complete that transition in the fourth quarter. 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 mattresses to realize greater logistics efficiencies. Our second strategic initiative is brand elevation and more effective marketing. Last quarter we discussed progress on our brand positioning work that will create an ownable, differentiated, and highly consumer relevant positioning for Purple that will serve as the foundation for all advertising and go forward brand communications. This positioning was further defined this quarter through the IntelliBed acquisition. With an immediate entree into the luxury end of the market, we'll now be able to further differentiate the Purple brand as a true premium alternative in the high-end segment of the market. To accomplish this, mid-next year, we'll retire the IntelliBed brand and segment the full Purple product line into three product tiers, Purple Luxe, Purple Premier and Purple Essentials. Purple Luxe will feature our highest end product ranging from $5,300 to over $7,000 and will be available in both our DTC and wholesale channels. As will our next tier, Purple Premier, which will represent our mid-range offerings from $2,000 to $4,500. Purple Essentials will represent our most accessible products starting at $1,000 and up to $2,000 and will primarily go to market through e-commerce but be available across all channels. This brand unification and resegmentation of the Purple offerings will be a significant leap forward in solidifying Purple and the Gel Grid as a true traditional mattress alternative across the price spectrum. To lead these efforts, I'm excited to welcome Kira Kraus, who joined our team as Chief Marketing Officer on November 1st. Kira has vast experience as a proven direct-to-consumer marketer and one with significant brand management experience. As I stated in our press release announcing her appointment, we are very confident in Kira's ability to advance our marketing strategies to grow revenue and profitability. Her immediate priorities include continuing the work to elevate our brand positioning, to support our premium strategy, and updating our ad investment thesis to get a better return. We'll be able to share more details at our next quarterly earnings call once she's had the appropriate time to dig in. Shifting to our third initiative, developing and expanding our channels. Starting with our showrooms, we ended the third quarter with 52 showrooms, after opening 11 net new locations and adding one IntelliBed store during the quarter, and we'll end 2022 with 55 locations in total. The stores we've opened over the past two years are experiencing the same headwinds as our wholesale business, but with more control over the selling process, we're navigating through the current environment with a path to our targeted store economics of at least $2 million in annual sales per store. Owned showrooms will remain a critical channel as we work to drive purple on the path to premium. Turning to our wholesale channel, as I mentioned last quarter, while we 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 this channel for us and our partners. Our strategy to accomplish this is through the premiumization of the wholesale purple offering through the segmentation I shared a moment ago, which will further improve our financial attractiveness with our wholesale partners by migrating purple offerings to a more premium products and price points that ensure we're offering mutually a creative contribution that drives traffic and margin for all parties. raising the average ticket price with our selling story, and build the gel category and increase the size of the overall market. We're at the very early stages of expanding the IntelliBed product line across our wholesale network, but long-term we see this as a key opportunity for our brand and for our partners. Lastly, as an omni-channel premium brand, we're focused on bringing the path to premium to our e-commerce channel as well. Ecom has historically been an area of strength for Purple, and we've made progress this quarter in realigning both our digital marketing message and our online product assortment to our target customer base. While it will take some time to reposition our e-commerce channel, I'm encouraged by the progress made so far in 2022. 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 share that our new chief innovation officer, Jeff Hutchings, has hit the ground running since joining the team last quarter. Jeff's near-term priority has been reinvigorating our innovation department and filling our innovation pipeline, both of which he's accomplished in the short time that he's been here. Additionally, he's implementing a continuous innovation process to ensure we're consistently deploying new products that are truly innovative. Having seen some of the new innovation coming out of his lab, I'm excited for Purple's future, and I'm confident that we'll continue to hold the leading position in our category. From a product standpoint, while the IntelliBed acquisition accelerated our entrance into the luxury end of the market by several years, we've also been hard at work determining how to address the sub $1,500 end of the segment. This quarter, we launched Purple New Day mattress as an entry point for our Purple Essentials collection, building upon our digitally native heritage and competing directly with the bed-in-the-box players. And so far, it's doing exactly what we'd hoped it would do to bolster that product collection. New Day gives us a more competitive online price point and allows our showrooms and our retail partners to focus on the more premium Purple experience. In closing, I'd like to make two statements. First, many of you know that on September 17th, Coliseum Capital made an offer to acquire all of the purple stock that it didn't already own. Its offer is public and was not solicited by the company. The board of directors has formed a special committee of disinterested board members to evaluate Coliseum's proposal. The committee has hired independent financial and legal advisors. I do not have an update for you on this topic at this time and will not be able to address this topic further during our question session. Secondly, I want to thank our employees for their hard work against this quarter. I'm encouraged by the progress we're making and our ability to deliver quarter-over-quarter improvement in many of our key metrics so far this year. Our strategic initiatives are proving to be a solid foundation for profitable growth, that will serve us well as we continue to navigate the current environment. Operator, I'm ready to hand it over to you now for questions.

Of course, thank you. If you'd 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. Again, it is star 1 if you'd like to ask a question. And we'll go ahead and take our first question from Brad Thomas with KeyBank Capital Markets. Please go ahead.

Hi, good afternoon, Rob and Bennett, and thanks for taking my question. I wanted to first ask about margin. Good afternoon, Rob. I first want to ask about margin and just I think some really encouraging results here that you're sharing with us this afternoon. You know, by our math, EBITDA margin, 8.5%. I know that we can't take one quarter and extrapolate it out, but I was wondering if you could just talk a little bit more about your learnings and your optimism about what normal margins look like for PURPLE in the years ahead.

I think in the years ahead, we've got a lot of hard work still to do, but I do see significant and continued margin improvement opportunities. We said, I think last quarter and to some degree the quarter prior, That we would exit the year, you know, north of 40 our performance in Q3 is certainly encouraging that I think the other big question that we've been able to answer, you know, we took the The hard decision to right size the company pretty aggressively in at the end of the first quarter. And there were a lot of questions from both us and from from you guys on the analyst side. Timm Johnson, You know, the two plants at relatively low utilization. Could we make that system work and under air caners leadership, it is absolutely clear that when we look at total delivered costs, even at relatively low capacity utilization, we can make the company more profitable. So to me, the good side of that is those moves are sustainable, and we've got capacity upside that will not require us to make significant capex investments in the future. So long-winded way to say, Brad, we're optimistic about the margin progress so far, and we believe there is more to be had.

That's very helpful. Thank you, Rob. And if I could ask a follow-up about the product changes ahead here. You gave a fair amount of detail in your prepared remarks about the three tiers. But could you just give us a little bit more color around the timing that you think this will happen and some of the early receptivity that you've gotten as you've talked to some of your wholesale partners about what the new lineup is going to look like?

Well, the products will be represented in market shortly and then show up in market a few months after that. And I'm still learning kind of how quickly new product hits the floor here in the wholesale world, which is obviously more complicated than, you know, for example, the new day mattress that we just launched two weeks ago. So, you know, it'll be significant portfolio of new products and, you know, it'll be, No surprise that there's a big trade show in January, and that's a good place to do that kind of introduction. So it's not, I'm not talking about 12 months out. We're moving as fast as we can, and that'll be a significant refresh lineup. We'll also deal with and present to the trade the retiring of the IntelliBed line and then the Purple Lux line growing out of that. In most cases, we've talked to all of our customers about that. We did some roadshows about a month and a half ago, and they're encouraged. They love the way we've always been able to draw traffic into the store, and now with the product lineup better designed to meet the needs of wholesale, we'll be stronger for them in their margin portfolio, and I think we're going to get pretty good support.

Very helpful. Thanks so much, Rob. Thank you, Brad.

And we'll go ahead and move on to our next question from Seth Basham with Woodbush Securities. Please go ahead.

Thanks a lot and good afternoon. My first question is just a follow-up on Brad's question. Just thinking about the comments you made around outpacing the industry at certain retail partners when you're working together and what exactly have you done in those instances to drive that outperformance and how are you

Pursue that across the rest of your retail partner accounts Thanks, I think I think in earlier discussions that quarters that I shared with you that you know we were Very fortunate to grow the wholesale business that we grew over the last couple of years, but we didn't keep pace with what it takes to be successful once you have that distribution and So in the customers where we're performing the best, we've got great training resources in those stores, teaching their RSAs how to sell our product. We've got, let's call it marketing materials and presentation materials around the beds, making them look attractive and competitive with other top tier brands. And while that's not there's no rocket science in there. Without it, the brand simply doesn't perform well enough to get the most out of what it's capable of. So it really is just understanding the needs of what it takes to be a good wholesale partner and then trying to deliver that. Where we're doing that, where we have three, four, five beds on the floor, we're getting dramatically better performance, not only just for us, but also for the retailer. And so we're going to try to That's right. We're going to aggressively expand that plan as we head into the future and into early next year.

Got it. That's helpful. My next question is just around your performance in the fourth quarter date in light of your guidance for the fourth quarter. For the quarter to date, are you seeing a material slowdown in sales trends or some of those margin pressures that you're referencing? Can you give us a little bit more color, please?

Yeah, I don't want to go too far beyond Q3, but I will say that, you know, I think you've probably read, as we have, that it was a pretty decent Labor Day holiday, and then volume was relatively soft coming out of it. And we know that each, you know, Tier 1 major holiday promotion period this year has gotten more and more competitive. So we just think it's appropriate to be cautious given – You know, the demand in the market is, you know, it's pretty negative. Most everybody's reporting down 20%, 25% in category, both in units and dollars, and we're experiencing some of that same headwind.

Understood. Thank you. I'll turn it over.

And we'll go ahead and move on to our next question from Bobby Griffin with Raymond James. Please go ahead.

Good afternoon, everybody. Thanks for taking my questions. And congrats to the team on the progress shown in gross margin there. I guess my last question, I want to switch over to just the DTC segment. And it's more of a high-level question, Rob, maybe even going kind of when you guys going into 2023. But what are some of the opportunities to maybe jumpstart that segment back again? You know, it kind of seems for this business and model to work really well and profitability to drive having both wholesale and DTC grow with that margin mix is very powerful. So just any high-level thoughts there on kind of what's the plans to get that going again? Is it just a function of the overall environment or is there some new, you know, marketing plans or a different way to attack it with some of the advertising changes? Anything there for us to think about?

Well, I kind of put it in two broad buckets, Bobby. First is, you know, before we launched New Day, we tested that price point with our existing products, and we know there's a business that's important, had been historically important to us, and we probably, through price increases, walked away from unintentionally. So New Day was engineered to be at that price point, so it was a little bit less, a lot less punishing on a gross margin basis. So that's the first is getting that right product. Our essentials will basically be from a thousand bucks to 1900 and available across all three channels, but at the lowest end only available on e-commerce. You know, the second one I'd point to is we just made, you know, another significant leadership change to try to bring in stronger DTC marketing capability and Kira's bringing that to the team. So we've got a, execute better and we've got a better product lineup to compete on the low end of our price range.

Okay, that's helpful. And then maybe just switching over to the inventory side and the cash flow generation, great to see the positive cash flow from operations this quarter. You know, inventory still went up sequentially. So is that, can we think about the 91 million or so, is that the level of, you know, required inventory at this sales balance that you want to run with? Or is there opportunities for that to decline and turn into a source of cash going forward?

Yeah, I'd point out two things for you. First of all, that sequential inventory number now includes IntelliVet, which as you can see in the 10Q is about $4 million. So on a purple-only basis, we actually did a little better than what you see. And second of all, I think there is more opportunity there. As Eric takes more command of the operations group, I think we're going to be able to run a little tighter on raw materials and on imported finished goods So the answer to your question is it's a little better than it looks, and that we will do better going forward.

Thank you. Very helpful. Best of luck here in the fourth quarter. Thanks, Bobby.

We'll take our next question from Brian Nagel with Oppenheimer. Please go ahead.

Hi, good afternoon. Thanks for taking my questions, and I too would like to add my congratulations on some nice progress here. So the question I have is, On IntelliBed and the acquisition, you're making clear that you're really going to integrate this product into the Purple products. So the question I have is, with IntelliBed, is there a unique manufacturing for that product, or will you be able to produce this product within the Purple facilities? And then from a wholesale partner... Okay, go ahead. I'll ask my next question next. Go ahead.

I do want to make sure I remember, Brian. Thank you. So there is a lot of similar obviously with the license technology. So we were well aware of what it was capable of. And I would suggest to you that there were some agreements in that the way the licensing was structured that limited both of us from experimenting in a way that overlapped with each other. So we're really excited about having that all under one roof where we can make you know, continue to make innovative kind of boundary pressing new formulas with the material. And we couldn't do that before. Specifically, your question, it is a very similar material. It's a very similar manufacturing process with a couple of key differences. Their machines are set up a little bit differently than ours. They make it in a continuous basis instead of a shot basis. And so we will continue to make it in the Salt Lake facility. It's a very modest facility. I'm trying to think of the size, but 6,000 square feet?

That part of the facility is about 20,000.

Okay. So it's much smaller than our two other facilities and it's 25 miles away. So it's not, you know, it can almost be run as an annex of P-West. So right now there are no plans to incorporate the physical making across the two plants, there are significant plans to look at the two methods and try to figure out how to get the most out of them. So we don't see making it in that third location as a cost prohibitive thing at all. And we will try to figure out how to use the different gel technologies to make better products for consumers.

Got it. That's really helpful. Then my second question, Rob, we've talked a lot about just the the focus on improving the wholesale relationship. So as you bring this new product then to wholesale partners, I got to assume that way it's going to enhance the relationships you have, but does it also get you into, and to the extent you want into new relationships, new doors that would previously not maybe not have taken purple?

You know, I don't, we don't, we don't have a whole lot of new doors in the near term plan. Um, we've added, um, 1,000 doors in the last 12 months, actually 1,100 in the last 12 months. I really want to focus on door productivity. And I think door productivity will definitely lead to open up more doors. To the degree somebody hasn't taken us, it's either because the margin structure isn't right for them or for us, or they just don't have enough confidence in the brand. But I don't know that any other brand in our category has added 1,100 doors in the last year. I really want to get the door productivity up. So in the near term, we're going to focus heavily on that. And most of the IntelliBed technology and that premium lux expansion will be into doors where purple already exists.

Got it. Helpful. Appreciate it. Thank you. Thank you, Brian.

And we'll move on to our next question from Jeremy Hamlin with Craig Holm Capital Group. Please go ahead.

Thanks, and I'll add my congratulations on some impressive execution. I wanted to come back to your marketing, your advertising spend, which you've really splashed down. In terms of thinking about where the normalized level would be, I'm trying to understand how much was maybe overspending or not the right type of spending, and mediums previously versus just simply right-sizing the spend versus the current run rate on sales, is there kind of a targeted level for that sales and marketing line item that you're looking to hit on a longer-term basis? Is that bogey 30% of sales, or is it something more like you know, 20, 25%, you know, and now you're almost there for a year, you know, you probably have a better sense of where you think that might be.

I am coming up on a year, but it certainly hasn't been a normal one in the category. So I'm not sure I've reached any conclusions yet. I do know that, you know, in the fourth quarter, just before I got here, advertising cost and efficiency moved away from each other dramatically. And some of it was complicated by the pressure for online advertising units, if you will, buying them and putting them in the market. We want to invest in the brand. In the past, the premium strategy is going to require significant investment. Year to date, we've spent about 13% of total sales on advertising. And in my mind, it's probably closer to 20, but it has to be productive. And so we really haven't slashed advertising as much as we've been able to find a way, while the ad spend that Bennett quoted was down significantly, 56%, I think the number is, our traffic is down a much smaller fraction of that, proving that we've been able to get more efficient. there is a place where we'd be underinvesting. So we want to get the advertising investment back up, but we're going to do it in a way where we're very confident in the return on that spend and that we're getting the kind of traffic and conversion it takes to grow the business.

And as a follow-up to that, is there anything that you're finding kind of on the SEO side of you know, how your marketing online that you think is, you know, not being optimized now that you see, you know, low hanging fruit, you know, but given that this is a, you know, digitally native brand, you know, just wanted to get a sense for, you know, where there's additional efficiency to ring out there as well.

Okay, I'm certainly in this market right now. There's no low hanging fruit. I'm positive of that. But we are, you know, the leadership change, the strengthening of that team is all about us believing we can get better. And so we brought in somebody with very deep experience in that space. And we got to support all three channels. So we need great brand positioning, messaging, and communication. But we also need to be very, very effective in that e-commerce advertising spend. And both we want it on a direct basis and our wholesale customers want it because it generates interest in our brand. So, yes, we need to get better. No, there's no low-hanging fruit. And finally, we're committed to deliver that kind of execution in that department just like we have in the others.

Great. Last one real quick. In terms of, you know, understand the focus on making wholesale doors more productive, what you have now, In terms of thinking about opening up purple showrooms next year and potentially beyond 2023, how are you thinking about that investment as a priority versus the wholesale business improving?

As I mentioned in the script, showrooms remain a significant and fast-growing component of our distribution strategy. Dave Kuntz, Both for value of the store from a financial standpoint and the value of marketing and getting the name out there, you know some some folks put these in. Dave Kuntz, In kind of destination locations we've been putting them in high end lifestyle and high performing malls and. Dave Kuntz, there's a benefit of the traffic that comes with that, but there's also a benefit of just getting that name in front of consumers so. You know, we have an aggressive showroom growth plan. We haven't nailed down the final numbers for next year. But I think what you saw this year will be between, you know, a third smaller to that to a third bigger than that in the next few years for sure.

Great. That's super helpful. Best wishes, guys. Thanks.

All right. Thank you, Brian. Thank you.

We'll move on to our next question from Matt Crandall with Roth Capital. Please go ahead.

Hey, guys. I just wanted to see if you could unpack the gross margin change either year-over-year or quarter-over-quarter for us in a more detailed way. I mean, you're exiting – or sorry, you put up gross margins just far higher than where you said you'd exit the year. So I just wanted to kind of get a more detailed walk on where the improvements specifically came from.

Yeah. Six or nine months ago, we started out with McKinsey looking at our plant operations and we've since brought in Eric who's essentially taken over and expanded what they've been doing. And so the improvement in gross margin is pretty well focused on what goes on inside the plant. Eric has improved the purchasing to where we're essentially offsetting inflation now. And then with the reduction in force we had, plus higher machine operating efficiencies, we've taken the costs out of operating labor and overhead within the plants. And we believe that the improvements of several margin points we've gotten in there is sustainable and replicable, and we'll continue to see that improvement going forward.

Okay. I guess what I'm also curious about is, like, is there any way to break down? I mean, if I look at, you know, the improvement year over year, it's like almost 600 bps. Is there a way to bucket out the 600 bps points of improvement between sort of plant operating efficiency and labor cost reduction? Just any way you want to bucket it would be super helpful.

Well, there are a lot of components, including mix and discounting, that go into gross margin. But that six points is basically labor, plant efficiencies, and plant overhead reductions. So I would say that whole six points is basically in the plants.

OK. All right. If that helps. Yeah, no, that is. That kind of gives us a little bit something to go on for modeling going forward. And then I guess the other question in the near term for me is implied in your guide is you essentially give back like almost 700 bps of margin in the fourth quarter relative to the third. And that's even though I guess revenue in your outlook is also kind of flat to up relative to the third quarter. So just what's baked into your outlook from a margin standpoint? How much are you assuming you give back due to promotions and discounting in the fourth quarter? versus just leaning back into marketing, I guess, has helped us understand the bridge to the fourth quarter, because it just seems like a pretty big reduction, Q over Q. Totally understood.

And most of that is not in the plan that Bennett just referenced. Our concern and caution is around the increasing discounting that's been required to get the demand to happen. both from a consumer standpoint and competitively. And with Black Friday and Cyber Monday being kind of the biggest promotional weekend of the year, we are just trying to be cautious around that.

Okay, fair enough. And then just if I could do one follow-up on that, I mean, where are you seeing the most incremental discounting? I guess if you kind of break down your products into higher or lower end, is Is there more pressure in one segment or another? Maybe just help us understand kind of what's driving that promotion.

It has been more aggressive on the lower end of our price tiers, which is kind of tough on both sides because there's less margin to give, and that's where it's been the most competitive.

Okay. Makes sense. I'll jump back in here. Thank you.

Thanks, Matt. Okay.

And we'll go ahead and take our last question from Atul Aswari with UBS. Please go ahead.

Good evening. Thanks a lot for taking my questions. Rob, first one, on the gross margin, a pretty dramatic shift in trajectory there, so kudos to you and your team. But as it stands today, and based on what you know, having been with the firm for almost a year, what is the realistic goal over the long haul as far as gross margin line is concerned? As of the end of the third quarter, you're about 300 to 400 basis points below 2019 levels. So is that a realistic medium-term goal, or do you believe you can go over and beyond that on gross margin? And if so, what do you need to do to get there?

Well, we do think that in a in a more normalized demand situation that you know internally we've talked about uh being more in the 45s than in the 40s just a matter of when you know you're asking me to call when the market's going to turn and i honestly wish i knew that but i don't um but i you know when we look at the makeup of running this business efficiently out of you know primarily two major facilities Those are not unrealistic goals. We want to come back to you and tell you when we're going to get there. And I'm not telling you I know that now, but we know that's what we're aiming for.

Okay, got it. That's thoughtful. And as my follow-up, Rob, it sounds like you do plan to be more promotional during this upcoming holiday period. What is the risk that you are conditioning your customers to rely on promotions going forward, which would be in contrast to your plans to build a premium brand over the long haul? So if I ask this in another way, what is the risk that these promotions could erode brand value over the long term?

I think it is an area we need to be concerned over time. But you know, this is a highly promotional category. And there really is no incremental promotion activity. There's just incremental promotional depth. And we're trying not to lead here. We're trying to follow. But we know we've got to be competitive on those tier one promotions is the language used in the category, but the major three-day weekends when this category is heavily promoted by all brands and all players, recently those promotions have gotten deeper and a bit longer in days available, and we're just trying to be cautious to make sure that we must be competitive.

Got it. That makes sense. Thank you for that, and good luck with the fourth quarter.

Thank you, Atul.

And with that, that does conclude our question and answer session for today. And that does conclude our call as well. We appreciate your participation, and you may now disconnect.