Purple Innovation, Inc.

Good afternoon, ladies and gentlemen. Welcome to the Purple Innovation fourth 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 my pleasure to introduce your host, Cody McAllister of ICR. Please go ahead.

Thank you for joining Purple Innovation's fourth quarter 2022 earnings call. A copy of our earnings press release is available on the investor relations section of Purple website at www.purple.com. I would like to remind you that certain statements we will make in this presentation are forward-looking statements. These forward-looking statements reflect Purple Innovation's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting the company's business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements included in our fourth quarter 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 because 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 DiMartini, Purple Innovation's Chief Executive Officer.

Thank you, Cody, and good afternoon, everyone. With me on the call today is Bennett Nussbaum, Purple's Chief Financial Officer. As I reflect on my first full year as CEO, it was certainly more challenging than I initially anticipated. When I joined Purple in January of 22, I knew there was a good deal of work to be done to turn the business around and return the company to profitability. What I didn't fully anticipate was the difficult market conditions that we would be operating in throughout 2022. While it was expected that the industry would give back some of the COVID-related gains it had captured in 20 and 21, decades high inflation and the shift in consumer spending towards services and experiences put even more pressure on demand and led to what has been cited by many as the worst annual decline in the history of the US betting industry, with unit volume estimated to be down 20 to 25%. Against this challenging backdrop, our organization has made significant headway towards improving the efficiency of the business and strengthening our foundation for growth as we executed the strategic initiatives that we believe position the company to deliver improved results even in the face of continued market headwinds. Looking back on 2022, we right-sized our cost structure and lowered expenses to align with current demand. This included the difficult but necessary decision to meaningfully reduce our headcount. Net of showroom growth, headcount is down approximately 45% compared with this time a year ago. At the same time, we eliminated inefficient and expensive advertising, bringing advertising spend down nearly 60% from the 2021 levels. These two actions allowed us to increase profitability during the back half of 2022 without sacrificing operational productivity. We added new expertise to our leadership team to prepare Purple for the next stage of profitable growth. Jeff Hutchings joined the team in May as the company's first ever chief innovation officer. Jeff has been busy reinvigorating our innovation department and filling our product pipeline. Additionally, he's implementing a continuous innovation process to ensure we are consistently deploying new products that are truly innovative and authentic. Eric Haener, our chief operating officer, joined the team in June. Since that time, he's made significant progress with raw material and operational cost improvements, helping offset inflationary pressures. Eric's also helped to drive continuous improvement in our productivity while balancing supply and demand. This action, along with rebalancing our production between our two facilities, has helped maintain a sustainable structural plant cost position in line with the current demand projections. He's also delivered significant improvements in safety and customer service. Kira Kraus joined our team as chief marketing officer in early November to lead our brand repositioning in support of our path to premium strategy. She's been instrumental in the coming launch of our elevated brand positioning that will happen in the second quarter of 2023 and is leading the process to identify the most efficient ways to reach and subsequently convert our consumers across all channels. Our new brand positioning will debut in mid-May. And most recently, we appointed Scott Kirby as Chief of Owned Retail. Scott joined us in January of 23 from Sephora, where he served as Head of Stores for Canada since 2019. Scott's been tasked with elevating our company showrooms into highly productive beacons of the new premium brand position, while also continuing to expand the fleet as we continue to balance our direct channels with our wholesale channels. Jeff, Eric, Kira, and Scott have helped solidify and complete a strong senior leadership team that's been assembled at Purple. Finally, we took a step to better position Purple in the premium category with our acquisition of IntelliBed. In addition to the shared technology, eliminating licensing barriers and opening full innovation potential, the manufacturing expertise, attractive financial profile, and highly complimentary product offering made IntelliBed an excellent fit for Purple. IntelliBed's portfolio of higher priced mattresses compared to our legacy offerings provided a natural extension of Purple's product line. This accelerated Purple's product development schedule by several years and immediately placed us in the $5,000 and up segment of the mattress market. The addition of IntelliBed combined with Jeff Hutchings' work accelerating our innovation engine generated a great deal of excitement among our wholesale partners at the Las Vegas market in January. We came out of that show with commitments to significantly increase our retail presence this coming year, both in terms of number of slots on the floor and increased point of sale materials, which I'll speak to more later on the call. Despite the significant ongoing challenges for the mattress industry, we're encouraged by the way 2022 unfolded. Over the course of the past year, we saw sales and margins stabilize and build after bottoming in the first quarter. While our financial performance is not yet where we want it and know it can be, including a tough start to the new year, we hope what you'll take away from today's call is that we believe we've taken the necessary steps to successfully operate in the current environment and have set the business up to achieve incremental top line and bottom line growth in the back half of 2023, even if the macro environment remains challenged. As a leadership team, our commitment to and excitement for our long-term outlook remains unchanged. This category has repeatedly demonstrated resilience and durability through its history, and I'm confident that the work we accomplished this past year has positioned us to weather the current environment and reestablish a strong growth trajectory once the market headwinds subside. We remain confident that our four strategic initiatives, accelerating innovation, Elevating the brand, developing our three distribution channels, and achieving operational excellence will be fundamental to our success this year. In addition to that, we believe that our new product launches, new elevated branding position, and the expansion with our wholesale partners will provide substantial tailwinds as we begin to establish Purple as the new premium lifestyle challenger brand. I'll cover those and additional 23 focus areas in more detail ahead of the Q&A session. But now I'll turn it over to Bennett, who will review the financials in more detail and share the outlook for 2023. Thank you, Rob.

For the three months ended December 31st, 2022, net revenue was $145.1 million. a decrease of 22.2% compared to the $186.4 million in the prior year period. 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. By channel versus prior year, direct-to-consumer net revenues declined 34.5%. Within DTC, e-commerce declined 43.4%, primarily driven by market conditions and compounded by changes to consumer consumption patterns. Showroom net revenue increased 41.3%, driven largely by the addition of 27 net new showrooms over the past 12 months. The overall decline in the DTC channel was partially offset by an increase in wholesale net revenue of 0.3% driven in part by the IntelliBed acquisition. Gross profit dollars were $50.7 million during the fourth quarter of 2022 compared to $64.7 million during the same period in 2021 with gross margin at 35% versus 34.7% in the fourth quarter of 2021. The increase in gross margin over the prior year can be attributed primarily to the cost reduction initiatives implemented this year, partially offset by a higher proportion of wholesale channel revenue in the quarter, which carries a lower gross margin than revenue from the DTC channel and an increased promotional environment versus last year. Wholesale net revenues comprised approximately 46% of net revenues for the quarter, compared with approximately 36% in the same quarter a year ago. Operating expenses declined $34 million or 35.4% to $61.9 million compared to $95.8 million in the fourth quarter of 2021. This was largely driven by an intentional decrease in advertising spend which resulted in a reduction of marketing and sales expense of $38.2 million, or 50%, compared with the prior year. Even with lower revenue, our expense reductions drove significant leverage in the quarter. As a percent of revenue, operating expenses improved 8.8 percentage points to 42.6% from 51.4% in the fourth quarter of 2021. Operating loss improved $20 million to $11.1 million from $31.1 million last year. Net loss for the quarter was $70.2 million compared to a net loss of $21.8 million in the year-ago period. On an adjusted basis, which excludes certain non-cash items and other items we do not consider in evaluation of our ongoing operational performance, including gains from the change in our tax receivable agreement income and the change in valuation of our net deferred tax assets. Net loss was $9.1 million, or 10 cents per adjusted share, compared with $23.9 million, or 35 cents per adjusted share, in the year-ago period. Adjusted net income has been adjusted to reflect an estimated effective income tax rate of 25.9% for the current year, compared with a 25.4% in the year ago period. EBITDA for the fourth quarter was $156.3 million, compared with a loss of $20 million in the fourth quarter of 2021. Adjusted EBITDA, which excludes certain non-cash gains and losses and certain other items detailed in today's earnings release, was essentially breakeven compared to a loss of $23.4 million in the same quarter last year. With our annual results available in our earnings release and with many of the factors that drove our fourth quarter performance the same as the full year, I'm going to move on to our balance sheet. As of December 31, 2022, we had cash, cash equivalents, and restricted cash of $41.8 million, compared with $91.6 million at December 31, 2021. Last month, we completed a primary public offering that resulted in $57 million of net proceeds for the company. The primary purpose of this transaction was to provide us with the financial flexibility to execute our new product and brand strategy that we unveiled at the Las Vegas Market Trade Show in early January. There, we announced a number of exciting changes that we believe will be transformative for the Purple brand and business in 2023 as we reimagine our product lineup, our brand messaging, and our wholesale presence. In February, we also extinguished our $24.7 million senior term loan and reduced our existing credit revolver to $50 million, which currently has zero borrowings against it. Net inventories totaled $73.2 million at December 31, 2022, compared with $98.7 million at December 31, 2021, and $91.4 million at September 30, 2022, representing decreases of 25.8% and 19.9%, respectively. Turning now to our outlook, we are confident that the work our teams completed in 2022 has the company positioned to drive profitable growth in the years ahead, which included the development of the new product line that was well-received at the Las Vegas market in January. While we are encouraged by our internal accomplishments, we recognize the macroeconomic environment remains challenging with limited near-term visibility. Taking all this into account, we are expecting 2023 net revenue to be in the range of $590 to $615 million with adjusted EBITDA between $13 and $17 million. In terms of how the year unfolds, The challenging market trends from 2022 have continued into the start of 2023. On top of this, some retailers are clearing their inventories ahead of taking the initial selling of our new mattress models of the second quarter, which is adding extra pressure to our quarter one performance. For the first quarter, we expect net revenues to be approximately $105 million and negative adjusted EBITDA of approximately $9.5 million. Driven by the new product launch in May, a stronger presence throughout our wholesale channel and new marketing programs, we are projecting quarterly results to improve sequentially throughout the year, with Q2 revenue up nicely from Q1 and similar to the second quarter of 2022, before returning to year-over-year growth in the second half to reach our full-year targets. For modeling purposes, Following the sale of the 13.4 million shares in our February equity offering, our fully diluted share count is now approximately 107 million. Finally, after the close today, we filed a 12B25 with the SEC, which provides a 15-day extension for filing of our 10K. This delay is needed in order for certain of our service providers to complete the evaluation over the effectiveness of their control environments. We expect to file our 10K on or before March 31st. Now I'll turn it back to Rob.

Thank you, Bennett. While we expect the current operating environment will remain challenging, I am confident that our four strategic initiatives will continue to act as the fundamental building blocks for our path to long-range revenue and profitability. In addition to these ongoing initiatives, I want to close today by detailing a few key areas of focus that we believe will accelerate growth beginning in the back half of the year. Starting with the changes to our product lineup, the IntelliBed acquisition in late 22 provided us with an immediate entree into the luxury end of the market. Since that time, we've been working to integrate the premium IntelliBed product set while also engineering our existing product lineup to better meet margin specifications needed across our distribution channels. The full Purple product line has been organized into three tiers. The Purple Essentials Collection represents our most accessible products with prices under $1,800. This collection is comprised of our Legacy Purple and Purple Plus mattresses, along with our newly engineered Purple New Day mattress priced at $1,000. These products have been engineered for and will primarily be sold through our e-commerce channel. Our purple premium collection represents our new mid-range offerings with six all-new mattresses ranging from $2,000 to $4,000. The Restore, Restore Plus, and Restore Premier mattresses are our completely re-engineered grid plus coil hybrid offerings that will be available in two distinct firmness offerings. A first for Purple that we believe will broaden the appeal of our grid-based technology. Our premium collection will be available in both our wholesale and direct-to-consumer channels. And finally, our Purple Luxe collection will feature our highest-end product, ranging from $5,000 to $7,500. This top-of-the-line sleeping experience is delivered through three rebranded in Telebed mattresses, Rejuvenate, Rejuvenate Plus, and Rejuvenate Premier. These mattresses incorporate superior pressure relief through enhanced gel grid plus, intentionally designed to sit deeper within the mattress, along with the enhanced foam layers and our responsive coil system. From a channel standpoint, the Luxe collection will primarily be available through our showrooms and our wholesale channel. Initial testing with our wholesale partners has been very positive so far. While we're excited about our new product lineup and believe this reinvigoration of our innovation engine positions us for growth later in the year, it is putting pressure on first quarter results as Bennett outlined. To prepare for the launch of our new mattresses in May, some retailers are working down their on-hand inventories by selling through our legacy models without replenishing orders, which is temporarily impacting sales. While this will make for a difficult start to the year, the response to our enhanced offering from our wholesale partners has been very positive, adding to our confidence that the upcoming launch will accelerate consumer demand as the year progresses, with the understanding that the broader economic environment will also play a part in shaping the trajectory of our recovery in the near term. Turning now to our brand messaging care has been instrumental in helping develop a premium brand position that can support our single brand multi channel strategy and the distinct consumer segments, we want to address. To create an ownable differentiated and highly consumer relevant positioning for purple as the brand for life enhancing sleep we're refining our marketing strategy in 2023 in several ways. To begin, we're reimagining the Purple brand to be bolder and more appealing to the premium customer set. While we've historically had great success with marketing campaigns tailored to our DTC consumer, as our product set has expanded into the premium space, our target consumer has evolved. You can expect to see us address a higher-end consumer with our brand messaging in 2023 with a shift in messaging that better articulates the unmistakable benefits of our differentiated gel technology. While many competitors attempt to differentiate themselves with common materials, one of the hallmarks of the Purple brand is revolutionary technology that provides a truly differentiated sleep experience. We'll use our innovation to our advantage in 2023 and position ourselves as a true alternative to the premium memory foam mattress segment. Along with this messaging and the target demographic shift, tactically, we're also focused on driving higher ticket values in 2023. We will adjust our approach with bundle pricing and enhance our messaging with our mattress bases and mattress enhancers like premium bedding and pillows to drive increased add-on revenue. Another key aspect of our 2023 strategy is strengthening our wholesale partnerships. At the Las Vegas market, we shared how our new product lineup and new incentive structure, combined with enhanced point of sale assets, will drive increased sell through with higher average selling prices and higher margins. The response was very positive and has resulted in the following results. Wholesale product placement commitments have far exceeded our inbound goal of 20%. Dozens of shop and shops confirmed with interest for several hundreds more and overwhelmingly positive feedback on the new trade-up direction of the brand. At the same time, we remain focused on expanding our successful showroom channel in 2023. We ended 2022 with 55 showrooms. The 46 net new stores we've added over the last two years continue to perform in the current, more challenged operating environment. We remain very positive about the future of our showrooms and plan to add 11 in 2023. In closing, I'd like to thank our employees for their hard work through a truly transformational year for our company. While so much change in such a short period of time is never easy, Your dedication through this challenging period has enabled us to stabilize and change the trajectory of our company during a very difficult time for our industry. I'm proud of the progress we've made in 2022, and I look forward to continued success with you in the coming year. As I hand it off to the operator to take questions, I'd like to remind everyone that the purpose of today's call is to discuss our fourth quarter and full year 2022 results, as well as our financial outlook. As we head into the Q&A, we ask that you limit your questions to these topics. Operator, we're now ready to begin to take questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Thank you. And our first question is from Brad Thomas with KeyBank Capital. Please proceed with your question.

Hi. Good afternoon. Thanks for taking my question. I wanted to talk a little bit more about the rollout of the new products. And I was wondering, Rob, if you could talk a little bit more about, you know, the performance that you had been seeing and may continue to be seeing in some of these pilot prototype stores where you had tested out adding the IntelliBed products, you know, with the purple branding and any other signs about what kind of list a store may see when they get the new assortment. Thanks.

Brad, thank you. It's a good question. So to frame for the group, because of the pace of how we brought the new Lux product to market, we hustled in the fourth quarter and put the IntelliBed mattresses with simply a purple logo on them into approximately 60 different customers across our customer base. And we did that so when we went to Las Vegas, we would have some evidence of results. The trade-off story, quite frankly, is a pretty easy concept to sell. But in fairness, our customers said, you know, great idea, will it work? And we were able to demonstrate that not only was IntelliBed's results where they had distribution pretty accretive to a retailer, we were able to take 60 stores and show them that Not in every case, but in the majority of the cases, with no marketing, very little branding on the product with the exception of a purple logo, they were able to achieve very encouraging results. We think the incremental slots are probably worth maybe about $1,000 to $1,500 a month across the new line, and that, along with the average retail price, makes that a very good proposition for retailers that can sell that. We're expecting to get incremental placement in 250 to 300 stores of IntelliVid throughout the year or Purple Lux throughout the year. Did that get at your question, Brad?

Definitely. Very helpful, Rob. And just as we think about the timing of the rollout, obviously there's a lot to undertake here for you this year. Can you just talk a little bit more about some of the timing milestones that we should think about?

Yeah, we will, you know, the retailers are destocking right now. We'll begin to ship wholesale during April and we'll have a hard conversion to the new line on May 15th in our own channels. So online and in store. We'll synchronize wholesale with that Robert Marlayson, conceptually, but because you got so many moving parts across 3500 doors there'll be some that will have that product, a little bit early and there'll be some that will be. Robert Marlayson, Later in the summer, based on their internal plans so think about hard conversion may 15 of own channels in a transition conversion of our partner channels in May, June and July.

Very helpful, Rob. A lot of exciting things going on and good luck to you.

Thank you, Brad.

Thank you. And our next question is from Jeremy Hamblin with Craig Hallam. Please proceed with your question.

Thanks. And I wanted to follow up on some of those points and just make sure I understood where our expectations should be as it relates to that May 15th hard launch. So if I do the math, it looks like your implied revenues for Q2 to Q4 are about $162 to $170 million a quarter, with adjusted EBITDA over the course of those three quarters of $23 to $27 million. In terms of thinking about the Q2 results versus what you're expecting in the back half of the year, because it sounds like there's still going to be softness in Q2, and then you're expecting a meaningful uptick. Should we be thinking about, like, second half of the year where you're looking at $175 million plus a quarter in revenue? Or, you know, any type of color that you can share on that? And again, you know, maybe some tangible evidence in terms of how we can kind of back into that math would be super helpful.

Okay, thank you, Jeremy. So, you know, obviously Q1 is softer than we expected. Some of that is clearly destocking, but some of it is also our stale product not performing as well as the category, and the category is not very strong. So the combination of that has produced a Q1 that has us, the 590 to 615 that we gave you is a lower number than we started planning for the year. Mike SanClements, driven by that Q1, so that is reflected in that. As Bennett outlined, we expect Q2 to be pretty typical with a normal quarter in 2022. Mike SanClements, And so, then from there, you guys can do the math. There is a definitely an uphill year and I don't really like planning that way, but given that we don't start the launch until May 15, Mike SanClements, we are planning for expecting and realize the challenge that creates for you guys when you model this of a very strong back half.

Okay. And talk me through, you know, the confidence on that just, you know, a little bit more. So you're expecting, you know, product placements, presumably, you know, slots that are going to increase, I think you said far exceeding your goal of 20%. And then, you know, maybe just a little bit more color on the kind of ASP change that you're expecting.

Yeah, the mix change, you know, across the total business will be driven mostly by Purple Lux. Our premier prices are ever so modestly a little sharper than the business we're pulling out. So that really won't add to the ASP. So the ASP blend will come from the Purple Lux business. But if you think about the growth year on year, there's really – Well, four components. So the wholesale growth we talked about, we've got a nice, healthy growth in slots, and we know what those are worth, and we have haircut them pretty sharply on the incremental side, thinking that each slot we put into a store is probably worth a bit less than the last slot that we have. But we've also got showroom maturity. You know, you've got 46 stores. that are less than two years old, and 26 that haven't even annualized yet. So that will contribute growth through the year. And then marketing is up 11% on the year, but about 40% on the back half because we underinvested in Q1. That also contributed to the softness because we're trying to save the powder for the launch. So the combination of annualization, new wholesale slots, increased marketing spend, and although we're expecting, but we didn't put a lot of building block on the quality of that marketing. If Kira's on the line, don't repeat that. We expect it to get better, but we didn't build in volume for that. But those are the components of that growth, and it'll start in May and be heavily delivered in the second half.

And just clarifying that, the 11% increase in marketing spend, that's the total that you're planning for for the year?

That is correct. That's correct. Okay.

Yeah.

You know, on top of that, Jeremy, last year was Q1 was by far our highest spend, and this year it is by far our lowest spend, and yet the spend is up 11% on the year.

You're saying year-to-date or for the total for the year?

No, total year. Year-to-date, I don't have that number in front of me, but year-to-date spending in the quarter is probably about 50% of what it was year ago. Got it.

Okay, guys, exciting. Best wishes.

Thank you, Jeremy.

Thank you. Our next question is from Bobby Griffin with Raymond James. Please proceed with your question.

Good afternoon, everybody. Thanks for taking my questions. Rob and team, I mean, clearly a lot of moving parts here with the product launch. Exciting stuff getting out there. Do you have an estimated of what the EBITDA drag is from the part of the launch that you're kind of helping support the retailers in, whether it's just any type of, you know, where we can kind of try to get a feeling of the underlying profitability of the business this year?

When you mean EBITDA drag, Bobby, do you mean, tell me, say more about it. You mean in the product construct?

Yeah, well, I mean, there's clearly some one-time costs that you're absorbing here. Retailers, I guess, are going to be absorbing some, too, to launch something as big as you're launching, kind of given the history of the company that's the biggest product launch. So just curious, is there any dollar figure around that of what the product launch costs here are? Or any way to kind of like back into that where we can kind of get a better feeling of where the underlying profitability is of the business?

Yeah, I'm trying to figure out a good way to answer that. It's customary practice in this industry that floor samples go in at half their normal wholesale costs. So resetting 3,400 doors, there is a price to that. I don't have that in front of me, but we can figure that out and share that with you. And then in a couple of cases, and we have built in some dollars to clear inventory, mark down in rare cases, maybe even pick up and resell in another format. So there definitely is a cost tied to that. I don't have a good roll-up for you right now. We'll get one and follow up with you.

Okay. I guess, do you have the, for 3,400 doors, we can kind of figure, we can back into a price. There's, what's the, do you know the average SKU, you know, that's going in per door? And I could probably back into the rest from there.

Yeah, we're going to move from pre-launch about 4.4 beds per door. And that will go up about one and a half to 1.8. Okay. Okay.

Okay, that's helpful. And then I guess just on the quarter itself, is the sequential decline in gross margin from the 41.5 to the 35 that we just reported in the fourth quarter, is that all just a change in mix? You know, wholesale went up 500 basis points. I know we talked previously about a more promotional environment, too.

Yeah, I mean, as we said going into when we wrapped up Q3, we knew It would be more promotional. That probably cost us a couple of points. Channel mix cost us a couple of points. And those are the two big steps.

Okay. And then, Rob, lastly for me, I mean, I understand your comments about your product being, you know, you've got to get the new product out there to really kind of see what's going on from demand. It's helpful. Do you think the industry itself here in the year-to-date period has stabilized, or do you think it took a further step down?

It feels to us now, I think our brand is underperforming the market right now because the product is stale and that's part of that soft quarter. I'm not pinning all that on the category, but I do, it did feel as Q1 kind of week on week got weaker after January.

Okay. And then the comparison starts to get, I guess, easier for the industry here towards the end of March. Is that correct in your view?

So I hear. I haven't had any easy comparisons yet, Bobby.

You and I both look forward to hopefully seeing some of that.

Well, let me say it more positively, though. We are confident in the wholesale expansion, the work that's going to go on in our showrooms, and fresh marketing and product to re-energize e-commerce. I clearly believe we grow behind this initiative, irregardless of the health of the category.

Okay. Fair enough. I appreciate the details and best of luck here with this big launch.

All right. Thank you, Bobby.

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

Thanks a lot and good afternoon. My first question is just making sure I understand the components of the revenue guidance for the first quarter. Obviously, retailers are destocking a bit of your product, but I can't imagine that's too much of a a hit to your sales considering they probably hold less than two weeks. So is the vast majority of the year of your decline in the growth that you're expecting for sales driven by the underperformance of your product and a little bit of pressure from the industry?

Seth, I think that's fair. It's definitely not the majority of it, but I do think it's a meaningful piece. I also think brand underperformance because we've got product that's been out there for three plus years without being refreshed is contributing. And then I think that, you know, the category contribution is probably the smallest of those three components. But we've got to perform better. There's no question about it.

Got it. Okay. I understand.

Sorry, I'm going to add to that. The marketing spending in Q1 also didn't make us any stronger because we were saving investment to put, you won't see us invest at year-ago up levels until May.

Got it. Okay. Second question, in the slots that you're gaining, any sense from your retail partners who are losing those slots?

No, when we were in Vegas, a number of folks asked us that. They're very much not, you know, they were pretty firm on what we were going to get they really do not communicate where it comes from. I would tell you I don't think it comes from Temper. And so it would come from other players, but we're not pushing them off the floor. We're really trying to present an idea that gives the retailer an alternative premium brand to put in the position directly next to Temper.

Got it. And my last question is on the new product line, the pure merchandise margin rate of those products relative to your prior line, is it materially higher?

Lux definitely is. The others are not materially higher. They're a little bit better in most cases and a little bit sharper for the retailer. So they're not, you know, we're not, we've got to do it by growing units. It isn't engineering margin to get back to good profitability. we did look very hard at the prices we were off the margins we were offering the retailer the margins we were making and the prices where our products needed to be to be competitive so we don't get a big up tech in unit margin in the restore line we obviously do in the rejuvenate line understood all right thank you so much and good luck all right thanks seth thank you our next question is from matt carondo with

Please proceed with your question.

Hey, guys. Good afternoon. Let me just try to attack this from a different angle. So the back half of the year potentially needs to be kind of in the high teens to low 20% growth. How much of that growth is coming from units versus the AOV improvement you're going to get from the new launch?

Matt, how are you disconnecting the launch from the units? I mean, it definitely is unit growth in the back half. And then mixed growth because Lux is annualizing and in the line.

OK, but the majority of the units is what we should send.

Yeah, the majority of its units. I mean, even the Lux units on a unit basis is slower than the rest of the line because of their premium price. OK, but we're annualizing.

Go ahead.

Part of it is annualizing that IntelliBed business. I believe there were only four months of it in 2022.

Okay, great. And then maybe just could you talk about the gross margin progression, just given that, you know, the back half is going to be mostly unit growth. It sounds like probably some better utilization through the facilities. How should we be thinking about how that factors into gross margin improvement? and how you think about flowing those dollars back into, you know, reinvesting in marketing.

Yeah, I mean, because of the downsizing work that we've done and some of the efficiency that Eric has brought, you know, this business is very sensitive to the volume we put through the plants. We get that unit growth will contribute to that. And then mix is also helping in the back half of 2023.

Okay, great. I'll take the rest of mine offline, guys. Thank you. Thanks, Matt.

Thank you. Our next question is from Keith Hughes with Truist Securities. Please proceed with your question.

Thank you. With the launch of the new line, are you changing historical advertising co-op or kind of real to a salesperson incentives? Is it going to be different than what has historically been at Purple on the new products?

I'm sorry. Will you give me that question again? I'm sorry. I missed half of it.

Yeah, sure. With the launch of the new products, are you changing your advertising co-op agreement with the retailers or some of the retail floor incentive payments, things like that? Is it different than it's been historically?

No, we have sharpened the margins. I don't know if this language is used in this industry, but what I'd call front margin. basically what they buy it for, what they sell it for. We've sharpened those in the restore line to try to get at some of the historical drag that was on the wholesale business. In most cases, or I can't think of a case where we've changed the back end at all. Yeah, there are not cases where we've changed any of the back end. We have sharpened the front end a bit, and then as Lux gets into the line, That margin dramatically helps the vendor margin as they look at how much Purple contributes because those are very rich sales for the retailers that sell Purple Lux.

Okay. Thank you very much.

Thank you.

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

Good evening. Thanks a lot for taking my question. Rob, I'm going to apologize in advance, but I also have a back half question. So a lot of exciting stuff clearly going on with the product launches and the incremental slots. But what have you assumed for industry growth in the back half that look like what's embedded in the guidance?

We have not assumed industry growth. We've assumed share growth in the industry. And if you can tell me what to plan, I'll do that. But we didn't. All right. I will also say we didn't include further decay either.

Got it. And then my follow-up is on the gross margin. I think you mentioned a few hundred basis points, Jack, from promotions, higher promotions in the fourth quarter. Please correct me there if I'm wrong. No, that's correct. But what have you assumed for promotions for 2023? And related to that, What is the risk that all this increased promotions could condition your customer to expect these offers even as you launch the higher quality new beds?

We do have planned in the year some improvements in discount levels. And in most cases, we've already begun to see some of that. It's a little hard to read in wholesale right now because of the destocking noise that's in there. But we have assumed modest improvement in discount levels across all three channels. Yeah, so a decrease in promotion. Make sure I'm saying that clearly.

Right. Awesome. Thank you very much, and good luck with this year.

Thank you, Atul.

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

Good evening. Thanks for taking it. Just wanted to, I guess, clarify what's going on from a slotting perspective. So I think you said 4.4 per door. It's going up by one and a half or so, maybe a little bit more. Is that right? And is that across all 3,200 doors or just a portion? Yeah, what ultimately will that look like when you're done?

Well, I mean, I was giving you blended rates, but we're not going to put Lux into a significant majority of our doors. Um, we've got 3,400 doors and, you know, across the average, it'll end up being maybe 1.2 to 1.4, somewhere in there. Increase.

Yeah. Okay. Um, and then just on the point about the store and stores, um, vignettes you're putting in, um, I guess you guys are funding that, I think. Um, what is the cost, um, you know, per door? Um, Are the retailers funding any of that?

There's a few different flavors, kind of depending on the breadth of the brand. And Curtis, we're being cautious and making sure that investment, we have planned for it. We will be very discriminating in how and where we put that in to make sure we get a reasonable return. Okay.

And then just what should we expect for CapEx this year?

Total CapEx? Yes. We're looking at about $35 million in total capex.

Okay. Thank you.

There are no further questions at this time. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.