Good afternoon, ladies and gentlemen. Welcome to Purple Innovation's Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Cody McAlester of ICR.

Thank you for joining Purple Innovation's Fourth Quarter 2021 Earnings Call. A copy of our earnings press release is available on the Investor Relations section of Purple's website at www.purple.com. I would like to remind you that certain statements we will make in this presentation are forward-looking statements. These forward-looking statements reflect Purple Innovation's 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 forward-looking statements included in our fourth quarter 2021 earnings release, which was furnished to the SEC today on Form 8-K as well as our filing with the SEC referenced in that disclaimer. We do not undertake any obligation to update or alter any forward-looking statements whether as a result of new information, future events or otherwise. Today's presentation will include reference to non-GAAP financial measures, such as EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures is available within the earnings release, which can be found on our website. With that, I'll turn the call over to Rob DeMartini, Purple Innovation's Chief Executive Officer.

Thank you, Cody, and thank you, and good afternoon, everyone. I'm glad to be here today speaking with you in my new capacity as permanent CEO, and I look forward to meeting many of you in the months ahead. I started with Purple 2 months ago and from the moment I engaged with the Board to discuss this role, I've been impressed and excited to work with this brand and this company as we endeavor to bring comfort technology to the world, building from a foundation where we first win in sleep in North America. The market fundamentals are there, and Purple has a growing portfolio of both intellectual property and know-how with which to profitably extend its share gains. As a way of background, I've been fortunate over my career to work for and lead some great businesses that I believe have prepared me well for the challenges Purple faces today, and to capitalize on the opportunities that we have going forward. I spent my first 20 years of my career at Procter & Gamble in sales and general management roles. I then had the chance to work with Jim Kilts at Gillette and lead North America business during its turnaround and subsequent growth. More recently, I spent 12 years as CEO running New Balance, where the leadership team globalized a predominantly wholesale North American brand and moved it into the omnichannel world. During my time at New Balance, we grew from $1.5 billion to over $4.2 billion. I then took the last 2.5 years to pursue a passion project leading USA Cycling. I fully believe my experiences have prepared me to help get Purple growing again in a healthy and sustainable way. I have confidence and conviction in this business, and I believe in the strategy we laid…

Thank you, Rob, and welcome aboard. Due to the extraordinary impact COVID had on consumer behavior, I'm going to provide certain comparisons to the fourth quarter and full year 2019 in addition to 2020 to provide sufficient context. For the 3 months ended December 31, 2021, net revenue was $186.4 million, up 7.2%, compared to the $173.9 million in the prior year period. By channel, wholesale revenue increased 35.9% and DTC revenue decreased 4%, as our wholesale business was favorably impacted by wholesale partner expansion. DTC net revenues declined due to lower e-commerce revenue, partially offset by growth in Purple retail showroom revenue, driven by the additional 19 showrooms we ended the quarter with compared to a year ago. Compared to the more normal 2019 period, net revenue was up by 50%, with wholesale revenue up 48.7% and DTC revenue up 50.7%. Gross profit dollars were $64.7 million during the fourth quarter of 2021 compared to $82 million during the same period in 2020, with gross margin at 34.7% versus 47.2% in the fourth quarter of 2020 and 47.7% in the fourth quarter of 2019. The decrease in gross margin from the prior year can be attributed primarily to higher material, labor and freight costs and a higher proportion of wholesale channel revenue, which carries a lower gross margin than revenue from the DTC channel. Wholesale net revenues comprised approximately 36% of net revenue for the quarter compared with approximately 28% in the same quarter last year and 36% in the same quarter 2 years ago. Operating expenses were 51.4% of net revenue in the fourth quarter of 2021 versus 42.9% in the prior year period and 45.4% in 2019. The increase in operating expenses as a percent of net revenue compared with the prior year period was driven primarily…

Thank you, Bennett. Since joining Purple, I've seen many positive attributes of the business that excite me about the future of the organization. First, we have a differentiated, innovative product built with proven and proprietary technologies. Our gel Grid technology is the next evolution of sleep, and the required proprietary in-house manufacturing process provides Purple a clear differentiation and helps create an intellectual property moat around our business. Additionally, our domestic manufacturing capabilities provide an added layer of benefit for the company as we control nearly all aspects of our finished mattress products. Second, the brand is healthy and the potential for creating even stronger demand is there. The success of our company showrooms are the clearest indicator that fundamentally, things are going well. We just need to focus on getting healthier in our other channels. We continue to build market share even in the challenging fourth quarter, where we increased our share in the overall mattress category by a full percentage point from the previous quarter and up nearly a full percentage point from the previous high mark in Q4 of 2020 and Q1 of 2021. Additionally, our close rate among people who are considering purchasing a Purple mattress was at an all-time high in Q4 '21, which speaks to the healthy demand for our product. Third, our profitable showroom concept is a clear bright spot for us in our retail channel. 80% of online customers say they want to lay on a mattress before purchase, and our showrooms are the best way to showcase our full product line with consistent premium presentation, while simultaneously creating a North Star for our wholesale partners to look to for elevating our brand within their stores. Today, we have 30 owned showrooms, 19 of those opened in 2021. In 2022, we expect…

[Operator Instructions] Our first question is from Brad Thomas with KeyBanc Capital Markets.

Rob, congratulations on the permanent full-time role here as CEO, looking forward to working with you.

Thank you, Brad.

I wanted to maybe start with kind of a bigger-picture question that ties a lot of questions that we get together, which is -- first, just if you could share your thoughts on the margin potential for the business. Obviously, Purple greatly benefited from the environment that we were in when the pandemic first hit, leveraging a lot of its core strengths, and more recently has faced some challenges. How do you view the medium and longer-term opportunity from a profitability standpoint for this business and this brand?

Brad, thanks. And some of it, I definitely am still learning. But as I said in the script that we expect to get to where we had been before by the end of the second half. And beyond that, just based on experience I've had in other businesses, both from a pricing and from a manufacturing efficiency, I don't see why we can't get well ahead of those targets in 2023.

That's helpful. And then, Rob, I was hoping if you could just talk a little bit about the sales outlook for the year. And if I've done the math right, it does look like it's going to be a pretty difficult first quarter with sales down substantially. And so to get to your full year guidance, it does imply a pretty big acceleration in sales and perhaps double-digit sales moving through the year. I guess, can you speak to your confidence in getting that acceleration and what you're assuming from an industry standpoint versus maybe a company-specific standpoint that you're driving yourself?

Brad, in reading other people's releases, clearly the category is facing some short-term headwinds, but we are planning for quarter-on-quarter improvement on just about every line of the P&L, and the demand is still healthy. Clearly, the shift away from e-commerce back to more normalized distribution is tough on us in the short run, and I think we've got to make sure our marketing is working harder. But we're investing at healthy levels, we're getting a reasonable return, and I think there's room for improvement. So like you, we do see it's an uphill challenge, but we're confident in the plan and taking the actions to deliver that quarter-on-quarter improvement.

Our next question comes from Matt Koranda with ROTH Capital.

Congrats to Rob as well. Maybe just picking up on the questions with regard to the acceleration for the rest of the year. I guess what it implies is you guys need to do at least 25% growth for the remainder of the year. And likely, it sounds like it's more back half-loaded. So probably a little bit greater in the back half of the year here. Just wanted to see if you could maybe put a finer point on. Are there assumptions including incremental price action that kick in beyond the first quarter? Or maybe some channel inventory build from new wholesale partners that we're assuming that kicks in later this year? Just any color on sort of what we're assuming to get to that acceleration.

Thank you, Matt. So first off, on pricing, we've taken the pricing action that we believe is appropriate based on input costs. Obviously, if those were to change dramatically, we would need to reevaluate that. But today, we think we have that in a good place. We definitely have the maturing of the retail -- our showrooms. 19 new ones last year that were open for less than a year, and then 25 to 28 new ones that will open this year. So that grows faster than normal or faster than the category for sure. And we have the same thing happening on wholesale partners. We've opened a number of doors last year and we'll continue to do that this year. So those 2 channels should grow faster. But obviously, we also need to continue to make sure that the e-commerce channel grows as well. The combination of that is producing our confidence to get to that guidance on the top line that Bennett gave you.

Okay. That's fair. And then on the gross margin improvement side, thanks for the sort of more solid numbers in terms of targets in the second half. I appreciate that. But I was wondering if you could maybe just bridge us to that mid-40% exit rate that you talked about, Rob. Just in the form of how much of that is coming from some of the price action that you seem to have already taken versus the efficiencies you think you can wring out of the existing footprint versus the rightsizing of production? Just maybe a little bit more granularity on the gross margin improvement front on the building blocks to get to the mid-40s.

Matt, I don't have those numbers directly in front of me, but it's about half and half in the current plan from pricing and efficiency. And I -- honestly, as I walked the factories, I think there's meaningfully more in efficiency that is not fully in there. It obviously takes some time to take the actions to get that. But I believe the mix in the current year is about half and half coming from pricing and from better efficiency.

Our next question comes from Seth Basham with Wedbush.

Congrats, Rob. I guess my first question is around pricing. You've mentioned that you've taken all the pricing that you need to, to cover the input cost inflation. But do you think that you may have taken pricing too high? Because it seems like the price increases you've taken relative to other competitors we track, it's much higher and do you think that's impacting your demand too much?

It's a good question, and I want to soon have the answer for you. I don't have it today. I think it's possible, but we do believe we've got input cost covered. And I think what we've got to do -- this is an adjustment for me with a lack of POS data in the category, but we've got to get better at reading that. And I don't want to -- we're not starting there, but clearly, if that's a door we would have to open, we'd look at it. At this point, we're not there yet.

Okay. Do you have any good measurement of demand elasticity and how that's performed with your price increases over the balance of the last year or so?

I don't think we're sharp enough on that that we want to be. Clearly, the prices have accelerated aggressively in the back -- in the late back half of last year and then early into this year. And some of our price increases on non-mattress products have only been in market for 2 to 3 weeks. So we are reading them real-time right now.

Okay. Got it. And then lastly, my follow-up question. I may have missed this because I joined a little bit late. But in terms of the cost cuts, I know you've cut back in a number of areas. But what are the most substantial areas that you've cut in, in terms of personnel? And have you taken down any manufacturing capacity that you added over the course of the past year?

We have not taken down any manufacturing. We have paused on some of the expansion that was partially underway. And we've also had to make some pretty big adjustments in our Utah factory as we balance demand of 50-50 with our new plant in Atlanta. So that's probably the single hardest-hit location. Obviously, that pays us back relatively quickly because we're not shipping mattresses across the country. But the Atlanta factory has seen the most growth and the Utah factory is the most pullback.

Our next question comes from Jeremy Hamblin with Craig-Hallum Capital Group.

I wanted to come back to the top line guidance for the year here. So midpoint Q1, $130 million, for Q2 to Q4 average, I think, implied here is about $225 million to $230 million per quarter. In terms of how we get there, what is embedded within that guidance in terms of your wholesale door count growth? What was the number that you ended with in terms of your wholesale doors? Where do you expect that to be embedded within the guidance? That's part one. And then part two is understanding what your mix assumption is for '22 of DTC business versus wholesale?

Jeremy, let me come at it backwards partly because I got the numbers clearer to me that the year ends up being about 60% DTC and 40% wholesale. In that, this year, we have projected about 600 to 700 store door growth in the wholesale channel. And I will tell you we are on pace to deliver that sooner than what's in the plan, but we still got a lot of work to do there. On the first half of your question. Will you restate that for me again, please?

Well, first, I wanted to know what was the ending door count.

Yes, door count, that's right.

Is it 2,700 or 2,800? Is there a number there?

Sorry, I'm trying to get some notes here because I don't have all these off the top of my head, but I believe we ended the year at about 2,600 to 2,700. I can verify that. And some of those included a pullback early this year in some of our retailers where the doors were not working. And then we're adding a net of between 600 and 700 in 2022.

Okay. So if we add 600 to 700 doors, is the thought here that you're going to get increased number of slots in each door? Or that your door productivity is going to be significantly better? That definitely took a little bit of a step back versus where you were in 2019 in '21. So just any additional color there.

Yes, so we had one significant retailer where we pulled out of a meaningful number of stores in the 200 to 250 range, and that was happening late last year and early this year. The new stores, as I said, about 600 to 700 in the year. And I'm still trying to get my hands around door productivity on slots. And I think we've got to get much more maturity in our wholesale business in total to be looking at door productivity. I referenced in my earlier comments about wholesale experience that I've had. And I think about it, if I'm not working harder than other choices for that retailer, we're not going to be able to hang on to the slots. So I think instead of measuring distribution as a single count, I want to measure the productivity of distribution, and we are working on that right now. Doors matter, slots matter, but most importantly, our contribution to our wholesale partners' customer or their performance is what matters the most. We should end the year at about 3,000 stores. Maybe a little bit above it, but that includes cleaning up doors that weren't working for us or them and getting more contribution to our partners that we have.

Okay. And then just as a follow-up. So in terms of making those doors more productive for both you and your partners, does that mean that your advertising spend, which I think had been quoted several times that it was down versus what it would have been because of the production issues, is that expected to jump this year? And if so, by what percentage? And that's the last one.

Jeremy, so we've done some work to make our advertising investment more productive. That was done late in Q4, and we're encouraged by the early signs. Our advertising investment year-on-year is relatively level. So it hasn't gone down. I think the real issue is making sure we're working with our big wholesale partners to present the product better, make our advertising work harder for them and ensure that whatever slots they give us are profitable for them and for us. And that's just a degree of kind of next steps of maturity in what I said before was a very young wholesale business.

Our next question is from Alec Legg with B. Riley.

My question was just on the split between DTC and wholesale. You mentioned a 60-40 expectation this year. Is that your new baseline expectations going forward? And essentially increasing your wholesale mix? Or should we expect it to longer term revert back to 65-35 or even 70-30?

Yes, I don't think it does revert back. I think we've got to get all 3 channels growing. Channel development is one of the single biggest priorities I'm focusing on, and I do think you'll see it continue to move towards showrooms and wholesale at a higher rate than DTC, simply because as I'm learning this category, it seems like 4 out of 5 consumers want to experience the product at retail, and we've got to make sure that our product is available for them to do that. So 70-30, I don't think we go back to that level.

And then my follow-up is just on your liquidity and cash balance at the end of this first quarter. You mentioned, I think, $15 million to $22 million. What -- remind us what was the delta between the ending of fiscal year '21 and then getting to that $15 million to $22 million at the end of this first quarter?

We ended at about $91 million, and the major drivers in that reduction include the net EBITDA, net loss for the quarter, $12 million to $15 million in capital. We had an enhanced spending in advertising and some other areas, so our payables will go down. In addition, our new amendment requires that we prepay the year's principal. We prepay it, which is about $2.5 million. And then with our prior owners, we had a TRA that required about $6 million of cash in the first quarter.

And then I don't know if I misinterpreted or misread, but in the new credit amendment, any excess cash on the balance sheet over $25 million. Does it have to go back to that credit facility?

It gets swept against the revolver, but it's still available to us as part of the revolver.

Our next question is from Keith Hughes with Truist.

You had mentioned earlier some stores you stepped away from in the last couple of months. Can you give any idea how much that's contributing to this what's going to be the 30% sales decline at the midpoint of your guidance range?

Keith, I heard the first half of the question, not the second.

Let me just ask it all again. You had talked about 250, I think, stores that you were going to be exiting. How much -- how big a role do that move play in your guidance, which calls for about 30% decline in revenue year-over-year?

It really involved 2 different customers. But by definition, they were not very productive stores for us or the partner. So it's not a big part of the volume equation and it gets netted out by growth of either more slots in existing doors and more doors in total.

Okay. Let me ask one final one here. We talked a lot about a lot of different channel things in the call here today. I guess just in general, it appears that the whole brand has lost momentum over the last 3 quarters, irrespective of what channel it's coming from. Now you talked about some new product launches. It sounds like those were in '23. What would you think would be the drivers to get the brand moving in the right direction in a short period of time here?

Yes, Keith, and I'm sorry, I'm going to edit a little bit your statement, but our showroom demand has been very strong, and our wholesale demand has been, I'll call it, solid. DTC is where we have struggled a bit more, and it goes right back to my priority about reenergizing the brand. As we've moved up in price, we've taken on new consumers, and I don't think our marketing effort has kept track or has kept pace with that shift in kind of demo and psychographic consumer target. So that's why that's the second priority on my list, and we have to prove it to you, I understand that. But we expect to have some new creative in the market by mid-second quarter at the latest.

Our next question comes from Curtis Nagle with Bank of America.

So first one, and then I have a follow-up, is on comments you made. It sounds like you're backing the prior team's long-term growth plans. Do you still think you can hit that target, I think, was it $2 billion to $2.5 billion in 3 to 4 years despite a much lower revenue base? And I guess, why? And the second question was just trying to work out the gross margin math, right? So we have much larger -- a wholesale penetration planned, right, for the year? I think there's like a 1,000 bp difference between wholesale and DTC. So I understand that things are in place here or you're putting in place things to improve some of the operational efficiency. But is that not a big continual headwind? So I guess how do we get to that mid-40s gross margin at the end of the year with that wholesale headwinds in the business?

Let me -- Curt, if I could, I'll take them backwards, but I'll answer both questions. The shift from -- one of the first things I talked about with the Board when I looked at the long-range plans before I joined, the shift to wholesale under normal -- under normal is the wrong word, under mature development, would clearly be dilutive. I think this company has been chasing demand for so long that I believe we can offset that by greater efficiencies in the operation. So while the straight shift is dilutive, there is enough opportunity in manufacturing and marketing effectiveness, and to some degree in pricing and product construction, that I believe we can offset it. That really flows directly to the long-range plan. And while I'm not experienced enough yet to project for you the timing, when I think about the progress this company has had in the premium side of the category with mostly an e-commerce-only approach, and as I said before, we're an 11% share of the premium category, there's plenty of headroom. Now I've also learned pretty quickly this is a very competitive category, so I don't take any of my competitors lightly. But is there room there for us to be a $2 billion to $2.5 billion company? Absolutely. Absolutely. And we got to go earn it. Nobody is going to give us a single share point, but it's here to be had if we execute well.

Our last question comes from Atul Maheswari with UBS.

I have a 2-parter, but I'm going to ask the guidance question first. So just going back to the revenue guidance and the implications that you have in the guidance that calls for a pretty sharp acceleration later in the year. Is this contingent on industry demand improving? Or do you believe you can achieve this outlook, even if the industry demands remain pretty consistent with where it is right now?

Atul, it's a good question. And we built these plans and then -- on the basis of the strategic choices and better execution. Clearly, the headwinds of the last month or so haven't made that any easier, but we are confident in those numbers. So I do think it's us executing better inside the category as opposed to the category given us much of a tailwind.

Got it. And then as my follow-up, Rob, just based on the due diligence that you've done over the past 2 months since you were here, what were the primary reasons that Purple's revenues didn't accelerate even after the production issues were fixed later in the third quarter, and marketing was ramped up in the fourth quarter? So what caused -- what was the holdback?

Atul, I don't think I'm in a great position to talk about what happened 6 months ago. I've just been running company long enough to know that situational decisions are what they are, and it's hard for me to look at it. I do think that as demand shifted back towards wholesale, we were not as mature there as we wanted to be, and our showroom footprint is still quite small. So we just were poorly positioned to maintain those peaks that were driven by store closures and stimulus checks. Whether that's the right answer or not, I'm not going to project it. That's just what I've observed so far. And at the same time, I see that if we mature our channel development strategies well, then there's plenty of room for this brand to grow going well into the future.

There are no further questions at this time. I'd like to turn the floor back over to Rob DeMartini for any closing comment.

Well , thank you. I want to reiterate my confidence in both the fundamentals of this company and our ability to pull together as a team to get back on track. Purple's future has a lot of potential, and with our focus on executional excellence, elevating the brand, channel development and product innovation, I know we can get there. Thank you to our community of employees, customers and partners and investors, for your patience during this transition period. I'm excited to be here with you, and I look forward to building a strong future together. Thank you all very much.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.