Good afternoon, ladies and gentlemen. Welcome to the Purple Innovation First 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. [Operator Instructions] It is now my pleasure to introduce your host, Cody McAlester of ICR. Please go ahead.

Thank you for joining Purple Innovation's First 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 first quarter 2022 earnings release, which was furnished to the SEC today on Form 8-K; 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 DeMartini, 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. Our first quarter performance reflects the early progress of our initiatives to return the company to profitable growth. While the business environment continues to be challenging and there is still much work to be done, our overall results came in better than we guided. Ben will review the numbers in detail shortly. But from a high level, sales exceeded guidance this quarter, driven primarily by higher wholesale volumes. With respect to our direct-to-consumer channel, showrooms continue to perform well and were mostly in line with the forecast. However, this was offset by softer post-pandemic e-commerce trends that deteriorated more than anticipated as the quarter progressed. Our e-commerce results are still above 2019 pre-pandemic levels. As I said on our last earnings call, one of the key areas of focus is elevating our brand through more effective marketing which includes winning the company off its dependency on expensive and inefficient performance marketing. We did exactly that in the first quarter pulling back on pay-per-click spending. This tactic negatively impacted Purple site traffic. It contributed to adjusted EBITDA coming in close to $10 million better than we guided. We're encouraged by the elements of our first quarter performance and are still in the very early stages of rebuilding the framework for strong, consistent operational results. While we continue to expect positive progress quarter-over-quarter in 2022, we are adopting a more conservative view for the remainder of the year. We're adjusting our full year revenue guidance to $650 million to $690 million and adjusted EBITDA to $21 million to $27 million. Like much of the industry we're facing new post-pandemic headwinds that have developed in recent months, including a shift…

Thank you, Rob. For the three months ended March 31, 2022, net revenue was $143.2 million, down 23.2% compared to the $186.4 million in the prior year period. This decrease was primarily due to the challenging year-over-year comparison created by the pull forward of demand, driven by the effects of COVID and record economic stimulus in the first quarter of 2021, coupled with the pullback in discretionary consumer spending in early 2022. Compared with our previously provided guidance, revenue was ahead by approximately $13 million at the midpoint of the range, as wholesale sell-in was stronger than anticipated. By channel versus prior year, wholesale net revenue declined 6.3% and direct-to-consumer net revenues declined 31.5%. With DTC -- within DTC e-commerce declined of 38.6% were primarily offset by 138.2% increase in showroom net revenue, driven largely by the opening of 25 new showrooms over the past 12 months. Gross profit dollars were $51.6 million during the first quarter of 2022, compared to $87.5 million during the same period last year with gross margin at 36.1% versus 46.9% in the first quarter of 2021. 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 40% of net revenue for the quarter compared with approximately 33% in the same quarter last year. Operating expenses were 48.9% of net revenue in the first quarter of 2022 versus 37.9% in the prior year period. The increase in operating expenses as a percent of net revenue compared with prior year period was driven primarily by lower net revenues coupled with an increase in showroom-related operating expenses associated with continued showroom expansion…

Thank you Bennett. As I mentioned on my first earnings call upon joining Purple, I saw many positive attributes of the business that excited me about the company's future. An additional 60 days on the job has only increased my enthusiasm about where we're headed. Our differentiated innovative product built with proprietary technologies backed by a challenger brand position and a motivated workforce has the potential to be a true disruptor in the sleep and premium wellness space. The bad and the good news is that today our stumbles have been largely self inflicted a misread on the sustainability of COVID driven DTC demand leading to an overbuilding of production capacity, underinvestment in wholesale partnership, alignment stale marketing and underinvestment in innovation have hindered our ability to properly execute the past few quarters. But all of these challenges are within our control. While the current operating environment has proved to be more challenging, especially for our e-commerce channel and is slowing the place of our – the pace of our recovery, I'm very confident that our four strategic initiatives we outlined last quarter are the fundamental building blocks for our path back to our long-range revenue and profitability plan. I want to close today with an update on our progress against these four strategic priorities. The first priority is operational excellence, which will allow more effective and efficient capacity utilization delivering higher product quality and enhanced returns on the capacity investments we've made. In 2021, we overbuilt across much of the company in both headcount and operational capacity. To address headcount, we made the right and difficult decision to reduce our labor force in February and again in early April. We were mindful to retain personnel in all critical roles and I'm confident that the work that needs to be…

Thank you. [Operator Instructions] We'll take our first question from the line of Seth Basham with Wedbush Securities. Please go ahead. Your line is now open.

Thanks a lot. It's, Seth Basham from Wedbush. A couple of quick questions for you. First, just thinking about the developments in the wholesale channel. Rob, you talked about making sure that you have an appealing product and pricing and incentive structure for your wholesale partners. Can you give us a little bit more color on, how you think that might change beyond what you already announced late last year in your new agreement with one of our largest partners?

Yes, thank you. What I've seen because of the way our wholesale business matured, there's significant cost that happens between us and our customers. So we can enhance their margins and ours by being more efficient. Our logistics effort, our communication effort, our merchandising efforts, have all been developed without much -- quite frankly, without much deep understanding of how they operate. And in many ways, it costs our customers' money. So they either have to absorb that in a constrained margin for them or they keep us out of merchandising, because it's not profitable for them. I've had these discussions with really most or all of our larger customers. And we've agreed, that by working better together, we can create a win-win from a margin standpoint for both of us, and they'll feel more comfortable about growing our business.

Fair enough. And as you look to the future you see that pendulum swinging back to bricks-and-mortar retail. Where do you expect your sales revenue mix to be at year-end 2022 and 2023 and beyond?

Yes. The current numbers I mean I think we'll be about 55% DTC, 45% wholesale. 2022 will be above 2019 on an e-commerce basis. But the amplification that we've seen over the last – really since Q2 of 2020, I don't think we're going to see that percentage distribution return anytime soon.

Okay. Last one and I'll turn it over. Just thinking about that margin differential between the two channels DTC versus wholesale, where is it now relative to history? And do you expect it to widen or narrow over time?

I mean there is about a four-point gross and 2.5 point net difference roughly. I think we can maintain that. And if we can work better with our customers, we obviously can take some cost out and enhance both of it. But there's no question it's a more – I mean it's the revenue side of the gross margin that makes it challenging.

Understood. Thank you very much.

We'll take our next question from the line of Brad Thomas with KeyBanc Capital Markets. Please go ahead. Your line is open.

Hi, good afternoon. Thanks for all the details here. Just to follow up on some of the guidance commentary that you provided. So just as we're thinking about 2Q and getting sequentially better, would that mean basically the rate of decline improves from here and as you go to the year on revenue and similarly maybe that the rate of headwinds on margins get better? Is that the way to interpret it? And any more color on how to think about 2Q specifically?

If you – I mean just take Q1 results, if you straight line that out that says there's about $75-ish million of growth to get to the middle of that range that we gave you. It will be quarter-on-quarter strengthening that happens. And we do believe that the distribution by channel is about what I had said earlier about 55-45 DTC to wholesale. Not sure, Brad if that answered your question or not but follow up if it didn't.

That's very helpful. And then just as we think about some of the cash needs of the company, obviously a year ago, it was under inventoried. Can you just talk a little bit about how you feel about your inventory levels today? And any potential changes in working capital in the quarters ahead that we should anticipate?

Yes, this is Bennett. I would say that our cash position is very good after our $93 million stock offering. And so we feel like we're in good shape as I said in the script. We've got about $63 million in cash right now and a full $55 million to draw on our revolver. For the balance of the year I think our inventories will be flat to slightly down. I think as our wholesale business grows, our receivables will and that's the use of cash. And so I would see our cash declining a little bit over the next quarter and then starting to grow again as our volume grows and our EBITDA grows, which is very consistent with what we said at the last call, which is our cash will track our growth. So we feel like, we're in very good shape on cash or on liquidity right now as a whole.

Great, great. And the last one for me, the Purple stores seem to really be doing well, and I think an important indicator of the health of the brand and the interest in the product recognizing that you often have long lead times to sign leases especially where you want the store. How should we think about, you all signing more leases for 2023? And what that store pipeline looks like for you?

Brad, so we got six opened in Q1 2022 balance of the year. That annual pace is probably pretty accurate for where we'd be in the year ahead. And right now what we're finding is that there are -- we're having good luck with landlords, defining very good locations. They like our stores in their portfolio. And we expect that to be able to continue at least through 2023 and maybe probably beyond that but certainly through 2023

Great. Thank you so much.

We'll take our next question from the line of Bobby Griffin with Raymond James. Please go ahead. Your line is now open.

Good evening. This is Alessandra Jimenez on for Bobby Griffin. Thank you for taking my questions. First I just wanted to dive a little bit further into the gross margin impact for the year. Can you walk us through the building blocks to get to the 40% range versus 36% in 1Q?

I mean -- I can't -- I'm sorry, I missed your first name. Say it again please?

Yeah. This is Alessandra Jimenez with Raymond James. I'm on for Bobby.

Yeah. Because of the actions we've taken in the first quarter our cost structure is fully enabled to reach there it really is volume growth. Say it again, I missed it.

Pricing was not fully reflected in Q1.

Yeah, so Brad was reminding me that our pricing was not fully reflected in Q1 and now it is going forward. So, the combination of pricing being reflected in the quarters and revenue growth is what drives that margin improvement.

Okay. That's helpful. And then, on your steps to right-size the manufacturing footprint what else needs to be completed? I know we reduced the headcount. And we're starting to balance between the two different manufacturing plants. So what else will we see in the coming months do you start to implement to really drive margin enhancement there?

I think at this point again, the work has been done. It really is throughput and ensuring that we're doing that as efficiently as we can. I will say the team we have has been working very hard on this. And when, Eric Haynor comes in, he's got a lot of lean manufacturing experience that we expect will help us to accelerate that trend.

Okay. That's very helpful. And then lastly from me, have you heard anything from your wholesale partners on the recent price increases? And then, do you plan any more price increases to-date, or are you fairly balanced based on today's input costs?

If I take it backwards, we feel like we're in pretty good shape for what we know today for the balance of the year on pricing. As I talk to our customers, certainly the retail environment right now is pretty challenging. And they've all referenced that. But we did see the price increase in February meet some resistance from the consumer that has been coming back over the last six to 10 weeks. So we feel like we're in a pretty decent place there. Don't have to take any additional up pricing and we'll not need to take any kind of recision of any of that pricing going down. So we feel like we're in a pretty good place right now.

Thank you so much, and best of luck for the balance of the year.

We'll take our next question from the line of Atul Maheswari with UBS. Please go ahead. Your line is now open.

Good evening. This is Atul Maheswari from UBS. Thanks a lot for taking my questions. So your guidance implies a modest revenue decline over the rest of the year at least cumulatively from the second to the fourth quarter and also a deceleration of the three-year CAGR. So what have you assumed with respect to the macro in this guidance? Does the guidance assumes macro stays where it is, or does it assume an improvement later in the year?

We definitely are planning for quarter-on-quarter revenue improvement in Q2 through Q4 going forward. And I believe by the time we get to the end, we'll be lapping Q4 a year ago.

Okay. And then I guess with respect to consumer spending and the macro you're assuming pretty much status quo?

Well, I guess if I knew the answer to that one I'd probably be on the other end of this. But we certainly think that the environment is tough, but we feel like we're fairly well positioned for what we're facing right now.

Got it. And can you provide any color on quarterly date trends? Like have the year-over-year declines moderated thus far in the second quarter relative to the first quarter?

Quarter two does get a little bit stronger. So we think we saw the worst of it in Q1.

Okay, got it. That’s helpful, and good luck with rest of the year.

Thank you Atul.

We'll take our next question from the line of Keith Hughes with Truist. Please go ahead. Your line is now open.

Thank you. You had talked in the prepared statement about second quarter and to see some big creative coming out we're using third party to do that. Could you talk about what kind of consumer are you going to be going after with the new creative? How it's going to be different?

Keith certainly. So I think that's part of how our current marketing got a little stale is that our price points have moved up pretty sharply over the last four or five, six quarters. And I don't think our marketing has matured with them. So we'll move not dramatically but more premium and more female in our targeting and our messaging than where the brand has been in its history. And for what it's worth that is also the shape this category has naturally and we were just a bit more narrowly focused at male and young -- lower priced products.

Will it be more to older consumers? Is that a shipping focus?

I don't -- certainly we're not expecting it to be older. I think by definition it probably will skew a little bit older. But we're really talking about trying to leverage the innovation and the differentiation that I think Purple brings to the category and what I hear from our customers and our consumers is they like us as a challenger brand. We just have to stay fresh and I think that's something that we lost our way a little bit.

Okay. Final question. You talked about sequential progress in the second quarter. Do you think you'll be able to register a positive EBITDA number in the second quarter?

I mean, we definitely think each quarter gets better and we beat the first quarter. So we'll let that unfold. But the revenue holds up we're feeling good about the direction.

Okay. Thank you.

We'll take our next question from the line of Matt Koranda with ROTH Capital. Please go ahead. Your line is now open.

Yes. Thanks. Maybe just along the lines of some of the pricing questions that you've gotten a little bit of a different angle here, just wondered if you could speak to maybe the assumptions around the promotional environment that you are assuming for the rest of the year. I know, Rob, I think you mentioned you don't expect to take additional price, but also likely don't expect to get back price. But just how does that fit in the context of sort of promotionality, what you expect for the rest of the year?

Matt, one of the things that we're learning as part of that omnichannel maturity that I referenced both last call and this call. As a DTC brand, we could pretty much do whatever we want, whenever we want with any lead time as it related to promotional activity. And we got into that habit of too frequent and not meaningful enough promotion. So this category does have some clear kind of event-based seasonality that we had not participated in much. So we're really leaning towards fewer and stronger and better promotions, that does a couple of things. It puts us in the market when the consumer is in the market, but it also tries to put some integrity back into the MSRPs in the category for us. So we've been doing that for a couple of weeks. Actually a little bit more than a few weeks. And so far so good. It seems to be working. We've still got quite a bit of work left to do to make sure that our promotion plan is resonating with consumers who are in the market for mattress and sleep products.

Okay. Very helpful. And then, just on the April restructure, I wondered if you could maybe just quantify some of the fixed costs that you removed from the business. And then, just on a go-forward basis, maybe, if you could tie that to what we should expect for sort of core G&A and sales and marketing ex the performance marketing spend that you have, it'd be super helpful.

So the April event was about a $15 million impact on overhead, which is similar in size to what we did in January. I think the important message that I'm trying to make is that our cost -- we can make money with the current cost structure. And we went and ensured that that was in the actions we took, because it is an unclear environment ahead from a revenue standpoint, just in the whole marketplace we wanted to be ready. So we went all the way down to kind of the most conservative view of revenue and said can we make money at these prices with this overhead, even with the additional capacity that we have that, by definition, is going to be underutilized for a while. So they've been fairly significant and not easy to do. I don't want to be cavalier about that at all, but they were required. And we think from here we can build up and forward as the volume grows.

Great. And if I could just sneak one more in on the store expansion strategy here for the next year or two. I mean, you got a lot going on in terms of the turnaround manufacturing-wise, sort of, repairing or improving some of the relationships on the wholesale side, fixing some of the marketing issues on the DTC side. There's quite -- there's a long list of stuff to do here and you've got a healthy cash pile at this point. But just given some of the demand erosion that you've experienced and the whole category has, I guess why continue to lean into the own store strategy and the build out there in the near term, just given the uncertainties and the long laundry list of some have to do in the rest of that?

No, it's a good question Matt for sure. But I mean really two things. Number one, they're working. I mean just that simple. They are working. They are -- we think we can grow the four wall revenue from the current plan, but they are working even through these difficult times. But the second is as we grow wholesale those 3,000-ish doors, they need to be able to see what this brand looks like. And they have their own priorities to run and I don't expect them to mimic at all what happens in our store. But it does put a north star out there and this was very similar to the last industry I was in where High Street stores in that industry is what we call them, but the difference was those didn't make any money, but they did help you define what the brand should look like. And in our case, they're good investments, they're profitable investments and they help those 3,000 stores understand what this brand should and can look like at retail. So the combination of those two is why we've continued to do it.

All right. Perfect. I'll turn back in queue. Thank you.

Thank you, Matt.

We'll take a final question from the line of Curtis Nagle with Bank of America. Please go ahead. Your line is now open.

Good afternoon. Thanks for taking the question. Just a quick one on the gross margin guidance. So getting to I think around 40% by the end of the year. I think previously that was getting to mid-40s. What's the biggest difference? Is it primarily lower expectations on DTC sales, or is there anything else we should be factoring in there?

No. I think Curtis two things. It's lower revenue and we obviously adjusted the cost, but it was a meaningful adjustment. And then, it is a bit of the channel mix as wholesale plays a larger role in the volume going forward.

Got it. Okay. And then maybe just a quick follow-up on pricing. So it sounds like everything is pretty well set or changes need to be made. But if I remember from the last call, it sounded like you guys were getting a little bit of pushback. I think more on the entry level price points. Any update there? Has that dissipated? Yeah. Any updates on that?

No, it's still consistent. There is some concern that we've left some volume on the table by moving away from kind of one of the important price points that Purple used to play at. And with the new Chief Innovation Officer, I got them looking at both the top end and the bottom end to figure out where opportunity is, but that certainly is one of the contributors to some of…

Got it. Okay. Thanks for taking the questions.

Thanks, Curt.

This concludes today's call. Thank you for your participation. You may now disconnect.