Purple Innovation, Inc. (PRPL) Earnings Call Transcript & Summary

Good afternoon. I'm Rob DeMartini, I'm the CEO of Purple Innovation, and I've got just a very short 3 slides to share with you just to refresh or introduce the company to you, and then Brad from KeyBanc will come up and will talk a little bit about the business. For those of you that don't know us, Purple is about a 7-year-old company, went public in early '18, I believe. And we're primarily in the mattress and sleep products business, driven by a unique material, a hyper-elastic polymer, we call it the Grid that you can see a picture of up here that really is the first significant new technology in the sleep market since Tempur-Pedic launched memory foam some 20-ish years ago. We've been able to establish relatively quickly a brand that trades at retail prices between about $1,500 and $7,500 a mattress. So we started in the bed-in-a-box category, which is the lower end of that, the less than $2,000 part of the category. But today, that continues to represent a smaller and smaller piece of the total. We keep focusing on premium technology. And we believe pretty strongly that we have a robust business model. We've got a proprietary material that is well protected with IP and patents and trademarks. We are vertically integrated. We make that magic material ourselves. And we have an omnichannel route to market. We have -- we're about 60% direct-to-consumer, and that's through both e-commerce and 60 showrooms, 59 showrooms. And then we have about 3,400 wholesale partner doors making up our wholesale business, so a pretty robust business model. So that's who Purple is. We were 1 of the, I guess, Internet darlings through COVID that got probably ahead of ourselves and had a very high valuation and a very high spend into the future. We've spent a couple of years post COVID trying to get the cost structure right for this business at a time when the category has been as challenged as I think it's probably ever been. Our focus in '24, this says that these are all in, they're still going on, but we feel like we're making real progress. The first was achieving profitability. We did a prerelease this morning that Q4, we made money for the first time in about 3 years. So we feel like we're heading the right direction, and that's on relatively -- continuing relatively weak volume. We've consolidated our manufacturing operation. It got overbuilt in COVID in that run-up and probably I took too long going backwards, but we decided to rightsize it for today's business so we can ensure solid gross margins in this market today, and we've done the same thing on the OpEx side. Our showroom channel, which started with a bang and then struggled a little bit in the soft economy, is starting to show real signs of life, both in the way they've performed from a 4-wall profitability, but also in the way they're allowing us to drive the average transaction up. The transaction that happens in our showrooms is about $1,000 a unit higher than what happens in our partner doors and about another $500 a unit higher than what happens in our e-commerce business. So it's really helping us stretch the brand. And then we are looking at new partnerships that can be more profitable for us as a supplier and bring us a good consumer, and we're in the process right now of rolling out to a little bit more than 150 Costco doors, which is brand-new business for us. So '24 was a difficult year for sure, but I think we did a lot of the work that will help us ensure that we will be profitable and can grow in this market that isn't very good and particularly when the market gets better. In '25, we're focused on 5 key areas: grid leadership, and that's code internal for making sure people understand why they should buy our mattress, why it performs better; demand generation, there are a lot of people in this category that don't generate demand. They just draw off it to the retail base, and we think to keep a strong DTC business, we need to create demand for ourselves. And to keep a good wholesale business, we need to drive people into our customers. I spoke a minute ago about the gross margin delivery. We're going to -- we committed to leave '24 north of 40% margins. So we will beat that target and have expectations going into '25 to continue to drive it. We've got to make sure we can continue to convert in our direct channels, both owned and e-commerce, owned showrooms and e-commerce, and we got to make sure we're selective with our wholesale partners to find people that want us to play the role that we know we can play well and that there's no misalignment in the role they want us to play. There's a bit of a hangover in the business, where a lot of retailers are looking at the bed-in-the-box guys, the Caspers and the sofas, and there's quite a few of them. We don't want that business if that's the only business you want from us. So we're having to sort through that with our wholesale customers. But we really do fundamentally believe that the Grid creates a better sleeping experience. Our NPS scores are about double every other brand category, and it's because of the way the product performs. And so we think as long as that's well protected from an IP standpoint, well communicated from a marketing standpoint, and we continue the trade-up strategy that we're on? We're both an attractive brand for retailers and obviously, a very attractive brand for the business we do on a direct basis. So I think that's my slides. I guess, Brad, do you want to take questions now or you want let's do yours first and then take questions? Okay. Joining me is Todd Vogensen, our CFO; and Brad Thomas.

All right. Well, thanks for the chance to do this. I appreciate it. I'm Brad Thomas, the analyst with KeyBanc Capital Markets. And I've had the pleasure of following the Purple story, really, since the year it kicked off as we track emerging brands in the mattress space. And what's always stood at to me is Purple differentiation from a product standpoint. So that's where I always like to start as we talk about the story. You touched on it in your prepared remarks, Rob. But can you just talk a little bit more about how the product is differentiated and how well you think that's resonating in your communication with customers?

Yes. I think the Grid leadership is that first plank you see on our '25 strategy, and it is about trying to tell the consumer why we're different. This is a category with kind of 2 characteristics, more than 2. The 2 that stick out is there are a lot of promises made and they're very hard to measure. And we will not let our innovation become kind of internal detail of how many springs per inch that don't really deliver a consumer benefit. We're going to stay focused on the way Grid makes you sleep, cooler, pressure where you want it or pressure where you need it and soft where you want it. The idea is that there are some sleep disruptors that are significant. And if you can improve those for the consumer, you've got a winning product. But that's a hard thing to tell people, particularly in a category where some brands will tell the consumer anything to make the sale.

Absolutely. You acquired Intellibed, a licensee, not too long ago, and you continue to innovate and update the product portfolio. Can you talk a bit about what's in store here for 2025 from an innovation standpoint?

Yes. We bought Intellibed, who was a licensee of us that was marketing their business pretty much as Purple but better. And obviously, if Purple buys that, that's not a marketing plan we were going to take forward. But more from a timing standpoint. When we bought it, all we really had time to do is to change the wrapper, the cover. And so there was not out of our innovation inside the bed. They did use -- Intellibed used our Grid. But in -- later this month, actually, in Vegas, the trade show that is kind of a kickoff for new stuff, we'll launch our first version of the business we acquired with our innovation, Rejuvenate 2.0, 4 new beds, no real significant change in price points, but much better performance inside the bed and much more Purple. And I think that was important because Intellibed was -- if someone hadn't told you it was Purple, you wouldn't have known it. Most of our line, you look at it and you feel that you can immediately figure out. Now that may be polarized, you may like or not like it, but you know it's a Purple bed. And I think you've got to play the cards you're holding, and that was us for Rejuvenate.

We're looking forward to seeing that new product in a few weeks on Vegas.

That slide is not up there. That's actually a picture of that new bed right there. And so you can see we went away from the pillow top traditional approach that Intellibed have used and gone back to something that people will recognize as Purple.

Great. So between the Rejuvenate relaunch and the new doors with Costco that you mentioned, it seems like there are some nice drivers for the business for next year. Can you talk a little bit about where else you're focused in terms of driving growth in 2025 across the different channels?

So number one, we want to -- I mentioned in my remarks, 3,400 partner doors. Rejuvenate is only in about 700 of those. So we'll work to take this initiative and expand. It's not really expanded door count, it's expanded presence in the doors that we have. That's the best kind of growth if that throughput happens because my incremental costs don't go up. I'm already calling on that store. I'm already servicing their headquarters. So the first is to make our wholesale partnerships more productive. We will do a very hard push in our showrooms. We only have 59 of them, but the mix that, that product represents in our showrooms is north of 30%. So that is a very -- there's a great reward for focusing on that portion of the business. And then we'll look at Costco, as we talked about. We're still only in about a little less than half the clubs. And our pillow business is also creating the channels. We have approaching $100 million pillow business that we think can reach into more retailers than mattress only.

If we zoom out, how are you thinking about the whole industry? We've gone through 3 tough years for the mattress industry. It seems to be another year that may start off down a little bit at the beginning of the year. But what have you been seeing of late? And how optimistic are you for 2025?

I'm optimistic because I don't know how else to wake up, but I think we're cautiously optimistic. Black Friday was pretty solid in the category after a really, really weak late summer, early fall, and it just seemed to hold up so far. So, so far, so good. But we have to be cautious. When we did the cost changes, Todd helped me significantly. We had to say, look, we can't bet on a 1 more year and it's going to get better. So we got the cost right for this business. We will make money at this price, at this volume. And then if -- when it gets better, we'll be in a good position.

Are there key like indicators that you look at and would like to see improve to drive this industry's recovery?

I mean, yes, but I do -- we're a 5% market share. So I got to be careful not to blame the category. We got to execute as well as we can. And 1 share point is game changing for us as far as the economics of the business, particularly with the cost dialed into where they are right now. So we're going to focus on what we can control.

So if we transition, from your comments about getting the cost structure right to those difficult decisions that you made in 2024 to consolidate the Utah facility, can you talk a little bit about that initiative, what's happening, for those that aren't familiar, and talk a little bit about the financial benefits that you're going to be seeing from that?

Okay. Todd, do you want to? Go ahead.

Sure. So we did a number of things across 2024 really to continue to put our cost structure more in line with the current volumes that we're seeing so that we could generate cash, be self-sustaining and profitable at the levels of sales that we're at now. So 1 of the things we did, Brad mentioned, was to take our manufacturing facilities. We had 2 plus 1 small facility that we've now consolidated into 1 facility. We still have plenty of headroom from a volume perspective, from a capacity perspective, but being able to narrow down that overhead has been meaningful for us. We also looked at our corporate infrastructure and being more efficient with our corporate infrastructure. And all of that gives us about $15 million to $20 million of savings that flows directly to the bottom line. At the same time, we've been focusing gross margin on doing things like more advanced sourcing, dual sourcing products, looking at operational efficiencies in our manufacturing plants. All of those are things that have led us to get to that gross margin rate, this 40% plus that Rob mentioned earlier. And so doing all those things dramatically bring down our breakeven point, and it's really what's led us to the point of being profitable and cash flow positive in Q4.

That's a great point. And so as we think about run rating out EBITDA for the business, Todd, as I understand, you still have 90% of the savings you're getting from the plant closure ahead of you in 2025, and then you'll continue to get strong gross margins from the initiatives you've made. I guess the question would be, is there anything else that we're missing there? And then on that gross margin topic, can you dig into a little bit more what you've done to help drive the gross margins higher?

Absolutely. So I think those are the big points as we look at this year versus next year. Obviously, you wrap around on having incremental incentive compensation that will be built into the model going forward as we're closer to our targets. But by and large, we do have a lot of those savings that roll over and continue to grow as we go across the course of the year. In terms of gross margin, we've done a lot of work around our supplier base. So when it came time to launch new products, and we've had the biggest launch in the company's history in 2023, a lot of the focus was on who could deliver the parts and deliver them on time. Now we've been able to go back and look at not only those factors, but how do you build in that extra element of quality and price and on-time delivery to get ourselves in the best possible position holistically with our suppliers. And that has borne real fruit. Also I -- we have real, solid professional manufacturing talent that is leading our facilities, and they've been able to do a lot of process engineering that have taken our hours per mattress produced and reduce that by upwards of 30% to 40%. So those types of things yield real benefits really quickly.

Great. There seems to be significant opportunities within e-commerce or direct channel as well as advertising. Rob, do you want to talk a bit more about what you've done to improve profitability and what the opportunity looks like ahead there?

Yes. I think maybe I'll divide it into 2 answers because I think it's 2 different things. I think 1 of the things we're learning about those categories, you need a -- and this is like relearning it for the 30th time. But we need to spend at the top to talk about the brand, to create the demand, and we have to spend at the bottom to convert the transaction. And we have too often erred 1 way or the other too far. We think we've found the right balance. And so that's kind of the ad strategy right now. The other thing that I struggle within this category is the purchase cycle is so long, you can't think about this category as lifetime value. And as much as that pains me, having grown up in a very branded background, you just -- you're not going to get paid back for it. And so when you've got CACs that are running close to the MSRP, you go, well, how does this work out. And I worry a little bit more about my lifetime value, not the consumers, in this case. So we're trying to find that right balance and trying to build messaging that says you're going to get a better night sleep and it's believable. And I think the NPS scores are the best evidence I have right now because they are really good.

And to follow up, can you talk about some of your learnings with having stores? I know having your own showrooms drives some of the best performance of the Purple brand of any channel. What are you seeing there? And what's the opportunity?

So when I came to the company 3 years ago, there was a premise already in place around showrooms. And it was based on a dollar volume that we were not getting to. It was about 20% higher than where we were averaging. And what I couldn't put my finger on is how much of that is the category's weakness at this moment versus the brand magic that has been difficult to repeat. And so we brought a new leader in to run the showrooms. He's taken a very hands-on approach, and he's got the business moving in the right direction. Our volumes are moving up faster in showroom than any other channel. Our profitability, more and more stores are profitable each month. It's pretty clear to me that we're going to need a 60 gross margin in showrooms to make it work, and we've been running as low as maybe 45-ish at the weakest point. So he's made a lot of progress there. He's flirting with 55, and he owes me 5 more points. So we've got to figure out where to get them.

To hit on a few industry topics, it feels like the industry has been relatively rational. I mean, clearly, your gross margins have been moving in a favorable direction. How do you think about pricing and promotions? And what are you seeing from a competitive standpoint?

For those that aren't close, it's 1 of the most highly promoted categories I've ever been around. We're on sale pretty much all the time. And what the variance is, is what's the depth of that. And when this market got very soft in '23, discount started to escalate. And I think all manufacturers kind of said, "I'm getting nothing more for this." So they've stabilized, still highly promoted, probably 75%, 80% of the volume sells on some kind of promotion. But the depths have not continued to go deeper. And so hopefully, we'll all remain rational as this thing tries to get healthier.

We have a big couple of weeks ahead of us as we await a ruling on the Tempur-Mattress Firm deal. Without getting you to make an estimate of whether or not it will go through, Rob, wondering if you could just give us an update on your exposure to Mattress Firm just to remind everybody what your relationship is with them today?

Yes. So as background, Tempur-Pedic, the market leader, is buying Mattress Firm, the by far market leader of the retailer -- of the retail environment. And the judge is supposed to -- the FTC has already blocked it, but the judge is supposed to rule by the end of this month of whether that happens or not. We've been clear from the beginning. My concern about this has been less about the is it good for my business or not. I don't think it's good for the consumer. I never have. I don't think the rationale that prices will go down because of it, which is what's being argued by Tempur in this case, I don't see how that's possible. But regardless, they're 1,100 doors of my 3,400. They're the least productive on a per door basis, by far the biggest part of my customer. And we have an agreement to make no changes for a minimum of 18 months after the deal. So I think all you can do -- all I can figure out what to do is to take them at face value and say they want to be multi-branded and give them a chance to prove that that's what happens. I don't want any advantages. I just don't want to be disadvantaged. And I think inherently, it's going to be hard for that to happen.

Sticking with regulatory questions. Could you just remind us your exposure, if any, to China and potential impacts of any tariffs?

Yes. Todd, you want to take that?

Yes. It's actually very small. So all of our manufacturing is done in the U.S. We do have some pieces and parts, covers, bedding, those types of things that are purchased internationally. But what we're buying through China in particular is the very, very small piece of our overall mix. So it's just not a material exposure for us.

We got about 2 minutes. So maybe I'll wrap up with a question for you, Todd, and 1 for you, Rob. But the 2 questions that I tend to get around Purple. One of the first is just around the outlook for EBITDA and free cash flow, and you've done a tremendous work to stabilize the business on the cost front. Maybe, Todd, you could just speak a little bit more about your confidence in getting to free cash flow positive in what's still not an easy environment in the mattress industry?

Yes. So we really undertook all of our cost actions very thoughtfully with the knowledge that we had to get ourselves self-sustaining with the level of volume that we're currently doing. And Q4 is a proof point that we've been able to do that. Our strong belief is now we've set ourselves up for the fact that we can be sustaining at that level and then some as we go forward. The beauty is whenever you do these cost structure resets, when there's revenue upside, it flows through tremendously quickly. And that is where we've set up ourselves that we can get 30% plus, an emphasis on the plus, flow-throughs on our incremental volume upside. And so I think we feel very strongly that we're in a position of good, solid cash flow generation and also being able to generate positive EBITDA going forward.

Great. And Rob, maybe just to wrap it up. As you talk to either investors or potentially customers of Purple, what do you think is most underappreciated about Purple's brand or products or story here?

Yes. I think with consumers, they don't understand the -- I'm speaking in generalities as a 5-year brand. We haven't communicated the benefits broadly enough. And I think as we do that, we'll have more growth opportunity. I think customers, it's a different story. They want to see Purple healthy and growing. They need it as a bit of counterbalance. We're a very premium product. The dollars per unit that our retailers make is fully competitive, and that isn't where we started as an Internet brand. They wanted us because other people want us, but they didn't really want to sell us. So we've got that right. I think they just -- they want to see us continue to innovate. They want to see us continue to advertise. Those are 2 things that we do that not all category participants do.

Great.

Good.

Rob, thanks so much.

Thank you.

Thank you.