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

Thank you. Hello, everyone. Thank you for joining us and welcome to Purple Innovation's second quarter 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, I will now hand the conference over to Stacey Turnuff. Please go ahead.

Thank you for joining Purple Innovation's second quarter 2026 earnings call. A copy of our earnings press release is available on the investor relations section of Purple's website at www.purple.com. Before we begin, I'd like to remind you that certain statements made in this presentation statements. These statements reflect PURPLE Innovation's judgment and analysis as of today and are subject to a variety of risks and uncertainties that could cause actual results to differ materially from current expectations. We should not place undue reliance on these forward-looking statements. For more information, please refer to the risk factors outlined Additionally, today's presentation will reference non-GAAP financial measures such as adjusted gross margin, adjusted operating expenses, adjusted EBITDA, adjusted net loss, and adjusted net loss per share. A reconciliation of these measures to their most comparable GAAP measures can be found in the earnings release available on our website. that, I'll turn the call over to Rob Demartini, Purple Innovation's Chief Executive Officer.

Thanks, Stacey, and good afternoon, everyone. I want to start with what matters most from the quarter. While the market remains difficult, we continue to make progress in areas where we believe we have the greatest impact. Our showrooms had another strong quarter. Our premium products continued to perform well, e-commerce improved sequentially, and we delivered better profitability. This tells us the work we've been doing over the past year continues to take hold. We're a stronger and more disciplined business today than we were a year ago, and that is showing up in our direct-to-consumer business, product mix, and cost structure. The broader market did not give us any help in the second quarter. Demand remained uneven, and wholesale was softer than we expected. Turning to our quarterly performance, our results were mixed across channels. Starting with our direct-to-consumer, we continue to make progress across both our showroom and e-commerce channels. Our showroom business was the highlight of the quarter, with retail sales up 16.6% versus the prior year, driven by improving traffic, stronger conversion, and continued strength in our premium portfolio. E-commerce was down slightly versus last year, but the channel continued to move in the right direction, marking the third consecutive quarter of sequential improvement. We're getting better at managing the channel, and the work we're doing across marketing and the site experience is contributing to that progress. Purple's wholesale performance remained challenged in the second quarter as wholesale revenues were down approximately 19% year over year. In addition to continued softness in the broader mattress category, we've made a deliberate decision during the second quarter to invest more than $4 million incrementally in marketing programs with our retail partners. These investments affected reported wholesale revenue in the quarter, but we believe they were necessary to support consumer activation, retailer engagement, and Purple's long-term position within the wholesale channel. Excluding the impact of these incremental investments and other payments to customers, wholesale revenue would have declined approximately 8% year over year. On profitability, we made progress through disciplined expense management while continuing to invest in innovation, advertising, and consumer experience. Consistent with previous quarters, our strategy continues to center on three priorities. number one, deepening our understanding of the consumer, number two, delivering better sleep through product experience and expanded distribution, and number three, executing with financial discipline across the business. Let me walk you through how these priorities showed up during the second quarter. First, knowing our consumer. Purple has strong awareness, but awareness alone is not enough. We remain focused on helping people understand why the GelFlex grid is different and why it matters to sleep quality and which Purple product is right for them. Since March, we've shifted our marketing's approach to place greater emphasis on brand building and consumer education outside of key holiday periods, while continuing to use targeted conversion marketing as consumers move closer to purchase. The opportunity is to turn our strong awareness into stronger consideration. That means making the benefits of Gel Flex Grid easier to understand before consumers are ready to buy and making it simpler to choose the right purple product when they enter the purchase process. This work applies across the full consumer journey from our showrooms and website to our wholesale partners with the same objectives everywhere. Clearly answer why purple and which purple mattress. Within e-commerce, we continue to make improvements to the consumer journey throughout the quarter. It was a series of enhancements designed to make it easier for consumers to reach, to research, compare, and ultimately choose the right purple mattress while better understanding why our technology is so unique. These enhancements include improved product comparison tools, refined site navigation, and new content and landing pages designed to better educate consumers. We're also improving how purple shows up across traditional search and AI powered tools where consumers are increasingly beginning their research. The goal is not simply to drive traffic, it's to bring more informed consumers into the purchase journey and help them understand how Purple's GelFlex grid delivers a better sleep experience. We've now experienced three consecutive quarters of sequential improvement within e-commerce, supported by better marketing execution and stronger performance on Amazon. Second, delivering better sleep through product experience and expanded distribution. Our innovation continues to differentiate purple in the marketplace, and we remain encouraged by the continued performance of our premium portfolio. During the quarter, our premium products continue to perform well, with Rejuvenate remaining the strongest performing collection, particularly in our showroom channel. Within our showroom business, Rejuvenate 2.0 continues to account for more than half of total mattress revenue, underscoring the strength of our premium positioning and the consumer's willingness to invest in better sleep products. Beyond mattresses, our pillow business continued to deliver strong results, reinforcing the broader appeal of the Purple brand and providing additional opportunities to introduce new consumers to our GelFlex grid technology. While the overall mattress category remained under pressure, we continue to believe our premium innovation positions us well for long-term growth. Beyond the product itself, we're continuing to invest in customer experience across every touch point. Our showrooms are the clearest proof point for our product. When consumers experience the GelFlex grid in person and our teams can explain the difference, we see better conversion and a stronger premium mix. That was evident again in the second quarter with showroom sales up strongly. This reinforces something that we've believed for a long time. When consumers experience the GelFlex grid firsthand and understand how it differs from traditional foam, purple wins. Turning to distribution, expanding and strengthening our network remains an important component of our long-term growth strategy. Our owned retail footprint expanded during the quarter with the opening of one new showroom and the relocation of another, both of which are performing well. Looking ahead, we remain on track to open five additional showrooms before year end as we refine our real estate strategy and shift towards more productive, open-air retail locations that better align with evolving consumer shopping trends. We're planning a broader growth of the store fleet in fiscal 2027 with 12 to 16 additional locations. Our job is to scale the model thoughtfully so it can become a more meaningful contributor to PURPLE's growth. As we expand our showrooms, we continue to deepen our presence with key wholesale partners, The rollout of Purple Royale at Mattress Firm was completed during the second quarter. Costco continued to perform well during the quarter, and year-to-date volume was well ahead of last year, and we continue to see meaningful opportunity with this partner. Amazon also had another strong quarter delivering double-digit growth as we further optimized our product assortment and fulfillment strategy. Now let's talk about the third pillar, executing with financial discipline. Over the past year, we've taken meaningful steps to improve the efficiency of the business. Those efforts continue to support stronger profitability. During the second quarter, we delivered higher gross margins and profitability above last year, fight lower sales. We took pricing action in June to help offset commodity and logistics inflation and preserve gross margins going forward. Our sourcing teams continue to identify additional opportunities to improve costs through supplier diversification and operational efficiencies. As we move into the second half, the demand environment remains uncertain, but we are operating from a stronger foundation. We expect to benefit from continued operational improvements, additional sourcing initiatives, and the continued development of our premium product portfolio. Before I turn it over to Bob, one other update. Following the reverse stock split in July, last Friday, NASDAQ confirmed that Purple has regained compliance with its minimum bid price requirement and that matter is now behind us. With that, I'll turn the call over to Bob.

Thank you, Rob, and good afternoon, everyone. Before I walk through the financials, I'd like to briefly address the change in the presentation of certain costs in our reporting results. Beginning this quarter, merchant credit card processing and third party consumer financing fees are no longer classified within cost of revenues and are now being presented in marketing and sales expense. This presentation is consistent with industry practice and makes our gross margins more comparable to our industry peers. In the second quarter, the reclassification increased GAAP gross margin by 505 basis points, with a corresponding 505 basis point increase in marketing and sales expense. This change does not impact previously reported revenue, operating loss, adjusted EBITDA, or cash flow. To make the periods easier to compare, our Forum 10-Q includes supplemental schedules presenting prior periods under the revised classification. Net revenue for the second quarter was $98.3 million, down 6.5 percent from $105.1 million in the prior year period. The decrease is primarily driven by lower wholesale revenue, partially offset by strong growth and showroom revenue. By channel, direct-to-consumer, or DTC, net revenue for the quarter was $60.9 million, up 3.4%, compared with $58.9 million last year. Within DTC, showroom revenue increased 16.6% to $18.4 million, marking the fourth consecutive quarter of year-over-year growth. Comparable revenue in stores open for at least one year increased 18%, reflecting continued strength and rejuvenate and improving traffic and conversion. The second quarter also marked the fourth consecutive quarter of positive comps. E-commerce revenue decreased 1.4% to $42.5 million, improving sequentially for the third consecutive quarter. The decrease was primarily attributable to lower mattress revenue, partially offset by growth in pillows and cushions, and continued strength at Amazon. June was especially strong given the shift of prime days from July into June this year. Wholesale revenue decreased 19.1% to $37.4 million from $46.2 million last year. The decrease reflected a $5.3 million increase in certain payments to customers and a manufacturer under control with a customer. These payments represent consideration paid to a customer and are recorded as a reduction in revenue. In addition, we had a $3.5 million decrease in wholesale sales volume related to lower industry demand. GAAP gross profit increased 44.5% to $44.4 million compared with $42.5 million last year. GAAP gross margin was 45.2%, up approximately 470 basis points from 40.5% last year. The improvement in gross margin primarily reflected a $5.3 million IEPA tariff refund received in the quarter and year-over-year tariff mitigation from sourcing projects, favorable inventory adjustments, and lower scrap. These benefits were partially offset by higher freight and material costs, higher wholesale discounting, and lower volume leverage. We also took pricing during the second quarter to help offset higher input and freight costs and preserve gross margins moving forward. Because the increases did not impact revenue until the second week of June and take longer to flow through for certain customers, the benefit to the second quarter was limited. We expect to see a more meaningful impact in the second half of the year from these pricing actions. Operating expenses for the quarter were approximately $48.7 million, down $8.1 million, or 14.3%, from $56.8 million last year. Approximately half of the improvement was due to non-recurrence of restructuring, impairment, and other related charges recorded in the prior period. The other half of the dollar reduction primarily reflected lower payroll related expenses following a number of workforce reduction efforts over the last 12 months. professional service expenses and continued discipline across the business. Gap net loss was $3.2 million, a $14.1 million improvement versus last year. Gap net loss per share was 74 cents compared to a gap net loss per share of $4.01 in the prior period. Adjusted EBITDA was $2.1 million, a notable improvement of $4.4 million from an adjusted EBITDA loss of $2.4 million in the prior year period. For more details, please see the reconciliation of gap net loss to adjusted EBITDA in today's press release. We ended the quarter with cash and cash equivalents of $23.3 million, compared with $24.3 million on December 31st, 2025. Net inventories were $55.4 million, down $4.3 million compared to December 31, 2025, reflecting continued disciplined inventory management and improving working capital Efficiency. Cash flow from operations was positive for the second straight quarter and totals 3.6 million dollars through the first six months of fiscal 2026. This was a $30.7 million improvement over previous year's first half results, which are typically challenged due to the seasonality of our business. Capital spending in the first six months was $3.6 million, supporting showroom expansion and investments in our manufacturing operations. Finally, turning to our outlook. Given the continued softness in the category, particularly in wholesale, we are lowering our revenue guidance in the range of $420 million to $440 million. Importantly, the continued strength of our DTC business, coupled with our cost discipline, gives us confidence in our outlook to deliver a fiscal year adjusted EBITDA of to $25 million. Please note that we are revising our fiscal year 2026 gross margin target from approximately 40% to approximately 45% to reflect the reclassification of merchant credit card processing and third party consumer financing fees from cost of revenues to marketing and sales expense. We continue to expect gross margins to improve through the second half of the year as seasonal volumes increase. Price increases to offset inflation are fully realized, and our ongoing sourcing and productivity initiatives continue to take hold. While we are not satisfied with the current level of revenue, we believe the improvements in profitability, cash generation, and operating discipline demonstrate that Purple is operating from a stronger foundation versus last fiscal year.

With that, I'll turn the call back to the operator for questions. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your hands. set when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Matt Coranda with Roth Capital. Your line is now open. Please go ahead.

Hey guys, thanks. I guess just in terms of the reduced sales guide, is that all coming from a weaker wholesale channel? ARE YOU ASSUMING, I GUESS, THAT DTC SALES CONTINUE TO GROW, JUST GIVEN THE STRENGTH THAT YOU HIGHLIGHTED IN SHOWROOM? AND THEN I GUESS, HOW DO THE PRICING ACTIONS FROM JUNE OFFSET THE VOLUME DECLINES IN THE BACK HALF OF THE YEAR, JUST TRYING TO KIND OF FIT IT ALL TOGETHER?.

together here. Thanks, Matt. A couple of questions there. Let me take them backwards because that's how I'm remembering them. So we did some elasticity assumptions when we put the pricing in. I will tell you what we saw in But right after those started to take effect is that the reaction from the consumer was a little bit more downward than we would have expected or had we seen previously. We really need to get through Labor Day to figure out how they respond before we can read them. But to your first question, primarily the reduction is our wholesale business, and that's what allows us to keep our profit guide at the bottom half of it in the same place of where it was and really just taking off some of the top. We had previously been at 20 to 30. Okay, I got it. Does that make sense? I think I missed your question. Remind me what the middle one was. No, I think,.

I think it was just that I think you kind of buried it in there, but I was asking if DTC sales are still going to grow in the outlook in the back half of the year.

if you were to kind of look at the channel. Yes, Q3 will be a little bit tricky because we had some delivery issues last year with the launch of Rejuvenate, but we're still very confident in our showroom business and very encouraged by the fact that Ecom keeps getting closer and closer to flat. We were down 1.4 percent in the quarter and the back half tends to be more important to both of those businesses.

Yes. Okay. And then my second question, I guess, was just in terms of the implied EBIT I got for the back half, Maybe Bob, if you want to take sort of conversion to free cash flow, how we should be thinking about sort of the working capital needs or flush for the rest of the year.

to remain and how that might impact cash flow for 3Q42? I would expect that in Q3, we're going to see probably just given the seasonality of where Labor Day is and where the shipments come in for that, we'll see a small, we could potentially see a small step back from an operating cash flow perspective, but then we typically will see a very large increase in Q4.

that will keep us positive for the entire year. Got it. Okay. I'll turn it over to others. Thanks.

All right. Thank you, Matt. Your next question comes from the line of Brad Thomas with KeyBank Capital Markets. Your line is now open. Please go ahead.

Good afternoon, Rob. Good afternoon, Bob. Thanks for taking the question. Hi, Brett. I wanted to just ask about the performance in your showrooms relative to the rest of the market. If our data is correct, this is at least the sixth consecutive quarter that same store sales has had positive growth, if not some really strong positive growth as it did this quarter, that I think really is very encouraging to see. And I was wondering if you could just help talk about perhaps why some of your projects partners in the wholesale channel maybe aren't performing quite as well as what you've been able to deliver in your own showrooms. Thanks.

Thanks, Brad. A couple things. I think Q2, the 16.6 or 18% comp sales were helped a little bit by what I just referenced in Matt's question is some written sales last year that didn't deliver until outside the quarter. But the core of that business certainly 12% or more of that 18 is growth of the premium product portfolio. I can't comment on, I don't want to comment on our partners' business and how they do it, but I know when we get people in stores onto our beds and we can explain the technology, what looked like very expensive products become things they want to buy when they realize the benefit they're going to get out of it. And, you know, we've always known show rooms is the stickiest of all of our businesses, then probably wholesale, then e-comm, where it tends to be a little bit more transactional. But that's what's behind it. I think I know we've got four quarters in a row of positive comps in that channel, and we do expect that to continue.

I appreciate that and obviously really a nice bright spot here. in your execution. Maybe if I just move over to the environment with raw material prices, you know, having gone up, can you just speak a little bit to pricing and how much that's running.