PRPL - NASDAQ

Good afternoon, ladies and gentlemen. Welcome to Purple Innovation Fourth Quarter 2023 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, Brendon Frey of ICR. Please go ahead.

Thank you for joining Purple Innovation's fourth quarter 2023 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 fourth quarter 2023 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 gross margin, 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. Rob?

Thank you, Brendon, and thank you, and good afternoon, everyone. With me on today's call is CFO, Todd Vogensen. After our prepared remarks, we'll open the call up to your questions. While it has taken us a few quarters longer than we originally anticipated, we're extremely encouraged by the response to our new product lines from both consumers and our wholesale partners. Encouragingly, the green shoots we saw in the fourth quarter have continued into 2024. Our fourth quarter performance represents an encouraging finish to what was a transformative year at Purple Innovation. Sales increased year-over-year for the first time in eight quarters, in line with our guidance and despite lower advertising spend and industry seasonality, sales also increased sequentially from quarter three. The fourth quarter marked the continuation of positive trends in each of our distribution channels, in total and relative to recent industry growth rates. This was the third consecutive quarter that wholesale, showrooms and e-commerce, all registered sequential growth. Supported by the outperformance over the Black Friday/Cyber Monday holiday weekend, showroom sales for the quarter were up mid-teens year-over-year with more than 60% of locations comping positive, and e-commerce sales were slightly positive compared with Q4 last year as this channel further stabilized after 10 quarters of year-over-year declines, and our advertising initiatives gained traction. Wholesale also performed well over the holiday period with the channel nearly flat to Q4 last year. Our improving top line performance, combined with enhancements we've made to our manufacturing, supply chain and product engineering drove a meaningful sequential improvement in our bottom line, including positive adjusted EBITDA for the month of December. As I said, 2023 was a transformative year for the company. We embarked on our path to premium sleep strategy, aimed at establishing Purple as a formidable challenger brand in the premium sleep category. And despite sluggish industry trends, we made significant progress against this goal, capturing market share and building momentum for 2024. To recap the year, we executed the largest, most innovative new product launch in company history. We introduced nine new mattress models across our new three-tiered offering, including our premier and luxury collections, Restore and Rejuvenate, with Rejuvenate elevating our price points into the $5,500 to $7,500 range. We simultaneously began the process of repositioning Purple as a premium brand with the launch of a new campaign Sleep Better, Live Purple which communicates how our proprietary GelFlex Grid delivers deep, uninterrupted sleep. Following a period of reduced advertising investments ahead of the transition, we elevated our spending in the second half to support the launch and enhance consumer awareness and interest in the differentiated benefits of the Purple brand. At the onset of 2023, we expected the mid-May launch of our new products and new marketing would coincide with an uptick in industry demand after nearly 18 months of double-digit declines. While industry unit growth has yet to rebound, we made steady progress as the year unfolded as evidenced by the sequential quarterly improvements in our top and bottom line results. Our investments in product innovation, brand building and marketing, including enhanced point-of-sale materials have paid dividends across our distribution channels. With respect to wholesale, we increased our total number of floor slots by approximately 10% in 2023. More importantly, the collaborative approach we've taken with our retail partners to grow both of our businesses through higher-priced, higher-margin products has forged stronger relationships that we believe will lead to door productivity gains going forward. We remain grateful for the trust of our retail partners and the growing opportunities we have together. In our showrooms where we control the presentation and selling process, the launch had the most immediate impact. Our sales teams have done a good job upselling consumers into our Restore and Rejuvenate mattresses, driving an increase in average mattress selling price, post launch. These improving trends helped offset the softer industry-wide traffic and returned the majority of our comp stores to positive territory in the fourth quarter. With our price points moving higher and industry transactions shifting more towards brick-and-mortar, we're encouraged with the stabilization of our e-commerce channel showed in the first half of 2023 and the quarter-over-quarter growth it achieved in the second half. Our new product and marketing strategies had a positive impact on purple.com site traffic and more recently, we've seen an uptick in conversion, thanks to some of the adjustments we've made to the user experience. Below the revenue line, we also made important progress to ensure the company is positioned to drive profitable growth. Our Chief Operating Officer, Eric Haynor and his team have done a good job optimizing our manufacturing facilities and gaining efficiencies throughout our supply chain. This has allowed us to stabilize adjusted gross margins around 37% on current volumes, providing a clear path to 40% gross margins as we expand our top line and benefit further from the operations team's continued work. Meanwhile, our Chief Marketing Officer, Keira Krausz and her team evolved our marketing mix throughout 2023 to more efficiently reach and convert consumers across all channels. Based on recent learnings that are being applied to our forward plan, we expect to leverage marketing and advertising in 2024 by being more productive with our spend. As you recall, Eric and Keira both joined Purple in 2022, along with Chief Innovation Officer, Jeff Hutchings. In 2023, we rounded out our leadership team with three important hires, adding Scott Kerby as our Chief Owned Retail Officer; Tricia McDermott as Chief Legal Officer; and Todd as our Chief Financial Officer. I'm extremely pleased with the experience and the caliber of the management team we've assembled at Purple and believe the work they and our entire organization have done has built the foundation for profitable growth in 2024 and beyond. And we have a clear plan in place centered on five key initiatives designed to ensure we're on the right path towards this overarching objective. First, we're focused on improving productivity of existing showroom and wholesale doors. While showroom expansion has been an emphasis for the last few years, in 2024 will slow door growth and prioritize the profitability of existing showrooms through new top line and cost initiatives. One of the bigger opportunities we're focusing on is accelerating sales by leaning into third-party consumer financing to drive higher average tickets as customers both trade up and into our higher-tier offerings and bundle products like our new smart bases. We'll also rethink how we approach selling in our stores and shift to a more intentional selling environment with a focus on conversion, especially for consumers that are already in their purchase journey. From a cost perspective, we'll look to restructure current arrangements, including leases and overhead, to better align with the current level of revenue per store and enhanced channel profitability. In addition to being profitable growth vehicles on a stand-alone basis, our showrooms, especially the ones in high-traffic areas, serve as a form of advertising that's driving both traffic into our partner stores and overall demand for our mattresses. Our recent consumer research indicates that those consumers who didn't make a purchase on their first visit to one of our showrooms, approximately 25% then went on to shop at a wholesale partner store in a subsequent visit. The in-store education and the premium experience provided by our showrooms creates a high-quality, high-intent potential purchase, either directly or through one of our wholesale doors. With respect to wholesale, while we've made great strides over the past year with our partner relationships, we're aiming to create even more synergies to drive increased door productivity in 2024. We will look to leverage co-op dollars with our partners and provide more marketing support, while also conducting monthly and quarterly joint business reviews to solve for revenue growth together. Additionally, we'll look to continue our efforts around product education for retail sales associates to ensure they understand the benefits of our unique Gel Grid technology and help continue to grow enthusiasm for the Purple brand alongside our direct efforts. Our second area of focus is on improving e-commerce mattress conversion. In 2024, we will continue to test different messaging and different mediums to drive better conversion results. While our recent site improvements and shift in media strategy have sequentially improved both the quality of traffic and conversion rates, we believe there are significant opportunities to improve both the quality of traffic we are driving to our website and the conversion of that traffic into customers. Third, as we mentioned last quarter, driving gross margin improvement will also be a significant initiative in 2024. Several actions planned or already underway include select price increases on certain mattress models in some of our ancillary products, steadily increasing the mix of our higher margin, higher average selling price Premium and Luxe mattresses, reducing reliance on air freight and several initiatives to improve our manufacturing and sourcing efficiency. Fourth, we'll look to improve marketing efficiency. In 2023, we strategically spent a larger portion of our marketing dollars on brand awareness to support the launch of the new product lineup and new brand position. With our product and new brand now in market, we will still invest behind awareness building, but we'll shift our spend towards more efficient marketing tactics as we focus on customers already in the mattress market with consideration and conversion ad spending. We'll also plan to return to our highly effective experiential and demonstratable product advertising, starting with a reintroduction of our egg drop video. And lastly, bringing new products and innovations to market remains a core focus of the company in 2024. Purple was built on innovation and intellectual property that improves our consumers' comfort and sleep. With a strong innovation engine led by Chief Innovation Officer, Jeff Hutchings, I'm pleased to share that we currently have a strong pipeline of new products that are expected to come to market over the next 12 to 24 months and several technological innovations currently in development. This continued focus on our innovation heritage not only creates excitement for the brand, but it also cements our leadership in grid-based technology and drives new margin improvements as we leverage our frequently copied, but never duplicated intellectual property in new and exciting ways. To support the initiatives I just outlined in January, we refinanced our debt and added liquidity to our balance sheet. Along with our existing cash position, we are confident this new facility provides us with the financial flexibility to execute our path to premium sleep strategy and to invest in growth. I'll now turn the call over to Todd to discuss the 2023 financials in detail as well as our outlook for 2024. Todd?

Thanks, Rob. We were pleased to end 2023 with fourth quarter results that were in line with our expectations, and we look forward to building on our momentum throughout 2024. Now jumping to our recent performance. For the three months ended December 31st, 2023, net revenue was $145.9 million, an increase of 1.1% compared to $144.3 million in the prior year period. The year-over-year increase was largely due to the growing positive response to our new product lineup, partially offset by the continued industry-wide softness for home-related goods. By channel, direct-to-consumer net revenue increased 4.3% versus the prior year period. Within DTC, e-commerce increased 0.5% as our focus on driving higher quality traffic to our website gains traction. Showroom net revenue increased 17.5% driven partially by the addition of five net new showrooms over the past 12 months, along with higher ASPs compared to last year. The increase in DTC was partially offset by a 2.7% decrease in wholesale net revenue, while down year-over-year, our wholesale channel performance in the fourth quarter was better than the industry trends mentioned earlier, driven by growing consumer adoption of our new product line. Gross profit was $48.5 million during the fourth quarter compared to $49.9 million during the same period in 2022, with gross margin rate at 33.2% versus 34.6% last year. Gross margin in the fourth quarter of 2023 was impacted by costs associated with the launch of the new product line, including the industry standard price reductions on the sell-in of new mattress floor models to wholesale partners and incremental air freight costs associated with the purchase of materials for our new products. Note that we've completed the new product rollout in the fourth quarter with the launch of our new line at our largest customer, as a result, Q4 is the last quarter we expect these types of adjustments. Net of these costs, adjusted gross margin was 36.7% in the current year quarter. Adjusted gross margin improved by 210 basis points compared to last year due primarily to manufacturing efficiencies from higher production volumes in 2023 and increased average selling prices of the company's expanded product line. Operating expenses were $64.7 million compared to $61.9 million in the fourth quarter of 2022. The increase was largely driven by growth in advertising spend to support the launch of our new product line and the cost of five net new showrooms in 2023, partially offset by a $4.1 million decrease in G&A expense related to lapping special committee costs from 2022 and an insurance recovery on special committee costs in 2023. As a percent of revenue, operating expenses were 44.3% compared to 42.9% in the fourth quarter of 2022. As a result, adjusted net loss in the fourth quarter of 2023 was $15.8 million compared to an adjusted net loss of $8.1 million last year. Adjusted EBITDA was negative $9.8 million versus negative $0.8 million a year ago and fourth quarter adjusted loss per share was $0.15 compared to an adjusted loss per share of $0.09 in fourth quarter of 2022. Now to our full year results. For the 12 months ended December 31, 2023, net revenue was $510.5 million, down 10.9% compared to $573.2 million in the prior year. Overall, full year net revenue growth was negatively affected by difficult market conditions for the home-related goods category, coupled with several headwinds associated with the conversion and launch of our new product line. These headwinds included the industry standard practice of the discounted sell-in of floor models and increased discounting on legacy products. By channel, DTC net revenue declined 10.2% year-over-year, primarily due to decreased e-commerce channel demand, which was partially offset by growth in Purple showroom revenue driven by the addition of five net new showrooms in 2023, the annualization impact of adding 27 net new showrooms through 2022, as well as higher ASPs driven by the consumers' adoption of the new higher-tiered product within the channel. Wholesale revenue declined 11.9% due to the softening industry-wide demand and the previously mentioned transition factors. Gross profit was $171.8 million in 2023 compared to $208.1 million in 2022, with gross margin rate at 33.7% versus 36.3% in 2022. The decrease in gross profit over the prior year was primarily due to the impact of the new product launch in May, including new floor models being sold to wholesale partners that reduced pricing, higher labor and freight costs and decreased manufacturing efficiency. Excluding the product transition costs, adjusted gross margin for 2023 was 37.2%, a 90 basis point improvement over 2022, reflecting increased average selling prices of the company's expanded product line. Operating expenses were $285.5 million or 55.9% of net revenue in 2023 versus $250.8 million or 43.8% in the prior year period. The increase in operating expenses was primarily driven by showroom expansion, along with an increase in advertising spending from 12% of revenue to 14% of revenue to support the new product launch and $9 million in incremental special committee costs from earlier in the year. As a result, for the full year of 2023, adjusted net loss was $73 million compared to an adjusted net loss of $31.4 million last year. Adjusted EBITDA was negative $54.7 million versus negative $0.2 million a year ago, and adjusted loss per share was $0.70 compared to an adjusted loss per share of $0.38 in 2022. Now turning to the balance sheet. Net inventories totaled $66.9 million at December 31, 2023, compared to $73.2 million at December 31, 2022, and $72.1 million at September 30, 2023, representing decreases of 8.6% and 7.2%, respectively. At year-end, we had cash and cash equivalents of $26.9 million compared with $41.8 million at December 31, 2022. Our decrease in cash consisted of, cash used in operations of $54.7 million and capital expenditures of $15.2 million, primarily related to additional manufacturing facility investments and showroom expansion, all partially offset by proceeds from the company's stock offering in February of 2023. As Rob mentioned earlier, in January 2024, we amended and restated our two primary outstanding debt facilities, an ABL credit agreement and a term loan agreement with the company's previous lenders. At the same time, we established a new upsized term loan of $61 million with approximately $22 million of incremental available capital, resulting in approximately $48 million of cash and cash equivalents subsequent to the January transaction. Turning now to our outlook for 2024, we are confident that the foundation we have built in 2023 has the company positioned for continued improvement in the year ahead, while we're encouraged by our recent progress, we recognize that the macroeconomic environment remains challenging with limited near-term visibility. Taking all this into account, we're expecting 2024 net revenue to be in the range of $540 million to $560 million, reflecting mid to high single-digit percentage increase versus 2023. We also expect negative adjusted EBITDA to be between $20 million and $10 million and capital expenditures to be $10 million to $12 million. In terms of how the year unfolds, we expect quarterly revenue and adjusted EBITDA performance to improve sequentially as we progress throughout the year with positive adjusted EBITDA and cash flow in the second half of 2024. While we don't plan to give quarterly guidance throughout the year, since we are more than three quarters of the way through the first quarter, we are providing specific details in this instance. For the first quarter, we expect net revenue to increase by a low to mid-teens percentage to approximately $120 million to $125 million and negative adjusted EBITDA to be approximately $15 million to $10 million. Also, you will have noticed today that we issued a press release on an agreement that we've reached with Tempur Sealy. We'd be happy to answer any questions on this press release as we go through our question-and-answer period. And now I'll turn the call back over to the operator for questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Brad Thomas with KeyBanc Capital Markets. Please go ahead.

Hi. Good afternoon and thanks for taking my question. I wanted to just kick off with a follow-up on Todd, I believe your commentary about how 1Q is tracking certainly seems to be very strong if I heard you right, with revenues running up in the mid to high-teens. Can you talk a little bit more about what you've been seeing over the last few months here?

Sure. It's really been a continuation of the good momentum that we saw as we were exiting the year. So as we've gone through Q1, we are continuing to see good momentum, good progress really across all channels and expect that to result in the revenue that is up, call it, a low to mid-teens percentage as we go into Q1. As we look across the year, obviously, we're wrapping around on the launch of our new products that was in May of last year. So the compares are a little bit easier earlier in the year than as we go through the year. But with that being said, good positive start to the year for us.

That's really helpful. And then, Rob, you touched on a number of efforts to continue to drive productivity at a door level. And so I was hoping you could just highlight those a little bit more and talk about what kind of a lift you think you see when you have a door that's really had the training, the point of purchase materials, the marketing that you need to have in that marketplace? And maybe any more color around what kind of a lift you're seeing out of these new products when you really put the full effort behind it.

Thanks, Brad. Appreciate the question. Really, I'll break it in two parts and talk about the wholesale world first and then the showroom world. I mean, the wholesale world, there's really three efforts going on, two of them are well underway, and one of them is beginning to start now. The first one is really just basic training of the customers, salespeople. I think we have been relatively good over our history of big events, but we're working much harder on the day-to-day training visits to make sure that we're providing our customers, people with the confidence they need to sell a product that is truly different. And I think while all of our competitors are pretty good in this space and have shown our ability to do it well, I think it's more important to Purple than any brand on that floor because the product is so different. So that's the first. The second is we've started to address what we look like on the floor. You've heard me talk before of us wanting to be in position 1B as a premium challenger. We've got a number of initiatives out there that are building in around the product itself and the early returns, and I'll say it is early, is very encouraging. And then the third area I mentioned in the script itself, and that is we're still a young wholesale partner. And our customers will tell you that there's a lot of things we can execute better. One of those is ensuring that our promotion calendar and our marketing investments are well communicated, well-coordinated and then stuck to. And I would tell you that I wouldn't give us more than a C on that yet, but I know we can be an A student there. So that's on the wholesale side. In showrooms it's -- where we control the environment a bit more, it really is about leaning into consumer financing. We're very underdeveloped versus any benchmark that I hear out there either from furniture or mattress retailers. And I'm talking about 10% to 20% of our sales lower than the best out there as far as using consumer financing. So that's the first. The second is, these were launched very much as showrooms, as places to go see and experience the product, and we get very high marks for that. We're trying to get equally high marks for encouraging a purchase, either in our channel or wherever the customer wants to go. And then to the degree they're in our channel, getting that volume to walk out, ideally, if it's not a mattress. Today, we ship an enormous amount of pillows after taking the order in store. We can save ourselves real money by just giving that product to the consumer in hand and letting them take it away. So there are initiatives in both wholesale and showrooms that we believe will help drive more productivity.

Very helpful. Thanks so much and good luck here. Thank you.

Thanks, Brad.

The next question comes from Seth Basham with Wedbush Securities. Please go ahead.

Thanks a lot and good afternoon. My first question is just on the success of your advertising campaign as you've shifted a little bit to focus on bottom of the funnel and also move to the egg drop commercial. Can you give us some color on how that's done and what kind of savings do you expect to generate on advertising in 2024?

Thanks. So again this is a never-ending challenge. You're constantly trying to get your ROAS or return on overall advertising investment to go up. But as we said in the script, we spent a lot of money behind the launch at awareness, and I think it did the job it needed to do, but we're shifting to more middle and bottom funnel, we'll still spend on creating traffic. So I don't want to -- we're not going to step away from any tier of the funnel, if you will. But we are working much harder to try to both master GA4, the new Google Analytics tool, which honestly has proven to be a bit harder than probably Google promised, but we are making real progress there. And I would expect we can create the kind of growth that Todd talked about with an advertising investment that has a modestly declining percent of sales. So we're still going to be a big advertiser, but we'd like to get a couple of points more efficient.

Got it. Okay. Second question is just on the near-term outlook for the first quarter, good top-line growth against relative to each comparisons. Bottom line is still negative. And that's just because we're talking about absolute volumes on the top line being lower than they will be in the back half of the year.

Yes. I think there's a couple of factors in there. So Q1 is what is probably a seasonally low point for Purple for a variety of reasons. So, yes, that overall volume is lower than later in the year. And then we do or we're going to skew much heavier towards wholesale, which inherently has a lower gross margin percentage associated with it than our retail sales. So those two points put a little bit more pressure on the bottom line than what we would expect to see as we go throughout the year.

That's helpful. And then lastly, regarding the agreement with Tempur Sealy, just one point of clarification. If the FTC does not approve their deal, but it still goes through after litigation, will the agreement that you mentioned to be honored?

Yes. We expect this agreement -- what you're saying is they make -- the FTC requires some adjustments to get the deal done. This is just based on the deal being completed, not any conditions or terms or timing. So it's a 12-month supply agreement that starts the day the deal is completed, regardless of the shape of the deal.

Understood. Thank you very much.

Seth, the reason that's important, I'll go on to say, the reason that's important is that, our existing agreement is an evergreen agreement, which this adds another 12 months of stability from any evaluation.

Understood. Thank you.

Thanks, Seth.

The next question comes from Jeremy Hamblin with Craig-Hallum Capital Group. Please go ahead.

Hi. Good afternoon and thanks for taking the question. I wanted to come back to kind of the Q1 trends, which definitely have improved year-over-year, sequentially, pretty decent step down from Q4 levels. And just thinking about helping frame that up for -- just if we look back historically like the sequential step down is maybe a little bit more than what you typically have and what your peers have. So I just wanted to understand a little bit of what you're seeing in that because it does sound like you're pleased with progress. But is there a seasonality in Q1 that has changed given that your mix of business is shifting a bit more towards wholesale? Or any color you can share on that would be helpful.

I don't, Jeremy, first of all, thank you. I don't think channel mix has anything to do with the relative performance Q4 to Q3, excuse me, Q4 to Q1. I think what we heard while we were in Las Vegas is that January was kind of particularly soft. We will, I'm sure, end up reporting a positive trend year-on-year in January and February. But I think it's just the shape of the business coming out of relatively decent October, November, December and then a little bit softer in Q1. We're going to grow. And I think the guidance that Todd gave you is indicative of something that when the dust settles, I think we'll clearly show we're outperforming the market.

Got it. That's helpful. And then let's just talk a little bit about gross margin. It sounds like you've settled in towards a 37% kind of on an adjusted basis. And that's at this run rate of -- let's call it, $145 million plus of quarterly revenues, right? You did $140 million in Q3. And on an adjusted basis, just a slight step down on your adjusted gross margin. So, wanted to get a sense for where do you need to be from a quarterly revenue basis to get to that 40% gross margin that you're looking to get back to? And related to that, what do you expect the go-forward mix on channel to be DTC versus wholesale?

Yes, I'll take the first part of the question on what volume do we need to be at to get to that 40%. I would tell you, you're right in thinking about it that we are starting with 37% being that baseline that we're planning on growing from as we look forward into 2024. We do not necessarily need to get back to or be at the $140 million, $145 million of revenue to get up to approach that 40% range. We obviously, by the guidance that we gave, believe that we will head that direction. But we have a number of things that are underway this year that are helping out with gross margin rate. We've taken pricing increases in certain areas that Rob mentioned in his script. We also have a number of initiatives underway on the manufacturing and sourcing side to do what are some fairly fundamental improvements in the way that we source our products and the way that we manufacture our products that are going to fall to the bottom line for us. So as we look at that 40% run rate, we do view that as more something that comes with time as these initiatives gain traction than something that we need just top line to be able to leverage against.

Jeremy, on the second half of the question, I think we are aiming to and hanging around, if you will, a 60-40 split DTC, I think we are running the business internally to ensure that we can be profitable with a 50-50 split. So 60-40 is where we are and where we want to be, but I'm wanting to ensure that if our wholesale partners help us grow faster, we've got to make sure that we can be profitable without taking it away from them, which means finding efficiencies in the system and figuring out how to do business with them more efficiently, if you will.

Got it. And just following on to that. So at the high end of your FY'24 guidance range, you'd be roughly $140 million a quarter. Certainly, when taking into account the Q1 guide, you'd be at that $140 million to $145 million range per quarter on rev. So should we be interpreting that as though the gross margin rate is going to be after Q1 be approaching that kind of, let's say, roughly 40% range?

It will grow as we go into the year because, especially on the manufacturing and sourcing side, those are initiatives that are underway right now, and we're executing against, but it takes a little bit of time before that flows through our cost of sales. So it will be -- if you're modeling it out, I would expect to see gross margin improvement ratably across the quarters as we go throughout the year.

And then with an exit rate around 40% or again just trying to square it up.

That is the plan, yes.

Great. Thanks for taking the questions and good luck this year.

Thank you.

Thank you, Jeremy.

The next question comes from Bobby Griffin with Raymond James. Please go ahead.

Hi. Good afternoon, everybody. Thanks for taking the questions. I guess, Rob, first on the new agreement with Mattress Firm involving the Tempur Sealy, the potential acquisition, does that agreement allow for any expansion of your Mattress Firm doors? Or does it call for some in 2024, and that's included in the guidance as well or no?

Yes. Bobby, the way I would say it, is the agreement, to be clear, is with Tempur Sealy contingent upon the deal closing. So Mattress Firm did -- I kept them abreast, but didn't play a role in those discussions. We do have the ability to expand within our current agreement and that current agreement is what's being reinforced for a 12-month or longer obviously, but a 12-month period. There are cases right now in a modest way where we are expanding with them in a couple of geographies. And I don't think that's -- I don't want to say I don't think, I know that's not limited in any way by the agreement we reached with Tempur Sealy.

Okay. That's helpful. And I maybe want to switch gears a little, just circle back to the showroom aspect and the strategy there. We've talked before in the past, there's a wide gap in performance among the showrooms. So I was just, I guess, first, did that gap close any during the fourth quarter? And then two, is there any color you can share on, maybe if any of those on the lower end of that side are going to have some natural lease expirations here in 2024 that could help close that profitability drag from the showroom side of things?

Yes. So Q4, actually, very positive quarter on the showroom side. I think we talked about overall sales there being up in the mid- to high-teens, which is a really good sign. That, in combination with some of the things Rob talked about, where we're looking at also how we can generate cost savings at the same time in stores. It really has put us in a better position where we are narrowing the gap. We still have room to go, and it still is going to be a work in progress for us. In terms of lease expirations, a lot of the portfolio was put into place just over the last few years, so lease expirations generally are much further out. To the extent that we have kick outs that happen over the next few years, we, of course, are going to look at those. But I think those would be very selective and any decisions we make would be very much specific to individual sites. More so, I think we're looking at growing the portfolio over the long term. We see lots of opportunity to -- once we get the operating model dialed in to continue the growth of our showrooms to the point where we can get a lot more scale to the point where we can have a lot more awareness in the brand and really leverage that. And so I think we're looking at it more as there's more upside, certainly as we look over the next several years.

Okay. That's helpful. And I guess, lastly for me, just back on gross margins. I mean, a lot of moving parts, obviously, in 2023 with the launch. And when we look out in 2024, are we going to be getting back to more of a clean type basis? And should we, as your sell-side community kind of grade you against the 37% as where we can kind of dive into and see if we're making progress on the sourcing and some of the other non-kind of launch initiatives that are building gross margins back up? Or how would you kind of phrase how we should be kind of grading that? Because it is kind of a lot of things moving around from a gross perspective over the last couple of quarters with mix and launch and all that type of stuff.

Sure. That's exactly right. And, yes, that's how we're viewing it internally and how I would really recommend everybody view it is. On an adjusted basis, we have been about at that 37% right now for Q2, Q3 and Q4. So we've shown consistency. And Q4 is really the last quarter that we would expect to have to disclose an adjusted gross margin. That -- the 37% should really be the base as we go forward. I mentioned before, Q1 will be a little bit under pressure for a couple of different reasons, partially due to volume and partially just because we are in the early stages of growing some of those areas like sourcing and manufacturing and pricing that will have a positive impact. But across the course of the year, I would really start with 37% as the base rate, and they know that we're going to get growth opportunities on top of that.

Okay. And then, Rob, for the forecast for the year, did you guys build in an underlying industry unit assumption or some type of industry growth or decline expectation as the base case? Or is it more just by a building block of your wholesale doors expanding in the new products? Just kind of curious of what -- how it's built up?

Bobby, it's more of the latter. I want to take myself out of the position of predicting the industry because that didn't go very well last year. We know that the new launch is taking solid hold right now. We're seeing share gains in the places we get market share or balance of share data. We're seeing improvements in e-comm and showrooms. So this is really us executing well and getting reasonably better than category growth. It is not assuming a category recovery of any kind.

Okay. Very helpful. Best of luck here in 2024 and I appreciate the time.

Thank you, Bobby.

Thank you.

The next question comes from Matt Koranda with ROTH Capital MKM. Please go ahead.

Hey, guys. Good afternoon. Maybe just to spin back around of the first quarter trends that you mentioned, low- to mid-teens growth. I think you said maybe a little bit more slanted towards the wholesale side of things. Maybe just if you could -- I don't know if you want to quantify growth by channel or if you want to just talk about the trends about why we're seeing wholesale grow in excess of DTC, that would be helpful. And then maybe just any commentary around key promotional events. Is that where we're seeing the bulk of growth sort of concentrated around those events and then it falls off, maybe just cadence in the quarter thus far would be helpful?

Sure. So on the wholesale side, I think we continue to see and have seen for a while good momentum in wholesale. Wholesale, you'll recall last year, this was probably the lowest penetration quarter. So there is a little bit of what we're lapping around on, but then at the same time, we're also picking up momentum and adding doors on the wholesale side and that has certainly helped. And so we're just -- we're having a good quarter there. And I can't remember, I'm sorry, the second half of your question.

Yes. Just if you want to characterize the split in terms of relative growth between DTC wholesale and then just promotional events and what you see in terms of the quarter's cadence thus far.

Yes. I don't know that we would get down to the channel level guidance, but I would say, across the quarter, we have been seeing growth in each period. So there still tends to be a concentration around the big Tier 1 holidays. But as we look compared to last year, we've seen good solid growth across each of the months in the quarter thus far.

Okay. That helps. And then just spinning back to sort of the EBITDA guide, I guess, in the first quarter. Just help us understand why the positive growth top line is not translating into positive incrementals for the quarter. I just want to make sure we're super clear on sort of the gross margin degradation commentary? And then are we leaning in on OpEx, like in terms of sales and marketing. Maybe just if you could help us put a finer point on sort of why the negative incrementals that you're guiding to in the first quarter in EBITDA.

Sure. So I would say a couple of things. First, from a gross margin rate perspective, though, we are expecting to be positive versus Q1 last year, we are under pressure just from the things that I've mentioned before with the wholesale tilt as well as overall volume relative to the rest of our quarters. And then I would say on the operating expense side, we are probably, as you look across the course of the year and you're doing your modeling one thing to take into account, what we're looking to be more efficient across our advertising spend, we'll probably be spending a little bit more evenly across the year than we did last year. Last year had some big peaks and valleys. So in Q1, you should expect to see a little bit more dollar investment in the quarter and so that has an impact as well. Beyond that, it's just the normal ebb and flow of G&A and gross margins coming into play.

Matt, the other thing I'd add on top of that is that the pricing that we took didn't really -- it won't impact the wholesale volume for much of the quarter at all because of the notification agreements we have with our wholesale customers. We took it in the DTC channels early in the year, but won't see much of that until just the very end of this month actually.

Okay. That helps, Rob. Thanks for the context. And then maybe just last one, if I could sneak one more in, post debt refi, maybe would you be able to give an update on sort of where cash stands today or as of the refi? And then just plans on interest expense and how we're going to pay that on a go-forward basis? Is it PIK? Is it cash? What's our rough plan there?

Sure. So yes, immediately after we did the transaction, which was late January, overall, cash and cash equivalents was $48 million. So if you put that in context of the guide of the full quarter being down $10 million to $15 million in EBITDA and being positive EBITDA by the back half, we certainly believe we have more than adequate liquidity at this point. The extra $22 million we got from the refinancing was very positive for us. And it comes with a new facility that doesn't have all of the restrictions and requirements and everything that would typically come with an ABL. So we're in a much better position without any significant financial maintenance covenants or anything like that. And then, in terms of the interest, yes. So you're right, we do have the ability to pick all of our interest. I think it's fair to say in the near term, that is probably the conservative option, and we would choose to take that option for the foreseeable future anyway.

Got it. All right. Very helpful. I'll take the rest of mine offline guys. Thank you.

All right. Thank you.

The final question comes from Michael Lasser with UBS. Please go ahead.

Hey, this is Dan Silverstein on for Michael. Just two quick questions, maybe more on the overall industry or competitive landscape. How much of a unit or sales benefit do you think Purple could see from the third round of anti-dumping duties being placed on 12 additional countries? And then secondly, thank you for the update on the Tempur/Mattress Firm agreement. Ashley Home acquired Resident Home recently, another example of M&A in the industry. Will this have an impact on the competitive landscape for Purple going forward? Thank you.

Dan, just to make sure I understand, I will take your question back. Will the Ashley/Resident tie-up impact the category? Is that the question?

Yes. Just wondering what you think it means for the competitive landscape, another second case of another vertical integration in the space.

Yes. I mean, I don't want to speak for Ashley or Todd Wanek, but it seems to me that he's got a relatively new factory they were looking to fill. Resident is, I think, more marketer than maker, and I don't mean that to imply anything other than they're a very good marketing company. And I think that marriage makes sense to me. I think it also fits the Ashley consumer quite well. I can tell you that our business with that retailer is growing nicely. And so I don't see it as changing the landscape that much. They tend to trade a little bit below us in retail price. We overlap on the bottom side of the category, not the top side. And the path to premium sleep is about becoming a premium challenger brand. So it's too early for me to say the impact, but I don't see anything that immediately jumps off as negative.

Great. Thanks. And then just the first part was on the antidumping.

Yes. I mean, I think it's good for the category. It's good for the domestic industry. It doesn't impact us negatively. We don't import any mattresses. We do import some components in some categories, but we either make all of ours in-house or with partners here. So I think that -- I think it should be good for the category in the short run. I don't know the percentage of product that comes from those 12 countries. So how sweeping it is, I'm not sure, but it should help protect what is fundamentally a domestically made category.

Thank you.

Thanks, Dan.

This concludes our question-and-answer session. I would like to turn the conference back over to Rob DeMartini for any closing remarks.

Yes, I'll keep it short. As we've said, as Todd and I have laid out here, we think the path to premium sleep is a winning strategy, number one. We acknowledge it took us longer than I would have liked to get it started and that created some pretty negative results in '23, but we've got the team assembled to make sure we execute this. And I want to thank our associates, our customers and the consumers that are getting great night's sleep on Purple beds. So thank you.