PRPL - NASDAQ

Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the Purple Innovation's Second Quarter Earnings 2025. [Operator Instructions] I would now like to turn the call over to Stacy Turnof, Investor Relations. Please go ahead.

Thank you for joining Purple Innovation's Second Quarter 2025 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 are forward-looking statements. These statements reflect Purple Innovation 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. You should not place undue reliance on these forward-looking statements. For more information, please refer to the risk factors outlined in our filings with the SEC. Additionally, today's presentation will reference non-GAAP financial measures such as 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. With that, I'll turn the call over to Rob DeMartini, Purple Innovation's Chief Executive Officer.

Thank you, Stacy. Good afternoon, everyone, and thank you for joining us. With me on today's call is our Chief Financial Officer, Todd Vogensen. We're pleased to share our second quarter results, which exceeded our expectations and improved sequentially from the first quarter in both revenue and adjusted EBITDA. Our second quarter revenue reached $105 million, representing a 12.6% decrease from the prior year, but a slight increase compared to last quarter. Within the decline in revenue were 2 positive elements of note. First, demand for Rejuvenate 2.0 surpassed expectations and outpaced supply, particularly in showrooms. And second, the continued expansion of our Mattress Firm led us to ship inventory for the launch ahead of expectations. While these highlights were partially offset by weaker e-commerce results and the impact of last year's wholesale door exit, we remain encouraged by an improving demand picture and the emerging revenue growth observed this quarter. Additionally, we delivered strong profitability improvements with adjusted EBITDA increasing $1.8 million and 120 basis points versus last year. We are well on track to deliver positive adjusted EBITDA in the back half of the year with strong year-over-year revenue growth already taking shape this month. We expect acceleration in the second half to be driven by the significant rollout of new retail distribution for Mattress Firm, which is nearing completion and by the success of our Rejuvenate 2.0 launch, which is already increasing distribution and driving higher average selling prices. These initiatives are meaningfully expanding our reach and will support continued momentum in our path to premium sleep strategy. As we noted our last earnings call, incremental tariffs created notable pressure on gross margin in the second quarter, along with costs associated with ramping up both the Mattress Firm rollout and the Rejuvenate 2.0 launch. With the previous 4 quarters all delivering results above 40%, the second quarter gross margin of 36% is a temporary setback. With mitigation plans in place to offset tariff headwinds and improvements in manufacturing efficiencies, we remain confident that we'll exit 2025 with a gross margin rate above 40%. We're entering the second half with significant momentum that is expected to continue building as the year progresses, with quarter-to-date revenues up in the mid-single-digit ranges versus same period last year. We're seeing strong validation of our brand and innovation strategy through the success of Rejuvenate 2.0 launch, which has sold more than twice as many units as our Rejuvenate 1.0 launch through our direct-to-consumer channels. The growing momentum behind our Mattress Firm expansion, which is already rolling out across the country and the deepening partnership with Costco as we prepare to launch in 450 clubs for their year-end furniture show and the strong interest from other traditional and nontraditional partners, which we expect will materialize within the coming weeks. Turning to our 3 strategic pillars. Our path to premium sleep strategy remains focused on our 3 pillars: pioneering new technologies to drive product leadership, promoting our differentiation to effectively communicate our unique product benefits to our consumers and prioritizing gross margin, driven by ongoing operational improvements. I'll now walk you through our recent progress against each of these strategic pillars. Innovation remains the cornerstone of our competitive advantage. As I mentioned earlier, we recently launched our Rejuvenate 2.0 mattress collection, a major milestone for Purple and the first product to incorporate our new DreamLayer gel grid technology layered on top of our core GelFlex grid. This combination of technology provides an incredible dream-like sleep experience with each grid playing a different part to elevate comfort while preserving the unique pressure relieving and cooling benefits our customers know and expect. Rejuvenate 2.0 is now available online and across all showroom locations. Since the launch, we've sold over 1,300 Rejuvenate 2.0 units at an average sales price of approximately $6,000 through our direct channels, with approximately 80% of those sales coming through our showrooms, our most effective channel. Slot commitments across wholesale remained strong with an increase in non-Mattress Firm slots of over 60%. In the second quarter, we also introduced our new Grid Cloud Pillow, a $149 offering designed to bring the benefits of our grid technology to a broader audience. This innovative pillow launch extended across online platforms, including Amazon, walmart.com and our own website and is now available in over 1,200 Walmart stores featured alongside our ultra-premium Harmony Pillow. We're encouraged by the early positive consumer response to the Grid Cloud Pillow and look forward to continuing to deepen our relationship with Walmart and other nontraditional retailers. The strong consumer response to these latest launches reinforces our position as a leader in premium sleep technology and affirms the strength of our long-term path to premium sleep strategy. Looking ahead, our innovation pipeline remains robust with a mix of both incremental performance upgrades across our product portfolio and broader platform innovations that will continue to position us as the leader in the premium sleep category. While delivering better sleep through innovation is what sets Purple apart, how we communicate the benefits of our innovation is critical. Our refreshed messaging highlights the unique sleep benefits of our Gel Grid technology and focuses on what matters most, less pain and better sleep. As we look ahead, our new marketing will play an important role in an accelerating consideration and conversion across all channels. Our marketing strategy continues to evolve and move beyond traditional category tactics centered on discounting. Our new brand campaign, less pain, better sleep is resonating with consumers, which we've been validating through diligent testing. The campaign is designed to drive higher conversion on the website and stronger consumer engagement across all channels in the second half of the year. Now let me turn to how we're bringing our product differentiation to life across each of our channels. Our showrooms continue to play a key role in providing customers with a hands-on experience where our associates can engage and demonstrate the benefits of our products in a personalized setting. While channel performance in the quarter reflects the Rejuvenate 2.0 demand being primarily shipped in the third quarter, underlying sales orders for showrooms open for more than a year were strong at plus 5.5% growth versus the second quarter last year. This encouraging demand signal again drives confidence in our path to premium sleep strategy. The success of this launch has significantly grown the luxury share of showrooms product mix, now accounting for approximately 40% of order value. In fact, we've sold more than twice as many Rejuvenate 2.0 units during its launch as we sold during the launch of Rejuvenate 1.0, supported by the relaunch of our in-store selling model to further emphasize premium positioning and in-store education. Based on the early Rejuvenate 2.0 performance, we expect our showroom channel to become profitable in 2025. Similar to our marketing strategy, our e-commerce approach continues to evolve, shaped by a clear view of the consumer shopping journey and the specific role the website plays within it. In the past, our e-commerce was primarily focused on a more narrow segment of consumers who are willing to purchase a bed online in an industry where over 80% of consumers want to experience the mattress in person, particularly for premium-priced products. As part of our evolving strategy, our e-commerce focus is expanding to include reinforcing the strength of the brand, clearly communicating the less pain, better sleep benefits of our technology and supporting premium positioning across all channels. While the website will still support online consumers, we're optimizing it as an additional tool to drive engagement, education and conversion, particularly for products fulfilled through other channels. Alongside the new less pain, better sleep brand positioning, we implemented a series of meaningful website changes in the second quarter, including highlighting real-world product benefits like spinal alignment and cooling, simplifying the path to purchase and reducing friction at checkout. While still early, we're beginning to see encouraging signals, and we expect these changes to drive greater impact over the coming months. We've also been fine-tuning our data-driven targeting through a new engagement with an external partner to improve identification and targeting of our core audience. These insights are already informing media optimization across platforms like Google and Meta to drive ad spend efficiency and return on investment. Looking forward, we believe that our website enhancements, new less pain, better sleep brand positioning and targeted consumer strategies will drive conversion across our brick-and-mortar channels and renew e-commerce momentum over time. Wholesale revenue was down last year. However, we're encouraged by the meaningful sequential improvement from last quarter, especially against the difficult comparison of positive 7.2% comps last year. Additionally, wholesale revenue would have been slightly higher if Rejuvenate 2.0 orders had been fulfilled during the second quarter. As we work through the remaining backlog, we unlock the ability to launch Rejuvenate 2.0 into more of our key wholesale partners, which is expected to drive meaningful sales growth in the coming quarters. A key driver of our wholesale strategy is our expanded relationship with Mattress Firm. As I mentioned earlier, the momentum behind this expansion is strong, and Purple products will be in their full store network by mid-August. In parallel, we're developing an exclusive luxury mattress collection with Mattress Firm scheduled to launch early next year and increase our slot count to approximately 12,000, more than double our previous footprint. This is a meaningful step forward in our distribution strategy, and one that enhances Purple's national presence, expands our reach to premium consumers and includes us in their consideration set as they shop. Additionally, Mattress Firm's strong commitment to our product and brand is already driving increased interest from other partners. We've recently reached an agreement with one of the largest and fastest-growing mattress retailers in the country. We look forward to sharing more details in the upcoming months. Beyond mattresses, we're also expanding our pillow and accessory business across all Mattress Firm doors. Later this year, we'll be introducing our new DreamLayer pillow to sit alongside our high-performing Harmony Pillow, further reinforcing our position in premium comfort and wellness. We're also deepening our engagement with Costco through a key limited time promotional holiday event later this year. Following strong performance during last year's event, we're returning at a larger scale in the fourth quarter, participating in 450 clubs, more than double the number of locations we participated in during the same event last year. This expanded footprint represents a meaningful step forward in our partnership and significantly broadens our reach with a highly engaged customer base. Our third strategic pillar, prioritizing gross margin expansion reflects the operational discipline we've built over the past year, which has consistently delivered results. While gross margin of 36% marked a temporary setback, our strong performance over the past 4 quarters gives us confidence in a rebound as cost actions take hold, tariff mitigation efforts take effect and manufacturing efficiencies improve as we complete our Rejuvenate 2.0 launch and Mattress Firm rollout. Excluding these impacts, we would have seen clear margin expansion driven by a more favorable product mix shift into our higher-priced mattress collection and $2.4 million in direct material cost savings during the second quarter with those benefits flowing through as planned. Our sourcing, manufacturing and consolidation efforts are delivering meaningful structural improvements and positioning us for sustained margin expansion. We continue to actively manage the impact of the recent tariff changes. While future changes in tariffs are difficult to predict, we currently expect our total cost exposure in 2025 to be less than our previous $10 million estimate, thanks to swift mitigation efforts and changes to the underlying tariff rates. We've begun shifting sourcing outside of China. And in July, we implemented a price increase on select products. Our price increases were designed to avoid our most price-sensitive product offerings while protecting gross profit dollars. As we look ahead, we're reaffirming our full year revenue and adjusted EBITDA guidance. For fiscal 2025, we continue to expect revenue between $465 million and $485 million and adjusted EBITDA of flat to up $10 million inclusive of continued tariff headwinds. Our outlook reflects a continued cautious consumer environment, but also the strength of our innovation engine, improved execution and a structurally stronger business than we had 1 year ago. We're entering the second half with meaningful momentum behind our newest product line, a major wholesale expansion underway and greater operational flexibility to support profitable growth. Todd will go into more detail later in the call. Before I close, a brief note on the Board's review of strategic alternatives. This process remains ongoing. We have engaged with multiple parties about a broad range of opportunities to maximize shareholder value, including, but not limited to, a merger, a sale or other strategic or financial transaction. We'll continue to evaluate a range of options and provide further information as appropriate. We will not be commenting further or taking questions on this topic during the Q&A portion of today's call. Now I'll turn the call over to Todd to discuss our financial performance in more detail.

Thank you, Rob, and good afternoon, everyone. As Rob touched on earlier, we're pleased with our performance this quarter, which reflects our continued ability to execute effectively against our strategic initiatives. I'll now walk you through the financial metrics for the quarter and highlight the areas where we saw progress as well as where we encountered headwinds. Starting with the top line. Net revenue for the 3 months ended June 30, 2025, came in at $105.1 million, which was down 12.6% versus $120.3 million in the prior year. As Rob indicated earlier, the decline was impacted by the timing of Rejuvenate 2.0 shipments, lapping reductions in wholesale door count from 2024 and softness in our e-commerce channel. By channel, direct-to-consumer net revenue for the quarter was $58.9 million. Within DTC, net revenue for showrooms decreased 13.3% compared to last year as demand for Rejuvenate 2.0 outstripped our ability to supply customers. E-commerce continued to see softness and was down 11.5% during the second quarter. We also experienced a decline in our wholesale segment, where net revenue of $46.2 million was down 13.4% versus last year as we continued to be impacted by door count reductions from 2024. Despite this decline, we're beginning to see encouraging signs of recovery in our wholesale channel, particularly as we approach the significant expansion of our business at Mattress Firm in the third quarter. Gross profit for the second quarter was $37.7 million compared to $48.9 million during the same period last year. Gross margin rate for the quarter was 35.9%, a decline of 480 basis points compared to last year. In the second quarter, our gross margin was negatively impacted by tariff-related costs and ramp-up costs related to the Rejuvenate 2.0 launch and Mattress Firm expansion, where rollout costs preceded revenue. As production continues to scale at our Georgia facility, we anticipate greater manufacturing efficiencies and direct material cost savings to drive gross margin improvement through the back half of the year. Now turning to operating expenses. Operating expenses were $51.9 million, down 18.2% versus $63.5 million last year. The improvement was largely driven by reduced advertising spend and benefits from restructuring and other cost savings initiatives that we've completed over the past few quarters. Excluding restructuring and impairment-related charges, adjusted operating expenses were $47.8 million, down 25% versus last year. Our adjusted net loss for the second quarter was $11.7 million, an improvement from a net loss of $13.8 million in the prior year. And second quarter adjusted loss per share was $0.11 compared to an adjusted loss per share of $0.13 last year. Adjusted EBITDA for the second quarter was a loss of $2.4 million, an improvement from the loss of $4.1 million last year, driven primarily by our disciplined cost management. Now turning to the balance sheet. At the end of June, we had cash and cash equivalents of $34.2 million compared with $29 million on December 31, 2024. Net inventories on June 30, 2025, were $60.9 million, down 12.6% compared to June 30, 2024, and up 7.1% compared to December 31, 2024. We were pleased to exit the quarter with cash over $30 million. As we move into the second half, which is traditionally a period of cash generation, we believe that we're well positioned from a liquidity perspective to drive expected growth from our Rejuvenate 2.0 launch and the Mattress Firm expansion. As Rob mentioned earlier, we are reaffirming our full year guidance. We continue to project full year revenue in the range of $465 million to $485 million, with adjusted EBITDA expected to land between breakeven and positive $10 million. We anticipate sequential growth in the second half of the year, primarily driven by our successful launch of Rejuvenate 2.0 and the Mattress Firm expansion, and we expect to return to positive EBITDA in the back half, bolstered by continued momentum from our restructuring initiatives and sourcing improvements. With that, I'll turn the call over to the operator for questions.

[Operator Instructions] Your first question comes from the line of Brad Thomas with KeyBanc Capital Markets.

I was wondering, Rob, if you could talk a little bit about the cadence of sales in the quarter and how you're thinking about the acceleration in the business in the second half given some of the moving parts here?

Thanks for your question, Brad. The quarter started slow for sure. April was the softest month of the quarter, and it got modestly better through the quarter. I referenced in my comments that we left a little bit of demand on the table that would have probably had us closer to $110 million than $105 million had we shipped it on the timing we intended. It also would have turned the showroom comps positive for the quarter. So the optimism comes from really 3 parts of the business. Number one, Q2 was clearly affected by tariffs and start-up of both Rejuvenate and the Mattress Firm business. And we're in a place now into July where we will catch up on the demand, the shipments that are trailing demand on Rejuvenate in showrooms. We'll expand the footprint in showrooms of Rejuvenate -- excuse me, we'll expand the footprint of Rejuvenate into wholesale and then the Mattress Firm expansion, which is going to be about 3,800 slots in the quarter should all be in place by August 15. So the combination of the market kind of trending very modestly better and strong Rejuvenate and Mattress Firm sales, we expect the back half to get stronger as it goes.

That's very helpful. And then understanding that 2Q has been an unusual quarter for many companies given the tariff dynamics, but also for you, given some of these initial ramp-up costs with Mattress Firm. Is there a good way to think about how much might be sort of onetime in nature that you might get back next year?

Yes. In terms of the gross margin and where we're being hit by tariffs and some of the ramp-up costs, really, we expect the ramp-up costs we're largely moving past at this point. Tariffs will continue to mitigate as we go forward. It's a little bit of an uncertain environment to say the least. So we're planning conservatively at this point. But -- we do expect to end the year well north of 40% gross margin rate. So that will be a gradual improvement from Q2 through the rest of the year and then starting off next year in a strong footing at that plus 40% rate.

Your next question comes from the line of Matt Koranda with ROTH Capital Partners.

I think you talked briefly about third quarter trends in demand to date. Rob, I think in your prepared remarks, maybe you said mid-single-digit growth in the aggregate, but I just want to make sure I heard that correctly. And then can you share if that's mostly coming from the wholesale load-in that you're getting with Mat Firm and Rejuvenate? Or is there also some growth in the DTC channel as well?

Matt, 2 parts to it. First of all, there is a little bit of the Mat Firm in there. But remember, the way floor samples ship, they don't really contribute wholly to revenue. So it's probably demand picture is most of that up mid-single-digits and catching up with Rejuvenate where we've been behind in showrooms. So there's positive momentum in DTC, positive momentum in wholesale and some encouraging early signs in e-comm that we think will get stronger.

Okay. All right. That's great to hear. And then I think you guys said positive EBITDA in the second half for the guide. I guess, does that mean that you could be positive in the third quarter? Maybe just talk about sort of the seasonality of profitability as you expect it to play out for the rest of the year here.

Yes. So as we see improvements in revenue that grow sequentially and the same in gross margin, that will flow through to our EBITDA results. So really, we expect to see gradual improvement on the EBITDA side of things, probably a little bit more Q4 weighted just based on the fact that we'll have a full quarter of Mattress Firm and Rejuvenate 2.0, and we'll have the high side of our margin improvements. So we're not really guiding to the individual quarters, but to think about it in terms of a slope upward towards Q4 is probably the right way to think about it.

Okay. And then maybe if I could just sneak one last one in there. The -- I think you mentioned, Rob, in your remarks, there's another large retailer that you could be ramping up with on a wholesale basis. Does that impact '25? Or is that more likely a '26 event that we should be kind of factoring in?

Because of the timing of it, there will be a modest positive impact in Q3 and Q4, probably in Q4, still working out the details, but it will be a nice chunk of business in '26 for sure. But there should be a little bit of upside in the back half.

Your next question comes from the line of Robbie Griffin with Raymond James.

This is Bobby from Raymond James. Congrats on the early momentum in 3Q. So I guess, Rob, first, just a clarification, the temporary ability to fulfill, is that now corrected? And how is the capacity with obviously, the Mattress Firm account coming on, and you mentioned maybe another decent-sized retailer later this year. Like how is the fulfillment capacity and all that going forward looking?

Yes. I think there are probably 2 parts to my answer, Bobby. Thanks for the question. The first is the most encouraging part is demand in showrooms. We projected it to improve, but we started selling it, and I'm going to forget the exact timing, but kind of halfway through the quarter, if I remember right. And the unit sales are about 2x its predecessor. So that's the good news. The bad news is we planned a little too much of a swimmers' turn and didn't have much flexibility to catch that and left the quarter with about $4 million to $5 million of normal demand that should have been fulfilled. We are catching that up by the end of this month, and today is the 29th, so I get we're at the end of the month. We should be cutting those lead times about in half. And by mid-August, we'll have them back to normal delivery times. At the same time, the demand in showrooms has encouraged our wholesale partners and those slots commitments continue to grow modestly. And so we're going to have to make sure we don't launch ahead of supply, but get that wholesale footprint fully deployed as fast as we can in Q3.

Okay. That's helpful. And then on the tariff side of things, remind us the mitigation efforts. Have you guys started to adjust pricing yet for tariffs? I believe we've picked up some of our checks to just confirm that for us. And what have you seen -- like I think everybody is trying to zero in on what the inelasticity of demand is or the impact of demand from these tariffs. So what have you seen on units velocity for SKUs that you have adjusted?

Yes. So we announced about 60 to 80 days ago and the normal wholesale -- we could have taken pricing a bit sooner, but we learned the hard way a couple of years ago that we can't take pricing ahead of the wholesale lead times or we end up creating a bit of an arbitrage problem. So we took pricing on [ 722. ] So we don't have much read yet. I know the customer reaction, not consumer but customer was not a lot of concern. The pricing was a little bit less than 2% or about 2% and we stayed away from the items that we felt were absolutely either price point tethered or the most sensitive. So we don't expect a big consumer pushback, what the -- 7 or 8 days we've seen on the website on pillows in particular, we crossed the decile and we have not seen any negative reaction. So I don't think we're going to get any punishment for it. I think the trade understood it and appreciated that we gave them the notification lead time even though we did not get that from the tariff structure. So we're not expecting a big negative reaction to the pricing.

Appreciate. And then lastly for me, we got Mattress Firm coming on. It looks like the business is starting to inflect here if we get the EBITDA in the back half. Just as we roll into '26, EBITDA shows up and this business starts to generate cash and free cash flow, what's some of the priorities for cash? Is it debt paydown at first? Or how do you and the team think about that?

Yes. So you're heading down the path that we have been thinking quite a bit about it. As the business is generating this momentum, we think it does set us up really nicely from a cash perspective as we go into next year. Priorities, we are going to be looking at our store footprint as showrooms are continuing to show great results for us, looking at how we get back into the game of actually growing our store footprint and looking at how we're deploying capital internally. We think that's the best use of cash. Beyond that, yes, no specific plans. We want to make sure that we have built up an appropriate cash cushion for ourselves and that we're investing the cash back in the business and the things that we think will continue to generate the best returns for ourselves.

Your next question comes from the line of Dan Silverstein with UBS.

Maybe the first one, do you still expect the additional Mattress Firm distribution to be around, call it, $70 million in revenues next year? And then for this year, for that contribution, should we kind of assume like a pro rata amount? Just trying to get a better picture of comparable like-for-like trends today.

Yes. I mean the distribution should be in place by August 15, so it will start generating volume in the back half of the coming month and then through the rest of the year. And then by next year, as I said in my remarks, we are working on a premium Lux [ line ] with Mattress Firm and expect that to be in place. Timing is still TBD, but around the end of the first quarter, beginning of the second. So we'll end up with a footprint that is 12,000 slots on a year ago base that was sub-6,000. So we're pretty optimistic about what that should produce.

Got it. And then maybe just moving aside from Mattress Firm, you pointed out some things on the come and some positive progress already with nontraditional retail partners like Costco and Walmart. Maybe you could just take a minute and frame business in these type of channels today relative to the opportunity you see going forward over the next few years.

Fundamentally, in the wholesale channel, we've got to make sure that our furniture and mattress retailers are well stocked, well supplied and well supported so we can move that product through, that's the primary focus of our business. But I think as others have learned, and we're still a pretty young company, the right business in the right alternative channels, whether that's Walmart or Costco or HomeGoods or QVC, done well and done in a way that is both accretive to the brand, accretive to the margin and not disruptive to the traditional wholesale customers can be a nice chunk of business, and we still have way more opportunity in front of us than behind us in that case. The club -- Costco is a good example. We were in 170 clubs. We've been in distribution online for about 1.5 years, but we're in clubs for 170 clubs last year, and they had a nice piece of business. And the one that I spoke about earlier is going to be 450 clubs. So it's meaningful, it's profitable. And in many cases, it's very good for the brand reputation if you do it in a way that doesn't disrupt your traditional customer channels.

Your next question comes from the line of Brian Nagel with Oppenheimer.

So the first question I have, just on the gross margin in the quarter. As you talked about there being -- it would seem like more or less onetime pressures there. So wondering if you could just articulate that a little bit more, what those were, the size of them? And then how quick -- as we look into Q3, Q4, how quick will these onetime pressures abate? And maybe another way to ask the question is, how should we be thinking more specifically about the gross margin in Q3 and Q4?

Yes. So if you look back, we had greater than 40% margin for the last 4 quarters. So we've kind of demonstrated that, that is a level that we can operate at. As we got into this quarter, as you mentioned, tariffs were new. Now we do have plans in place to start mitigating that to a degree, we obviously won't be able to mitigate all of it, but that was probably a little bit more than half of the reduction in margin that we saw this quarter. So you'll see that mitigation come through across the course of the rest of the year. The other bit about ramp-up costs, that is really something that we believe we've addressed at this point. So a lot of that will come back to us even as we get into Q3. So as you look at margin across the rest of the year, and then in addition to that, I should mention, there's ongoing efficiency projects that we're working on that are really bearing fruit. There's a lot of projects along the mode of direct material savings and sourcing savings that kind of ramp up as we get through the rest of the year. So there's a lot of tailwinds behind us on the gross margin front. They really do build as we go through. So as you look at it, we'll be north of 40% as we exit the year in Q4 and then ramping up towards that as we get through the third quarter.

Got it. That's helpful. And then let's see if I can ask this correctly. So if you look at the quarter, at least from my perspective, I think one of the most significant positives here is that sales ramp and particularly what you're seeing thus far in Q3 with that rather sizable or meaningful growth year-on-year growth. Is the gross margin -- the question I have is, is the gross margin degradation in the second quarter completely disconnected in other words, not a driver of the better sales we're seeing?

I don't know if I'd say it's disconnected because a chunk of it was start-up cost, but it was amplified in Q2 because we got all the start-up costs and not the replacement benefit by getting all that Rejuvenate shipped as it should have. So I think the tariffs, we believe will mitigate a majority of that, as we said in the remarks. Direct material savings continue and we got the benefit of all of the start-up costs and very little of the replacement benefit coming. So again, we're confident we'll have a back half that certainly exits above 40%.

I will now turn the call back to Rob DeMartini for closing remarks.

First, I'd like to just say thank you for joining us on today's call. We remain focused on disciplined execution, our innovation schedule and building a premium, sustainable and profitable brand for the long-term. I'd like to extend my sincere thanks to our associates for their hard work through some pretty difficult times and our customers for their continued loyalty. Thank you.