Greetings, ladies and gentlemen. Welcome to Purple Innovation's First Quarter 2019 Earnings Call. [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 First Quarter 2019 Earnings Call. A copy of today's press release is available on the Investor Relations section of Purple's website at www.purple.com. I would like to remind you that certain statements we will make in this presentation are forward-looking statements.

These forward-looking statements reflect Purple Innovation's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting the company's business. Accordingly, you should not place undue reliance on these forward-looking statements.

For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements included in our first quarter 2019 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 references to non-GAAP financial measures, such as adjusted operating income, EBITDA and adjusted EBITDA.

A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures can be found within the earnings release and in our quarterly report on Form 10-Q, each of which can be found on our website. With that, I'll turn the call over Joe Megibow..

Thank you and good afternoon, everyone. With me on the call is John Legg, our Chief Operating Officer; and Craig Phillips, our Interim Chief Financial Officer. We are pleased with our solid start to 2019 in terms of our results as well as the continued growth and development of the Purple brand and organization.

Notably, demand for our mattresses early in the year has been very encouraging. And while under the leadership of John, who was appointed COO in January, we've made significant and measurable progress in our manufacturing and fulfillment.

Financial highlights for the first quarter include net revenue increasing 38% year-over-year to $84 million; gross margins expanding 650 basis points compared with the fourth quarter; and operating expenses as a percent of net revenue declining to 35% from 48% in Q1 2018, aided in part by a shift of approximately $3 million in marketing investments to later in the year.

The combination of these improvements and some shift in marketing spend resulted in non-GAAP financial measures of operating income of $4.8 million and adjusted EBITDA of $6.2 million. With respect to our top line, it was fueled by significant gains in our wholesale business as we've continued to add more doors and experience strong sell-through.

We believe our increased production efficiency has put us in a stronger position to successfully grow this channel. Specific to Q1, we opened 150 new Macy's stores and drove healthy same-store sales increases at other wholesale partners.

This includes Mattress Firm, where we expect to further expand our relationship throughout the remainder of the year. At the same time, our partnership with Furniture Row is exceeding our expectations, and we are very pleased that they've been strongly supporting our brand with Purple signage on the outside of a number of their physical stores.

In terms of our DTC business, first quarter sales were down 13% year-over-year in line with plan, as we continue to operate in an increasingly competitive market. DTC customer acquisitions costs have risen steadily over the last 18 months, which creates headwinds on profitably growing this channel.

We were able to partially offset these challenges with a strong Presidents' Day promotion as well as the launch of our new Purple Plush Pillow. We expect the current DTC headwinds to continue in the near term; however, we are working on several strategic programs to improve our recent performance.

We've also been able to get back to our roots with fun creative, such as the $0.99 April fools promotion launched on March 31, highlighting the race to the bottom price war we continue to see among the sub-$1,000 bed-in-a-box companies. This 1-day campaign reached more than 1 million people and drove significant sales for DTC.

I'll now turn the call over to John, who will provide an update on our manufacturing and fulfillment capabilities..

Thanks, Joe. I'm happy to be on the team here at Purple. I believe very strongly in Purple's potential and the team's ability to execute our plans. In operations, we've done some terrific work year-to-date, and we have a number of initiatives underway that will help us continue to optimize cost and improve customer service levels.

Q1 was an important quarter from an operation standpoint as we began to realize benefits from our early work to enhance product quality, operational efficiency and timely fulfillment.

The team has been working extremely hard, and we had record production numbers in Q1 while maintaining quality, which enabled us to eliminate our backlog all without increasing labor. As Joe mentioned on our previous earnings call in March, we have begun implementing automation equipment that is helping us control cost while improving yield.

After struggling with fulfillment in the past, we exited Q1 hitting our fulfillment service level agreements over 90% of the time, primarily due to our internal initiatives as well as our new 3PL partnership, which has helped with accuracy, timeliness and cost.

Q1 was our first full quarter with our new 3PL partner and the benefits of the partnership are reflected in gross margin. The team has also worked hard on inventory accuracy, and I'm happy to say that our latest physical inventory count was clean with no major adjustments.

The team has really rallied around Joe's vision for the company, and you can see that in the quality of the work being done. We've also been building out processes and supporting infrastructure to help us continuously improve.

I'm looking forward to our next quarter when we can share more wins with everyone as we continue on our journey to becoming a world-class manufacturing organization. I'll turn it back over to Joe..

product innovation; omnichannel retailing; organizational effectiveness; and brand development. We are currently executing multiple initiatives across each of these with some early successes starting to yield results.

Starting with product innovation, our core initiatives include improvements in our manufacturing processes, such as launching our Max 5 machine, which is on track for launch midyear as well as Italian-built automation equipment; improvements in our fulfillment capabilities, including leveraging regional 3PL warehouses; institutionalizing our product life cycle management process and fleshing out an appropriately sized innovation team.

During Q1, we made good progress on several of these initiatives including institutionalizing a cross-functional stage gate process, transitioning completely to our new 3PL partner, bringing some automation equipment online and making strides with Max 5.

For omnichannel retailing, we will continue our efforts to service the customer wherever and however they want, including continuing to aggressively expand our retail partner doors, significant improvements to our website and possibly brand showrooms.

We added 150 doors in the first quarter bringing our current-to-date total doors more than 1,000, while making progress on other fronts as well. With respect to organizational effectiveness, we are aggressively hiring for key roles as well as maturing and building out core functions.

With the help of a consulting firm, we've been assessing our controls and processes in an effort to both reduce waste, and more importantly, improve accuracy, which we have been challenged with throughout 2018.

In 2019, we've hired a COO, who you just heard from, and recently hired a Chief Retail Officer, Tres White, who brings significant depth of experience in retailing and merchandising. With the assessment of our process complete, we have already begun implementing improvements, which will continue over the course of the year. And finally, for our brand.

We continue to work with world-class brand strategists to better align our brand positioning and creative with the unique differentiated benefits of our products, especially the Purple Grid. We expect to start seeing benefits from updated branding during the second quarter, but primarily in the third and fourth quarters of this year.

In summary, we are pleased with our start to the year. The underlying work we have been focusing on is fueling improved performance and more importantly, positioning the company for long-term success.

As we look forward to the remainder of 2019, I'm confident we can build on the progress we have made in recent months, and achieve the revenue, margin and adjusted EBITDA guidance that we outlined on our last call. Craig will now review the financials and our guidance in more detail..

Thanks, Joe. As you mentioned earlier, for the 3 months ended March 31, 2019, net revenue was $83.6 million, up 37.7% compared to $60.8 million in the prior year period. The revenue increase was primarily due to continued wholesale door expansion, combined with higher replenishment orders following strong sell-through during the quarter.

Gross profit dollars were $34.1 million during the first quarter of 2019 compared to $25.8 million during the same period in 2018 with gross margin at 40.7% versus 42.5% in the first quarter of 2018. The year-over-year decrease in gross margin was primarily due to a shift in sales mix to more sales with wholesale pricing.

Wholesale channel revenue comprised approximately 36% of the net revenue for the quarter compared with approximately 6% last year and 25% in the fourth quarter of 2018. First quarter gross margins came in above plan, driven by fixed cost leverage on higher production volumes and improved efficiencies within our supply chain process.

Operating expenses were $29.3 million in the first quarter of 2019 versus $29.4 million in the prior year period.

Marketing and selling expenses as a percentage of net revenue improved 757 basis points to 28.7% from 36.3% in the first quarter of 2018 driven by improved efficiencies in our marketing initiatives, higher net revenue from the wholesale channel and approximately $3 million shift in marketing spend that Joe discussed.

During the first quarter, we reported operating income of $4.8 million compared to an operating loss of $3.6 million in the first quarter of 2018.

After adjusting for merger transaction costs, legal fees, equity incentive compensation, interim CFO costs and severance and CEO search costs, adjusted operating income was $5.5 million compared to an adjusted operating loss of $1.2 million in the first quarter of 2018.

In conjunction with the incremental loan the company secured in February 2019 as part of the previously announced amended and restated credit agreement, it was determined that the debt attributable to lenders that participated in both the original and incremental loans should be accounted for as an extinguishment of debt.

As such, we recognized a noncash expense of approximately $6.3 million from a loss on the extinguishment of a portion of the original debt.

At the same time, we recorded a gain of approximately $1.7 million in the first quarter from the change in the fair value of the incremental loan warrants issued in conjunction with the amended and restated credit agreement. The net of these 2 transactions represents net noncash expense recognized in the first quarter of $4.6 million.

Inclusive of this net noncash expense, net loss for the quarter was $0.7 million compared to a net loss of $4.3 million in the year ago period. EBITDA for the quarter was $0.9 million compared to negative EBITDA of $3.1 million in the first quarter of 2018.

Adjusted EBITDA, which excludes the same nonrecurring cost I just mentioned, plus the debt extinguishment and warrant liability, was $6.2 million versus negative adjusted EBITDA of $0.8 million last year. Moving to our balance sheet.

As of March 31, 2019, the company had cash and cash equivalents of $12.2 million consistent with the balance at the end of 2018.

Our cash position at the end of the first quarter compared with the end of 2018, reflects the proceeds from additional financing we secured in February, offset by working capital needs of inventory and increased receivables from growth at our wholesale channel as well as capital expenditures.

Net inventories totaled $25.3 million at March 31, 2019, compared with $22.9 million at December 31, 2018. The increase in inventory reflects the strong top line growth we've experienced early in 2019, particularly at our wholesale channel. Turning to our guidance.

For the full year 2019, we continue to expect net revenue in the range of $350 million to $375 million with adjusted EBITDA in the range of positive $3 million to $8 million. For the second quarter of 2019, we anticipate net revenue to increase in the mid-20% range and adjusted EBITDA of approximately breakeven.

This outlook takes into account the change in timing of the marketing expenditures, which benefited first quarter profitably and will largely reverse itself during the course of the second quarter.

As we get into the second half of the year, we anticipate the initiatives underway should continue to help drive continued top line growth and improved margins. I'll now turn it back to Joe for his closing comments.

Joe?.

Thanks, Craig. Similar to what I said on our last call, we still have a lot of work to do. That said, over the past 3 months, my confidence in turning this business around has increased significantly.

The work we began more than 6 months ago and have been successfully delivering is now flowing through, and our first quarter results indicate that we are on the right path towards profitably growing Purple's market share and generating increased value for our shareholders.

I'm very proud of how the organization is attacking our primary strategic objectives and successfully executing against them. And I'm excited to see the results I know we are capable of delivering this year and longer term. We are now ready to take questions..

Thank you. [Operator Instructions] Our first question comes from Brad Thomas with KeyBanc Capital Markets. Please go ahead..

Hi. Good afternoon. And congratulations on the strong start to the year here. Wanted to ask a little bit more about what's going on with your direct sales. When I saw the headline revenue numbers, I thought they were quite strong. And then you, I believe, said that direct sales were down about 13%.

Obviously, a competitive environment, you shifted to advertising.

I guess could you talk about some of the puts and the takes on direct and how much, if at all, did the shift in advertising have an impact on sales?.

Yes. I think as we said in the prepared comments -- first of all, to restate, we're at plan of where we expected to be and are continuing to guide against that expectation. We were managing the cash, as we've spoken about, coming out of last year which has an impact of just driving much less top of funnel traffic coming into this year.

And we've continued to manage cash where we're getting the most return on our investment, which has helped drive up our wholesale business quite dramatically and profitably, while we sort of rebuild some of our marketing and site capabilities in DTC. We are expecting that we are going to continue to lean into DTC.

By no means do we -- is this how we think things are going to go for the long haul.

And again, we've guided that we'll be a seeing full year results that are substantially better on DTC, but some of that comes to cleaning up our marketing approaches, which we're in the process of strategically, some site and content improvements and brand improvements which we're working through right now.

And as we lean into all that, we expect to see a rebound there..

Got you.

And from a timing standpoint, Joe, you think that's more second half where you see those initiatives start to drive results again?.

That's right. Well we'll see some improvement likely this quarter. But really, we've loaded most of that benefit into the back half of the year when we've really executed on these initiatives..

Great, great. And then from a wholesale perspective, clearly seeing some nice success. I guess, two questions there.

For one, where do you think the door count will be at the end of the year? Do you have an explicit target for that?.

We do not have an explicit target. And it depends on our continued partnership with the great partners that we have right now. It will certainly be quite a bit higher than where we are now. There's still a lot of headroom out there.

We kind of -- at the end of last year, we had talked about doubling at those numbers, and I think that's likely in the range of where we'll be. But -- we're -- it's not hard for us to open doors. We've got it down to a science now. They're performing well. As we said, same-store sales are continuing to grow. We're seeing ample demand.

We continue to reiterate that at our core, Purple is not built around a better way to buy a mattress -- the convenience play that many bed-in-the-box stores have been doing. It's really about a better mattress and part of that has been getting them on display in front of as many customers as possible.

So we're going to continue to press forward as far as the market will take it..

That's great. And you just highlighted -- the last thing I wanted to circle back on that, that comment that the same door sales are increasing.

I guess, could you remind us maybe how big of a sample you're working with at this point? What some of the learnings have been? And how positive those results have been as you've lapped an opening that you did over a year ago?.

Yes. We, I mean so we are over as of today, we are over a 1,000 stores that we are present in. And at least half of those stores, well, call it around half of those stores, we've got 4 beds on the floor. So it's a pretty good presence now or it's a pretty reasonable sample size.

Obviously, in terms of looking at same-store sales, we're seeing this increase in over months. So this isn't an annual growth, but from the time that we were launching even just 6 months ago in those stores to today, we're seeing measurable increases in flow-through.

So it's, some of that is operational on us as we've been able to build our capacity and build the efficiency in delivering. I think our partners have been patient with us as we improve and stabilize our operations to make sure we can meet the growing demand, and we've done that now.

I think now that we've got all of that in place, and we are set to both grow and deliver against customer and our partners' expected SLAs, they're leaning into our product more, and that's driving some of the results as well..

[Operator Instructions] Our next question comes from Seth Basham with Wedbush Securities..

It's Joe Delaney on for Seth here. First off, congrats on a really strong quarter. So my question is around the sharp increase in accounts receivable.

Is there anything going on here besides just the sales channel mix for the wholesale segment?.

Yes, this is Craig. No. There's nothing going on besides that. It's all driven by wholesale. As a matter of fact, we are approximately 1% beyond 60 days. So we're, we don't have any collectibility issues that we're seeing in this at all..

Okay. Great. And then if I could just ask one follow-up. I'm curious about how return rates are trending compared to maybe sequentially or year-over-year..

Yes. We, I mean, there's a number of things we've been measuring that drive into that. We are seeing return rates continue to come down, especially year-over-year. We're still a little higher than we'd like, but the momentum is absolutely in the right direction.

And a lot of that we had anticipated was related to our delivery windows, and we've gone from 6 months ago having roughly, call it, 0% of orders being fulfilled on the same day to now, the majority of orders are going out the door in the day they're coming in.

Same thing with meeting our tight SLAs when we're getting thousands of beds ordered in POs for our fulfillment partners. We are in the high 90s on our ability to deliver that. And that means consumers are getting beds in a very reasonable amount of time, and we have seen a direct correlation of that to return rates.

So, yes, that and a number of just other issues in managing customer expectations, we are continuing to see things trend very positively..

There are no further questions. We have another one from Bobby Griffin with Raymond James Financial..

Hey, Joe, it’s Bobby. Thanks for taking my question and at the end congrats on a good start to the year.

First, I just want to, for modeling purposes, is the $3 million shift in advertising all into 2Q? Or are you going to spread that out throughout the year? How should we reflect that in our models?.

Yes, it's -- I wouldn't say it's a formulaic like that. We have the spend allocated. It's in the plan. For a variety of reasons, it didn't happen this quarter, and the intent is that will get spent. Some of that is production. Some of that is direct spend, there's a number of ways that will manifest.

Really the message is that some of the good guy in Q1 is just a timing function on deferred spend. I would expect much of that will happen in Q2. But again, it's not just a cash purse that we're looking to empty..

Okay.

And then I guess secondly on marketing as you continue to grow out your wholesale segment here, are you starting to partner with retailers on the kind of the cooperative side of the advertising piece to co-advertise to drive traffic into their stores and to benefit Purple?.

There's -- I mean even from the beginning, there's been a variety of ways and depending on the partner, they have different models we followed, but absolutely. It's a win-win partnership, and we are finding ways to help each other out.

There's some really, really interesting things coming with one of our -- well with our largest partner we're excited about. But yes, it's -- this is -- we are finding good demand for the brand in our partners.

It's helping to drive foot traffic into their stores, and they -- and we're performing so they're seeing that, and we're absolutely working together on finding new ways to both drive our brand and our sales as well as just general foot track -- traffic into their 4 walls..

Okay, and is the goal for 2019 still to have the wholesale business in -- up around 30% of total sales?.

Yes we -- the plan for this year's a little higher than that, and that's really just this year. Long term, our strategy is around that 30% or 1/3 range, and we believe that's where we'll ultimately end up. But this year, we do expect it to be in the higher 30s, just the way we've built the plan out..

I will now turn the floor over to Joe for closing comments..

Thank you so much. As I said on the last calls, this is the foundation building year. And we're pleased to see that the underlying improvements are working, and that the benefits are starting to financially flow through. While we're off to a great start, still much work to do, including a number of planned investments.

With that said, I genuinely want to thank the Purple team for their hard work and continued positive results. Thank you again..

This concludes today's conference. Thank you for your participation..