Good morning, ladies and gentlemen. Welcome to Purple Innovation First Quarter 2021 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Mr. Brendon Frey of ICR. Please go ahead..

Thank you for joining Purple Innovation's first quarter 2021 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's innovation 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 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 2021 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 EBITDA, adjusted EBITDA, 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 Joe Megibow..

Thank you and good morning everyone. With me on the call today is John Legg, our Chief Operating Officer; and Craig Phillips, our Chief Financial Officer. Following our prepared remarks, we'll be happy to take your questions. As you saw from our earnings release issued earlier this morning, 2021 is off to a very good start.

First quarter revenue and adjusted EBITDA were up significantly on a year-over-year basis and both meaningfully exceeded our expectations. Given our recent performance, we are pleased to be raising full year guidance which Craig will walk through momentarily.

The year began with strong demand in our digital channel and as the quarter progressed, we experienced a sharp acceleration in our wholesale business.

The product and marketing strategies we are executing will showcase the premium nature of the Purple brand and our differentiated comfort technologies, along with our recent capacity expansion combined with improving traffic at brick-and-motor retail and the impact on consumer spending from government stimulus all contributed to our outperformance.

A few of the financial highlights from Q1 include net revenue increasing 52% to $186 million, gross margins improving 340 basis points, operating income increasing 125% to $16.9 million and adjusted EBITDA more than doubling to $22.8 million. Looking at our performance in more detail, I’ll begin with our DTC business.

DTC revenue increased 54.8% to $125 million. We take the post-holiday selling season off with a strong first week of January and carry that momentum into February before accelerating during an even stronger President’s Day. Momentum remained high through the rest of the quarter and we saw a peak when the March stimulus payments were received.

Our average order value with mattress increased 6% year-over-year driven by a combination of product mix and pricing increases. Moving onto our Purple brand showrooms. They continue to grow in size and importance to the DTC business. We entered Q1 with 9 showrooms, compared with only 4 in the year ago period.

We signed several new leases during the quarter so we were able to [Indiscernible] April and we remain on track to add between 20 and 25 this year, all locations are performing very well with our older showrooms now exceeding pre pandemic sales volumes and as to our newest locations they have scaled faster than any of our original locations.

We recently introduced a new store design that looks amazing with elevated presentation and an opportunity to tell the full brand and technology story across our complete assortment.

Looking at our product performance, our innovative mattresses continue to lead our business and within mattress demand continues to be strong as per our hybrid premier product line underscoring the progress we have made advancing the consumer recognition of the premium benefits of the Purple products.

As to our non-mattress products, our disruptive pillows had a banner [ph] year and were up nearly double in Q1 over the same period last year, helped in part by the success we have experienced launching Harmony with our wholesale partners.

Seat cushions nearly doubled from the prior year as we capitalized on the momentum that started early in the pandemic, and have continued to learn and improve our product, merchandising and marketing.

We launched a new adjustable base that we're really excited about and is already seeing triple the attach rate that our previous model received reflecting the right mix of style, functionality, ease of shipment in price point. Our other bedding products also experienced substantial growth similar to pillows and seat cushions in the first quarter.

We are very pleased with our progress in driving non-mattress products, lead with pillows and seat cushions as standalone products and continue to sell the majority to new to file Purple customers who have not yet purchased a mattress. We remain bullish on the CRM opportunities this is creating.

And as to engaging new customers, on April 1, we launched the Purple Squishy or miniature sample mattress and pillow as an actual purchasable product, each one shipped in its own adorable matchbox container. And in unit volume we are selling at similar levels as pillows or seat cushions.

Not surprising to our brand, we have seen fan videos with more than 10 million views in total, featuring the new Squishy, which brings us to marketing. Our brand evolution continues to make progress as we continue to focus on the differentiation of our product with clear benefits at the center of the campaigns.

We have also seen significant performance from both testimonial formats and to focus on Made in USA, which is a genuine source of pride for us.

Although we are early in our capabilities, we are seeing meaningful improvement in CRM and repeat customers as we continue to increase the size of our database and find effective ways to directly engage, led by both our maturing email capabilities and success with direct mailers.

This has resulted in an increase of repeat orders of approximately 75% versus the same period last year. From a promotional activity perspective, we leaned heavily into Presidents Day, a typically large mattress holiday and also played on the aspect of sleep related to daylight savings, both of which were successful campaigns.

Finally, for product and marketing, I'm thrilled to report on our recent announcement of our partnership with Dr. Michael Breus, as our new Chief Sleep Advisor and first advisory board member. Dr.

Breus will be overseeing academic research regarding the efficacy of our products, as well as assisting in research on new product development we have underway. As Dr. Breus stated, our hyperelastic polymer is like nothing he has seen in all his years as a sleep researcher and clinician.

We look forward to his help with formally demonstrating and documenting what we and our customers have known for years. Switching now to wholesale, our wholesale revenue increased 48% to $62 million, our best performance to date, and continue to evidence of our ability to compete side by side with traditional players.

As I mentioned earlier, the pace of wholesale sales picked up as we move through the quarter with sell through strongest in March. Our performance in existing doors, same store sales has returned to pre-pandemic levels consistent with Q1 last year, with most growth and coming from new doors added.

Also encouraging is that newer accounts such as love and furniture have been meeting expectations and fleet country and Canada is starting to reopen with only 40% of locations closed as of this month. In addition to our strong brand and product momentum, our wholesale performance also benefited from some external factors.

Specifically, store traffic has continued to improve as more of the U.S. gets vaccinated shifting a portion of the volume online game during the pandemic back to physical retail.

More stores are open compared with recent quarters, especially in Canada, and similar to DTC we have seen spikes in wholesale sell through correlated with government stimulus checks. And As of mid-March, we are starting to see easier comparisons due to store closures last year.

The strong momentum and wholesale has carried over into the second quarter so far. In Q2, we are seeing higher sell through at existing doors and anticipate that trend going forward as we lean into merchandising and advertising strategies, and have therefore adjusted the number of new doors we plan to add in 2021.

We previously expected to add over 1500 doors in 2021. However, by refocusing our resources on to maximizing existing door productivity first, we now expect to open between 800 to 900 total doors in 2021, which both achieves our stated net revenue goals and creates even more opportunity for the future. Moving on to production.

As I stated last quarter, we anticipate 2021 being our first year where we deliberately built access manufacturing capacity, and we are well underway in this regard. Purple South in McDonough Georgia is in production making Purple Grid, assembling mattresses as well as making both seat cushions and pillows.

Max 8, the first machine at Purple South has been in full production mode since February. In May, we brought Max 9 online and Max 10 and Max 11 are on schedule and will follow later this year.

These four machines are expected to increase our mattress output by over 65% by the end of 2021, which will further expand as we bring out Max 12 and 13 next year. And with our current capacity, we are already producing record levels of mattresses in April.

We are also completing our work on our entirely new next generation Max machine, which is already able to make Purple Grid in limited capacity and which we anticipate coming online in Purple South later this year as well.

We are very pleased with the start to our mattress pillow and seat cushion manufacturing assembly and fulfillment activities in Georgia.

In order to provide us with greater flexibility around our future plans for this location, which could include additional production for a fast growing pillow and seat cushion business potential space for additional mattress Max machines and regional expansion of our customer care operations, we recently took the opportunity to amend our lease and increase the size of the facility by an additional approximately 300,000 square feet.

This expansion will allow us to take advantage of economies of scale as we increase our presence on the East Coast, which along with our facilities in Utah provide us with a great foundation to meet the growing demand for our brand and products, drive efficiencies in our cost structure and better serve our consumers and wholesale customers.

We also continue to invest in quality and operational improvements in all of our Max machines and assembly lines and have recently introduced significant advancements in semi-autonomous raw materials feeds, mattress assembly and fulfillment. These efforts continue to lower labor costs per unit and increase her overall capacity.

I'll now turn it over to Craig, who will review the financials and our outlook in more detail..

Thanks, Joe. As Joe outlined, 2021 is off to a strong start from both a revenue and adjusted profitability standpoint. For the three months ended March 31 2021, net revenue was $186.4 million up to 52.3% compared to $122.4 million in the prior year period.

The revenue increase was driven by strong demand for our entire product portfolio across all channels. For the quarter, DTC channel net revenue increased 54.8% year-over-year, and wholesale channel net revenue grew 47.7%.

Gross profit dollars were $87.5 million during the first quarter of 2021 compared to $53.2 million during the same period in 2020 with gross margin at 46.9% versus 43.5% in the first quarter of 2020.

This gross margin increase of 340 basis points year-over-year can be attributed primarily to channel mix shift towards DTC and fixed costs leverage on higher revenue and production volume. DTC net revenue comprised approximately 67% of net revenue for the quarter, compared with approximately 66% in the same quarter last year.

Operating expenses were 37.9% of net revenue in the first quarter of 2021 versus 37.3% in the prior year period. The 60 basis point increase was driven primarily by additional administrative costs to support continued accelerated growth, partially offset by efficiencies and marketing and selling costs.

Marketing and Sales expense as a percentage of net revenue decreased to 29.2% compared with 30% last year, due to leverage on higher net revenue, and more efficient marketing spend partially offset by additional marketing spend to increase brand awareness and the addition of company owned showrooms.

For the first quarter, we reported operating income of $16.9 million, compared to $7.5 million in the first quarter of 2020, an increase of 125.3%. Net income for the quarter was $20.9 million compared to net income of $28 million in the year ago period.

As previously disclosed, we recently determined our outstanding warrants should be accounted for as liabilities, and recorded at fair value on the date of the transaction and subsequently re measured the fair value at each reporting date.

For the three months ended March 31, 2021 and 2020, we recognize non-cash gains of $9.1 million and $21.6 million respectively, associated with the change in fair value of warrant liabilities.

Excluding the impact of a company's tax receivable agreement, and the change in fair value of the warrant liability items, adjusted net income was $12 million or $0.17 per diluted share based on an adjusted weighted average diluted share count of $68.6 million compared to adjusted net income of $4.6 million or $0.08 per diluted share based on an adjusted weighted average diluted share count of $58.3 million.

Adjusted net income has been adjusted to reflect an estimated effective income tax rate of 26.4% for the current year period, and 25.4% for the comparable prior year period. EBITDA for the quarter was $27.8 million compared to $30.8 million in the first quarter of 2020.

Adjusted EBITDA, which excludes certain non-cash and other items that we do not consider in the evaluation of our on-going performance, as detailed in today's earnings release was $22.8 million compared to $10.6 million in the same quarter last year, an increase of 115%.

Moving to our balance sheet, as of March 31 2021 the company had cash and cash equivalents of $103.8 million, compared to $123 million at December 31 2020.

The decrease was driven primarily by capital expenditures of $12.3 million primarily related to manufacturing capacity expansion, and showroom expansion, and net cash used in operating activities of $9.4 million. Net inventories totaled $63.3 million at March 31 2021, compared with $65.7 million at December 31 2020.

Turning to our guidance, based on first quarter results, we are raising our 2021 outlook. We now expect full year 2021 net revenue to be between $860 million and $900 million, up from its previous range of $840 million to $880 million. The new range represents an increase of 33% to 39% over 2020 results.

Considering our first quarter results, adjusted EBITDA is now expected to be between $95 million and $105 million, up from his previous range of $90 million to $100 million.

This includes consideration for recent trends indicating an even greater channel mix shift toward wholesale in the second quarter, which could put additional pressure on current margin. In the second quarter of 2021, we expect net revenue to be between $200 million to $210 million and adjusted EBITDA between $21 million and $25 million.

We continue to expect capital expenditures for 2021 to be in the range of $45 million to $50 million, consisting primarily of approximately $20 million for the continued build out of the Georgia manufacturing facility, and 19 million related to the acceleration of showroom expansion, as well as expansion of wholesale displays and additional equipment for production and innovation facilities.

I'll now turn it back to Joe for his closing comments..

Thanks, Craig. As you can hear, we remain very optimistic about 2021.

I previously stated that this would be an investment year, and I'm very pleased with the significant progress we've made and anticipate continued investment in building out the team, investment in manufacturing and supply chain capacity, investment in the e-commerce platform, investment in contact center capabilities, investment in showroom expansion, and investment in innovation with not only a focus on product innovation, but renewed focus on manufacturing and materials innovations as well.

It's worth reminding that the overwhelming majority of our revenue comes from manufacturing equipment of our own design using materials of our own invention. We are very excited about what all of that will bring over the next few years.

As to the balance of 2021 as Craig stated, we have raised our full year guidance reflecting the over performance in Q1. We have learned to adapt to a seemingly endless run of unpredictable events and have continual confidence in our team's ability to successfully react and where possible arbitrage opportunity.

With that in mind, we remain confident in the balance of the year as originally planned. The one change we see possible would be mix shift from DTC to wholesale if we find additional wholesale opportunities that are growing capacity can support and which could create gross margin pressure.

We would still view this positively toward our long term strategy of taking share, which has significant long term benefits, and long term is what gets us most excited with our many anticipated innovative premium product expansions, geographic and channel expansions and strengthening brand, all of which remain at the core of our growth strategy.

In support of this, we anticipate hosting a virtual investor day by the end of June to discuss our multiyear strategy and operating goals. At this time, we will open the call up to questions..

[Operator Instructions]. Our first question is from Atul Maheswari with UBS. Please proceed with your question.

Good morning. Thanks a lot for taking my question. You did not call out supply chain and form issues as impacting you in the first quarter.

So A, was that an issue at all? And do you leave some sales on the table because of those issues? And if it wasn't an issue, how were you able to sidestep some of those pressure points that others in the industry called out?.

Hi, thanks. Thanks for the question. Certainly, no one in the industry has been completely immune from some of the supply chain challenges. One advantage we have is our dependence on foam is less than I suspect some other manufacturers or sellers are as the bestselling.

And then majority of our units are coil based cores with our Purple Grid on top, which is no foam at all. So some of it is just the design of our mattress or dependency on foam has been less. And that has helped.

We say we have been working with multiple suppliers and have been really leaning hard into a dual a dual or multi source strategy to augment our traditional suppliers. It's been touch and go. I think we've been right at the razor's edge. But so far, we've been able to stay just slightly out of our needs..

Got it? That's helpful.

And then as my follow up on your expectation now of adding only 800 to 900 wholesale doors versus 1500 plus earlier, does that add more risk to your guidance, given your reliance on smaller number of doors to fulfill your revenue expectations? So what is the thought process behind it? I'm assuming the contribution margin on these stores is going to be higher, but I'd love to get your thoughts on it? Thank you..

Yes, it's. So we said this last quarter as well. There's nothing magical in our minds on a specific number of score of stores. Really, it's about hitting the revenue goals that we anticipate around wholesale and in meeting that consumer demand. The most efficient opportunity we have is to sell everything we can in the doors we have.

And we've been recently emboldened by our ability to increase same store sales and see growth in the doors we have, which also then increases the value of every door and every future door that we would go into.

So really, it's just a matter of with the resources we have, maximizing what we can get out of our existing stores, first, and then augmenting that with growth and newer stores, it's recognizing it's more expensive to open additional doors, and there's a ramp, and you know that there's more of a delay in getting the full value and opening new doors, which is just the nature of going into anything new.

So it's going to be a balanced mix of both. It's just we had started the year with sort of a, preconceived notion of what every individual door could contribute. And then you build out from there, we're discovering we actually do have more opportunity in the doors we're in. And that's very exciting..

Got it? And if I can squeeze in one last one, on the gross margin. I know you call out DTC mix as a tailwind. But really direct-to-consumer was largely in line with the first quarter of last year, and then you probably also had some costs associated with the new Atlanta facility.

So maybe can you provide some more details on what drove the gross margin expansion in the first quarter? And how much of that is sustainable versus one time? Thank you..

Sure, Craig, you want to take that?.

Yes, there were there were a couple of factors. We actually when we compare it to the prior year, some of our freight costs were actually improved as a percentage of revenue. And the fact that we were, we exceeded our expectations were what we planned for on revenue, because of the additional volume, we were able to leverage a lot of our fixed costs.

So that's primarily what drove up our margins..

And our next question is from Keith Hughes with Truist. Please proceed with your question..

Thank you.

Did you give us any sort of feel, in terms of growth differences between price points in the quarter was shifted more to the higher and lower end of your offering?.

Sure, you don’t have mix shift that we've had [Indiscernible] background..

Yes..

Yes, so we are increasing. And this has been a multi quarter trend, really a multiyear trend to go up market. So more and more of our overall share is our hybrids. And we're continuing to grow especially with our hybrid premieres. So, yes, we're, becoming both less of a foam core mattress company on the mattress side, and we continue to lean upward..

And back to the door of things you talked about earlier, a lower number this year, is that due to some customers, you thought you wouldn't get you didn't or slower offerings that are fewer doors, that existing customers that you're our new customers are opening up?.

Yes, it again, customer here, I assume you mean, is wholesale partners versus end customers, as we're not seeing any, any waning of demand whatsoever. So there's nothing versus slowing here, it's really just a shift in focus. We have a finite number of resources, and it's a matter of where we invest our energies.

So there, there is still an enormous amount of demand for our product out there, there's still an enormous amount of demand from the retailers that are out there. It's just spinning up a large retail arrangement takes many, many months, and a lot of work and typically involves piloting in a few stores, proving it out, getting the training done.

And then, you know, then ramping up as we prove our, we're very big believers and sort of earning our key proving our ability to execute on the floor, which we always do. So we're not slowing that down at all. It's just again, we're recognizing we were leaving money on the table that we can go after now in the doors we were in.

And we are investing there first, as it's the most efficient way for us to expand our wholesale revenue. And again, as I said in the prior questions, it just increases the overall value of every individual door, which is a very great place to be..

Okay, thank you..

And our next question is from Matt Koranda with Roth Capital Partners. Please proceed with your question..

Hey, guys, thanks. Just on the DTC side in the quarter. And going forward, I just wanted to see if you could maybe discuss a little bit more about your own showroom contribution to revenue in the DTC channel this quarter. And wanted to get a sense for how you see that playing out as you add doors over the rest of the year.

Remind us again, I think I caught in the commentary still about 25 doors expected to be added to the cadence of that will be helpful as well for the rest of the year..

Yes, so I mean, we're at about 11 doors right now. And as we said in the prepared remarks, then the new design and the newer doors are outpacing the, the original doors, both in terms of their trend, as well as the their sort of ramp speed, how quickly they become fully productive.

So, we're increasingly emboldened with, with the success of our showrooms and our ability to execute on growth there.

Given the number of doors, we are anticipating opening balance for the year, it's obviously going to be a pace that's picking up I mean, we're going to be likely call it within a month or two, we'll be opening roughly a door a week, just to hit those numbers by the end of the year.

And our pipeline on leases signed or leases nearly ready to go and locations we're looking at, are fully on track with meeting those goals. So we feel very, very good about that.

Now, all in, it's still a relatively small piece, a single digit percentages of overall DTC, which just given the store accounts, it's, it's going to be a little while, a few quarters before it starts becoming any meaningful amount. But it is contributing and growing. And I also we don't, it tends to get forgotten in this.

But in addition to our show room doors, and DTC, we've also been continuing to invest substantially in our contact center. We are still believers of called human assisted selling, which you obviously get in a showroom setting where you can directly engage with our employees.

But our ability to do that virtually through phone and chat continues to be one of the highest growth engines in this business. And, is really going to be the second channel behind DTC way ahead of showrooms in our ability to grow and again it's continuing to be our fastest growing channel..

Great, that's helpful, Joe. And then just on the gross margins, it seems like embedded in your outlook, we may expect gross margins have sort of peaked in Q1. But it looks like seasonally if we look at the historical patterns, Q1 is relatively lower than the rest of the quarters.

It sounds like you're alluding to just the mix shift is the main explanatory variable there in terms of why we're probably not going to see increased gross margins for the remainder of the year. But maybe just wanted to see if you could discuss that, that interplay a little bit, Craig, that'd be helpful..

Yes, I would say that it's you're right. That is what we were trying to convey is that, as we continue to grow the wholesale side of the business, there will be pressure on margin, and we have seen the trend of okay, sale, continuing to improve in first quarter typically is one of the lowest margin quarters for the year. So what you're saying is true.

And that is the turn that we're seeing..

And then is that….sorry..

I just, I want to be clear that we are our positioning that we have a lot of opportunity for gross margin expansion remains. I mentioned in the prepared remarks our significant investment in operational improvements that were both driving more, more volume out of the equipment, we have reducing labor costs per unit, reducing waste.

I mean, we have significant investments we continue to make and our operational efficiencies. I would say, we're not even mid innings there. We're still in early innings there. So as you said, certainly mix shift is a is a very big contributor to overall margin as wholesale margins are dramatically lower than, than our own channels.

There's also the overhead of the investment. I mean, we've taken on 300,000 square feet more in outside Atlanta, which we're continuing to build out. So it's an investment year, but I just I want to be clear that our opportunity to expand margins is it's still very real. And under all of this investment, we're seeing those benefits..

And our next question is from Bobby Griffin with Raymond James. Please proceed with your question..

Good morning, buddy, thank you for taking my questions. Craig, Joe, I just wanted to maybe touch briefly on raw materials and pricing, and what you guys are kind of doing on the pricing side and what's embedded for pricing through the rest of this year 2021..

Yes, hey Bobby. So raw materials, as with everyone in the industry, we are seeing some inflation and pricing, which we're certainly hoping is peaking out here. And we're finding ways also to, through our sourcing strategy, be as efficient as we can and our cost of goods. We did just raise prices a couple of weeks ago.

And as we've gone through this in prior quarters, recall that because of our wholesale contracts, it can take 30 to 60 days before we see the full benefit of those price changes flow through. But we did raise prices.

Again, we believe this is the fourth time we've done this now, successfully so far early data shows that it's yielding the results we anticipated. So we'll continue to look at it if I mean, we clearly have some opportunity to raise prices.

We've talked about, we're going to continue to offer models that allow us to have higher price points intrinsically as the year progresses. But I'd say it's fairly straightforward.

Craig, anything you'd like to add?.

Yes, I was going to say, there because of the product, because the raw materials, we're using a lot of products that we buy from vendors. We can we're trying to find other vendors where we can potentially manage those costs a little better. Just expand those supplier base as well..

Okay, I appreciate. And Joe, I also want to circle back on just kind of the better productivity you're seeing inside wholesale on a per dollar basis. I mean, I think I think the slowing down the door growth is actually a meaningful positive when you kind of dive into what it's implying.

You're getting now on your same store doors, so can you maybe touch on what you're hearing from retailers of why you're getting that acceleration, better marketing any of the things you're doing to kind of push there? Is it a fact that you guys just had better supply, because you weren't relying on phone.

Anything there to help us understand what's driving this good new productivity or better productivity inside your same-stores? Because that's a very positive long term trend here?.

Yes. No. You're right. And thank you for picking that out. That is the point we're trying to make. So, we're -- this is a newer trend for us that we're leaning into hard right now. So I mean, we're figuring it out as we go. I'd say it's a mix of a number of things. So, first of all, there was just an opportunity to expand.

Coming out of COVID, we've had partners who I don't think can fully realize the potential of our product. Raymour & Flanigan had launched with us in February of last year, right before the pandemic hit. And now that everything's coming back. They've got renewed enthusiasm. We only had two beds on the floor.

There's opportunity for us to get three or four. And those kinds of things are happening. Similar with our early work with Rooms to Go where we started with only a couple of beds on the floor. We're now getting to the -- we're earning the rights to get more square footage on the floor, and that translates into sales.

So some of it is rounding out our fleet and making sure that we're getting the opportunity to sell the full assortment. But we also -- many of our stores are on displays from multiple years ago.

So, reinvesting in our presentation, I'd say, what we've learned through our own showroom strategy and how to present our product better and the sales techniques. And as we have invested in building out our Field Sales Team, which I've mentioned in prior quarters has been very, very light relative to industry averages.

We are also learning how to be a better partner to our retailers and improve our selling on the floor and improve our presentation on the floor. So you just -- you put it all together.

And it means, and not surprisingly as a young company, we by no means had achieved our maximum potential in the doors we're in and we're continuing to find ways to do that. Sorry, I forgot one other thing is accessories. And we also rolled out our Harmony Pillow in most of our wholesale partner doors now and leaning into accessories.

And again, part of part of our strategies are accessories aren't just units to throw onto a mattress, they really stand on their own. And having unique bespoke product that actually stands on its own, it's kind of a new game for many of our wholesale partners who haven't been as good with accessories.

And it's also opened up new possibilities to get brand penetration and engage with customers in these retail settings..

Thank you. That's helpful. And then I guess just one quick modeling question. The $2 million of Georgia facility production costs that was kind of called out just the EBITDA walk.

Did that mostly hit gross margin or cost of goods sold? And is that a decent run rate for us to use for next couple quarters?.

That is mostly in gross margin, I believe. And going forward, I wouldn't continue to use to know, because we are now up and running, facility open in the first quarter, so that will likely continue to decline..

Okay. I appreciate it. Thank you, Craig. Best of luck, guys. Thank you so much..

Thanks..

Thanks, Bobby..

And our next question is from Susan Anderson with B. Riley FBR. Please proceed with your question..

Hi. Good morning. Nice job on the quarter. I was wondering if you could talk about maybe the marketing spend. I think you mentioned that you're more efficient with it in the first quarter.

Maybe if you can give some color around that was that just shifting to more digital? And then also your expectations for the rest of the year? I think first quarter you all said, its higher year-over-year..

Yes. We're -- hi, Susan. We -- so marketing, yes, we got some leverage in Q1. And last year as we've reported, many times we have some incredible opportunities to arbitrage marketing. I'd say, marketing expenses are getting more -- marketing platforms are getting more expensive. There's more money coming in.

It's getting more competitive and we're starting to see things climb back up to levels. Its pre pandemic. And in some cases even higher as discretionary spend continues to open up. So I'd say, we had opportunity in Q1 both to continue to arbitrage without the investment and competition we're seeing right now.

And let's not forget there was the shot in the economy, stimulus money that came in last quarter as well. We lean hard into that, as we always do. And that was very productive for us. But that does mean, when there's extra money out there to spend, we work a little less hard overall to capture those customers. So, team continues to mature.

We continue to find ways to expand our addressable market and gain leverage. I've mentioned many times our increasing investment into lifetime value in CRM, which lowers our cost of acquisition at the transaction level.

But it is getting more expensive out there and more competitive and that is going to create a headwind that we're going to have to deal with moving forward..

Got it. Okay. That's helpful.

And then I was wondering if you could talk about the performance of the non mattress products versus mattresses? And then also any new products you have rolling out for the rest of the year?.

Yes. So, non-mattress continues to outpace mattress, which is terrific. And I'll just keep saying over and over, because it's true. It's not just on the strength of our brand, it's not just because we've got a Purple tag sewn on. I mean, these are amazing products that stand on their own.

And we could have a healthy business just selling these non mattress products. So they're great products that we continue to learn how to market, merchandise and sell. And even more so than our mattress line has some real low hanging fruit opportunity for line extensions and new product expansions, and new channels for that matter.

The channel opportunity in these non mattress are far greater than where mattresses are sold, which we're already starting to lean into our -- I mean, example, our seat cushions, we continue to expand in places where consumers would buy them through a distribution partner. We are now in all of lots of truck stops around the country.

And that's quickly become one of our top retail locations for seat cushions. It's just amazing to see these kinds of opportunities bottle up.

As a new product, we've hinted many times, we have some amazing new product in the labs that we are developing and working on products that are -- we're emboldened by the success we're making as they're very real with some significant advancements in what we have to offer. As with all things, innovation, they'll be ready when they're ready.

We expect some of this, as we've been saying for a while to be launched by the end of the year and a lot more over the years to come..

Great. That sounds great. Thanks so much. Good luck, the rest of the year..

Thank you..

And our next question is from Brian Nagel with Oppenheimer. Please proceed with your question..

Hi. Good morning. First off….

Good morning, Brian..

Nice start of the year. Great start. So the question -- first question, I had. Just with regard to -- Craig and Joe, you both mentioned stimulus. I guess, the benefits of stimulus in you're prepared comments.

So of course, if I remember correctly, you're back when the pandemic stimulus started a year ago, I thought you made the point that you didn't really see the benefit, or direct benefit in your business? So I guess one question I have is, if I understand now you are -- you did see a benefit? So that's one.

Then how should we think about -- or maybe what do you see with regard to sustainability of that? So because now you're halfway through the second quarter? Obviously, the guidance you laid out implies a very much a continuation of the strong trends.

I mean, how much of that is stimulus driven? Or if at all, how long do you think this could last?.

Yes. No. So you're remembering correctly, some of the conversation we had mid year last year. And I'd say, really that was a question of correlation versus causation. We saw a very high correlation. We asked our customers in direct surveys, did stimulus impact your decision to buy with us? And we got a resounding, no.

But the correlation nevertheless was very, very tight. And what I'd say is, it's been harder for us to continue to tease out hardcore causation. But nevertheless, we are seeing very, very tight correlation that anytime there is an increase -- a sudden increase in discretionary spend, we see equal and now predictable increases and what flows through.

So at some level, you stop asking the question and you just recognize it is correlated and we do see flow through. So, at some level you stop asking the question and you just recognize, it is correlated and we do see flow through. Now, as to the year when we built our annual operating plan, we didn't have stimulus expectations in there.

And that's part of why we're saying that we got some benefit. I mean, we I think we executed very well in Q1. And I think our ability to lean into these moments in time and capture the customer that appears, we continue to be good at. But we're effectively saying, we got some over performance in Q1 for a number of reasons, stimulus being one of them.

We don't -- it's difficult for us to predict any of that moving forward. So, we're basically saying, let's put that over performance in the bank. And we continue to remain very bullish on what was otherwise an aggressive plan for the balance of the year..

Got it. That's really helpful. And then the second question, or the follow up question I had, just with regards to new products. I know, we talked about the past.

But any update there with the new, particularly the higher end type products you'd plan to launch?.

Yes. Again, we don't spend a lot of time talking about unreleased product, as you know, I've been consistent on that. We had said, we were going to launch some significant addition to our line by the end of the year. We still believe that is in the realm of possibility. As with any significant endeavor on the innovation side, you learn as you go.

These are these are multi-year initiatives that are about invention and discovery. And we're learning a lot. And as I said, we're very emboldened with how far we've come and what we've learned.

At this point, again, I do anticipate we'll be able to launch more premium product that represents the outcome of significant investment of ours by the end of the year. Beyond that, we have not invested at this time..

Great, I appreciate it. Rest again. Thank you..

Sure. Thank you..

And our next question is from Brad Thomas with KeyBanc Capital Markets. Please proceed with your question..

Hi, good morning. Nice start to the year here. I had a couple follow-ups on gross margin, if I could. The results really impressive here. Understanding that channel has been a really important factor and how gross margin has played out in recent quarters.

I guess putting that aside, can you talk about some of the underlying puts and takes and how we should think about those going forward?.

Yes.

Are you referring the puts and takes as a result of channel?.

I'm saying if we ignore channel and we just think about manufacturing costs, price, things like that.

How to think about puts and takes on gross margin?.

Yes. So, some of the puts and takes, we've already talked about the raw materials when it comes to foam and coil and the price differences we've been seeing recently. That's one piece. Another is freight out. With as much traffic as there is in freight, that can vary, sometimes widely.

Others are, as we continue to build out Atlanta and increase the production there, we're going to start getting more leverage on the fixed costs in that facility. Grantsville, as well as we continue to improve manufacturing process and gain efficiencies out of that, those are certainly tailwinds..

Okay. Alright. That's helpful, Craig. And just thinking about, again, I know that in 2Q you're up against much tougher gross margin comparison with what's happened to DTC. But on a sequential basis, it seems like maybe the quarter could be sort of similar to what you just saw on 1Q from a mix standpoint.

Your revenue guidance obviously points to even more revenues than what you just did in 1Q.

So how should we think about how that affects gross margin sequentially? I mean, does it need to step down a lot from where it just was? Or can it be in the range of where you just posted from 1Q?.

Again, I know, you said let's put channel mix aside. I mean, our -- what we've proven over the last couple years is our ability to expand wholesale quickly as much more fluid than our ability to just suddenly grow DTC. DTC tends to be a curve. You invest you get the flywheel going, you grow.

What we had been doing pre-pandemic and obviously, in the pandemic, we had a sudden externality that drove massive increase in DTC, seemingly overnight. But I mean, that otherwise, never happens.

How we had historically been doing it and you followed us a while, so you remember is we we'd add some capacity, we immediately put all that incremental capacity to work in wholesale as DTC would ramp up and as DTC would catch up by then we're adding more capacity.

And we would continue to have sort of this back and forth to step function of taking advantage capacity by significant wholesale expansion as the DTC growth happens more on a traditional curve. And I think you're going to -- I think we're going to be getting more back to that.

We're -- John Legg and team have been just relentlessly building out capacity. We're tickled how and we haven't had many questions on this. But I mean, we're, we're tickled how on track we are. And on top of not only the grid and iron expansion of more Max Machines and more injection molding machines, the efficiency gains we're getting are remarkable.

I mean, we are putting so much into semi-automation and efficiencies and even gets into raw material costs, our ability to feed raw materials in the machines with larger bulk buys, and less human involvement and more consistency, and less waste is driving quality and yield improvements.

So, we're getting all those benefits, which means, we're getting the capacity available, which means, we have opportunity to lean harder into wholesale, which we can move very quickly. So that's the wildcard.

If we really can get some significant movement in wholesale, which we are seeing more and more opportunity for those who are going to have more immediate impact on gross margins in the short term. And it's just balancing short term and long term here, as we make sure we keep the overall ratio consistent over time.

But in any given quarter, we could have significant swings..

Got you. That's really helpful context. Joe. Thank you. If I could add one more follow up just around that wholesale opportunity that seems so exciting, and seems like you're seeing some really encouraging data points from.

When you look across your partner base and look at what the offering is, the number of beds they have per store, how they sell the accessories or adjustable bases that they may be utilizing.

How far along are you and identifying sort of best practices? And can you talk about the opportunity to speak more with those retail partners until and continue to point them towards how to maximize their Purple volume?.

Yes. We're still -- you've been following us a while. You remember, we were -- I don't know how -- I think the business term is we were an awful partner to our early retailers, when we began this, we just -- we didn't know what we were doing. We didn't know what we didn't know.

And there's been a lot of learning and growth on all sides, as we've learned to be a good supplier to our retail partners, and learned how to do this better and better. We're competing side by side with institutional players who've been doing this for decades. And I assure you, they are noticing us now.

So, we're seeing more increased direct competition. Some of it has been fortifying the team. We've got some significant new hires that are coming on board as we bring in some top shelf leadership out of industry to help us navigate these contracts and the operations in the field.

And we're continuing to build out the team, which is still a very, very thin team right now with experienced talented people. So I think there's a lot of opportunity in front of us, by no means what I suggest that we're great at this. And that's a very positive thing.

I mean, that means there is still a lot of opportunity in front of us as we continue to learn and optimize..

And our next question is from Jeremy Hamblin with Craig-Hallum. Please proceed with your question..

Thanks. And I'll add my congratulations on the strong execution results. I want to come back to wholesale doors per second. I might have missed this. But I think you said, you ended last year at a little over 2200 wholesale doors. How many did you add in Q1? Roughly, how many do you think you might add in Q2? And then, kind of as a follow up to that.

The limiting factor on 800 to 900 wholesale doors added versus 1400, 1500 that you might have expected earlier this year? Is that capacity constraint or some other reason why you wouldn't add more doors now as the brand is growing?.

Sure. The numbers are noisy in large part, because of like what's happened at Sleep Country, Canada. We -- the end of last year nearly most, there's around I think 275, 280 doors that they've got.

Most of them had closed down by the end of the year as the latest waves of COVID hit across Canada and Ontario County, Ontario Province, excuse me, continues to be mostly closed down. So for much of Q1, I think about 60% of the doors were closed. I think at this point, they're down to about only 40% are closed as of now.

So, despite adding doors, the doors we have not been consistently performing. And many of them, especially with Sleep Country were shut down. I believe last quarter we added, call it less than 50. So, modest door count increase.

Although, again, some of the doors that were closed, were opening back up, and we'll continue to see more of those doors open back up. It has not been constrained by capacity or anything else. A lot of the retailers have been getting themselves refocused as business starts to come back.

And again, these -- opening these doors at this point, and we tend, we're leaning towards Sleep Country type deals where these are full fleet hundreds of doors type contracts. It's takes time. I mean, these are long negotiations with these partners to get it right. And then the training and rollout across potentially hundreds of doors.

So that's all in play. And this is exactly what we had guided to. It was one of the reasons we were a little more back loaded in the year is we had said we did not anticipate significant opening in Q1. We were going to start to see some opening ramp up in Q2, and then really by Q3 is where we see the bulk of the door openings occur.

And it's really just timed to our business cycles. And really nothing more than that..

So, embedded within that response, then does that mean that 2022 could look like that's also a year with fairly significant door growth, given that, clearly the consumer is demanding Purple products. And I know there's in terms of inventory turns, it takes some time to gain slots, especially for the first time.

But then to add slots, which sounds like what's happening now? Is this something where you could see 800 or 900 more doors added next year simply because the consumer is demanding it?.

Yes. It's -- it means that the very last point you make is the most important one. This is how do we meet consumer demand and meet this addressable market that is still predominantly a brick and mortar category and predominantly offline category.

We view ourselves first and foremost not as an internet player, DTC player, but as a manufacturer of disruptive premium differentiated mattresses, and we want to get those in the hands of as many consumers as we can.

So it really -- we don't believe that we're going to need to be deeply penetrated in wholesale, because we are showing ability to sell direct through a combination of our online capability, our own showrooms, and increasingly, our contact center. So -- and we've said, what we're looking for is more of that 70/30 split of owned retail and wholesale.

There is headroom there. So yes. I think the idea that there could be hundreds of doors more into next year is absolutely in the realm of possibility. But ultimately, I do think we're going to hit a point of equilibrium.

And I think, that does then start to decay as we get to maybe that 2500 or 3,000 door count or somewhere around there, where we're able to meet consumer demand, regardless of their purchase preference, but still manage a great owned relationship as well..

Okay. And then just as a follow up on the gross margins. So mix was 34% in Q1 last year with 33% wholesale this year. I think, Craig called out a couple of million dollars in startup investment costs that had drag on your gross margins. And yet you still delivered 47% gross margin.

It would seem like that's almost like your baseline on a go forward basis, understanding - but is there something that we're missing in terms of like, what's the maximum percent of revenues that you could see wholesale accounting for in any of the quarters? Like, you have headquarters where it was above 40%.

But for the most part, it sounds like you're calling out 70/30 split, maybe it's 65/35, some quarters.

Will the mix get much higher than where it is now?.

Well, I think we're going to leverage all the capacity we have and lean as hard as we can into whatever we can grow. I'd a flashback to the days before we ever knew the pandemic was going to happen.

Our original plan that we were guiding to call it nearly five quarters ago now into 2020, actually was build around some substantial wholesale expansion, where we were talking about wholesale getting back into the mid to high 40% of total net revenue.

As the capacity we were building out, especially with our new facility in Purple South and in Georgia, that was the fastest path to growth, the fastest path to consumer penetration, as again, DTC build up. It turned out, the opposite happened, wholesale fell down as everything closed down last year.

And we were presented with unexpected and unprecedented opportunity to substantially grow DTC. But I think we're getting back into the world we were in pre-pandemic, where there's a lot of addressable markets. There's a lot of consumer demand that we can go after efficiently and quickly through wholesale that we anticipate going after.

And that could mean cannot over the long haul, but on a quarter-by-quarter basis, it is possible that we could find ourselves in the 40s, again, on percentage of total net revenue, depending on the timing, and then how quickly the ramp goes with some of the wholesale expansion we're anticipating..

And our next question is from Seth Basham with Wedbush Securities. Please proceed with your question..

Thanks a lot, and Good morning. My question is around the performance within the mattress category at existing doors of your largest and oldest wholesale customers.

Could you give us some color on how you're performing there, if you're still gaining share?.

Yes. Good morning. We -- share harder for us to calculate as some of our largest and oldest customers are not public companies. And we don't always get perfect information. What I can say is we are still seeing growth, and recently, meaningful growth. And that's encouraging. Whether our growth is faster or slower than their growth.

It's harder for us to tease out. I think we're probably close to growing comparably. So, I'm not sure we're actually gaining share right now. But again, I do think we are helping to support the overall growth in the business. So yes, I think, it's healthy. And we continue to see opportunity to expand, and we intend to continue to expand..

Got it.

And if you add in accessories, including pillows to the product set, do you think that you're more meaningfully growing share within your largest and oldest customers?.

Yes. I -- so, some of our earliest customers were very focused on mattress not on accessories, and they view that as an opportunity for themselves as well. So our early success, especially with our Harmony Pillow, has been very positive. And yes, I think that gives us opportunity to increase share.

And I think our early performance has exceeded everyone's expectations. It's too early for us to project too far out with that yet, but we're very pleased with the early performance and we see tremendous opportunity there..

Got it. As it relates to your production capacity being up 65% at year end on a projected basis.

When you build out the additional 300,000 square feet, that you recently signed a lease for, where will your production capacity be up to by the end of 2022?.

Yes. We haven't fully built that out -- build up a plan for that yet. We had an opportunity to take contiguous space at the facility we were already at that -- and we -- as we had said last quarter; we were already searching for our next location or third location.

And as we started to do the math, we realized there were opportunities for economies of scale on the manufacturing side that we can take advantage of by co-locating that additional expansion where we already were in Georgia. And we had other needs as well are.

We are growing contact center, which again, is a significant percentage of our overall DTC business. We're out of space in our facilities in Utah, and we're looking for something on the East Coast anyway.

So, this created opportunities for a number of benefits, as we anticipate co-locating, a fairly sizable owned contact center at this facility as well. So we're still building out the plan.

And as to the mix of max machines versus injection molding machines versus fulfillment and distribution versus things like contact centers, we just got a gift of a significant amount of square footage that we can appropriately lean into. But right now, it's more opportunity than defined outcomes..

And our last question is from Curtis Nagle with Bank of America. Please proceed with your question..

Good morning. Thanks for taking my question. Yep. Maybe just we could talk -- could we talk a little bit more about productivity run rates that sort of thing in terms of your own stores, existing versus new. I think, Joe, in the past, you'd sort of framed annual revenue contribution, that something over one million a store.

So yes, could we dive a little bit more into kind of where things sit -- yes, for your stores?.

Yes. Our showrooms, yes, it's well north of that number. And we anticipate some significant expansion in the four-wall productivity. As I said, in the prepared remarks, we're very pleased with the performance.

The newer stores are outperforming the original stores and the original stores are back to pre pandemic levels, actually higher than pre pandemic levels. They're modest capital investment to build out, call it, mid six figures. And we anticipate a true ROIC and maybe, call it a year or a little longer.

So I mean, really efficient, really good economics. Pleased with the performance of those in well north of a million per stores, as you said, and we see a lot of growth potential there..

Got it. And just to clarify, I think you just said that return on invested capital is roughly a year? If that's the case, that is pretty good..

Yes. You're a little longer depending on the door. But yes, it's call it, give or take closer to the year mark than anything else..

Perfect. Awesome. Alright. Well, good luck in the rest of the year. And thanks very much..

Thank you..

And we have reached the end of the question and answer session. And I'll now turn the call over to Joseph Megibow for those remarks..

Great. Thank you so much. We are off to a terrific start this year. We are executing as planned and intend to continue to invest in our growth and capabilities throughout the balance of the year. Looking forward, we've remained very optimistic both near term and even more so as we look out over the next few years.

Our investments in new products and capabilities continue to go very well. And we look forward to sharing more of this strategy soon. I want to personally thank our nearly 1700 employees for their relentless commitment and unwavering belief in our mission and goals.

To all of our customers, employees and partners, stay healthy, be safe, and sleep well..

This concludes today's conference. And you may disconnect your line at this time. Thank you for your participation..