Thank you for standing by. This is the conference operator. Welcome to Purple Innovation’s Third Quarter 2018 Conference Call. As a reminder all participants are in a listen-only mode, and the conference is being recorded. After the presentation there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Brendon Frey of ICR. Please go ahead.

Thank you for joining Purple Innovation's third quarter 2018 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 that is included in our second quarter 2018 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, 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 to Joe Megibow.

Thank you and good afternoon everyone. I'm thrilled to be here today speaking with you. I look forward to meeting many of you in the months ahead. With me on the call today is Mark Watkins, our Chief Financial Officer. I'll start today with my thoughts on the company and our future based on my observations, during my first 45 days here as CEO then Mark will review the financials and discuss our updated outlook, after which we will be happy to take questions. When I was initially approached about the CEO position here I obviously did a fair amount of research to understand what the prospects looked like for Purple both within the mattress space as well as in several adjacent categories. What I discovered was that Purple has all the criteria I believe best positions the company to win with consumers in today's omnichannel world. First Purple is a direct to consumer company which for me personally is the most exciting kind of company, with B2C we know in a very real financial way if we are getting it right for our customers. More importantly, Purple has built the beginnings of a great grand platform, mattresses are expensive considered purchases in an increasingly crowded space. Our marketing has managed to cut through the clutter and achieve incredible viral media reach. We've earned the right to create a true lifestyle brand. Second Purple is a product company at its core. Its founders have decades of history introducing innovative patent protective products that offer innovations in making our lives more comfortable and healthier. Importantly Purple is vertically integrated with internal domestic manufacturing capabilities to provide an additional mode around the business. And given the fact that humans spend roughly one third of their life in bed and that there is…

Thank you Joe. First of I would like to say how great it's been to have Joe here at Purple. He is a strong leader with a clear vision to take Purple to the next level. As for our third quarter results for the three months ended September 30, 2018 net revenue was 70.8 million up 26.4% compared to 56.0 million in the prior year period. The revenue increase was primarily due to change in our direct-to-consumer business, combined with contributions from our expanding wholesale channel, which initially launched in the fourth quarter of 2017. Gross profit dollars were 28.1 million during the third quarter of 2018 compared to 24.1 million during the same period in 2017, with gross margin at 39.7% compared to 43.0% in the third quarter of 2017. The decrease in gross margin was primarily due to increased product and freight costs, inefficiencies in our manufacturing process as we migrated to a new warehouse management system and improved quality assurance processes that have identified additional scrap. In addition, a shift in sales mix to more sales with wholesale pricing also reduced gross margin. Wholesale revenue comprised approximately 16% of net revenue for the quarter. These headwinds were partially offset by the higher product margins from the new mattress models. Operating expenses were 31.6 million in the third quarter of 2018 versus 29.5 million in the prior year period. This increase is primarily due to higher general and administrative expenses associated with supporting topline growth as well as expenses associated with being a public company. Marketing and selling expenses were flat compared to the prior year period in dollars, with efficiency improving to 35.6% of net revenue in the third quarter of 2018 from 45.8% in 2017. During the third quarter we reported an operating loss of 3.4…

Thanks Mark. While Q3 was clearly difficult, I remain optimistic. The team is working incredibly hard to dig into the many issues and I believe we are doing the best we can to remediate and move forward. Because of our deep diagnostic efforts I feel confident that we now have better data and a better understanding of our production systems and processes which is actually a silver lining of sorts. Let me close by saying, I remain very excited about all of the possibilities for Purple with a truly differentiated product that helps people live better lives, patent protected, local manufacturing capabilities the roots of a real lifestyle brand and growing brand awareness the company is uniquely positioned within the mattress industry to increase market share. I also believe there is tremendous potential for Purple beyond our current categories, but we need to walk before we can run. I'm confident that the work we are embarking on will allow the company to successfully capitalize on the many long-term opportunities that lie ahead and deliver improved value for our shareholders. Thank you for your interest in Purple. Operator, we are now ready to take questions.

[Operator Instructions] Our first question is from Seth Basham with Wedbush Securities. Please go ahead.

The first thing is just on gross margins, obviously you guys encountered some challenges this quarter, we're hoping to understand in more detail what the impact in gross margins were from each of those challenges and how should we think about run rate gross margin going forward?

This is Mark, Seth. We did have some challenges during the quarter. As mentioned in the prepared remarks they do revolve around a few different areas, comparing it year-over-year basis freight costs have been up ever since we launched the new model and so as we are talking about a year-over-year comparison that is still impacting us; we do have some improvements we’re making there and we’re switching out our fulfillment partner for any of those new mattress models under a £150 and so that's yielding some benefits that we’re scaling that up, we'll continue to see benefit throughout Q4 as well on year-over-year basis we did have cost increases, now we haven’t seen a lot of increases over the course of 2018 but in Q4 into Q1 of 20 -- Q4 of ‘17 into Q1 of ‘18 we did see some input costs primarily foam. The areas that are impacting Q3 specifically really revolve around two things. One is improvements to our quality assurance processes and just additional scrap that’s been identified as we continue to improve those processes; we view this as a positive frankly; for the long term this is something that's going to benefit us as we improve our quality, our consumers will be impacted, our return rates will come down over time if we have better quality, so that's one of the areas. The other is we have implemented new warehouse management system and there are some inefficiencies as we’ve migrated through that warehouse management system over the course of the quarter that is largely in place here as of the end of October and again this is something that while there’s some growing pains as we implemented that it’s everything from racking to an overall system that tracks all movement of our inventory and allows our processes to be improved upon. If you’d ask me to quantify that it’s probably somewhere in the neighborhood of 200 basis points of the margin between the scrap and manufacturing inefficiencies.

Got you, okay that's helpful perspective. Secondly on inventories, they seem still roughly heavy to us, can you help understand what’s the right inventory level to this business and are you guys correctly saying that you essentially own most inventory that is in Mattress Firm distribution centers, at this point in time?

So as of right now the inventory at the end of the third quarter frankly was a little bit high still, it’s come down, several million dollars since Q2, I think a little over 4 million and so that’s heading in the right direction because this is a lot of heavy, now as we are heading into the holiday period, where we’re at right now is actually appropriate, so we’re getting to the right place. I don’t have a specific number for you but roughly 28 million that’s sitting on our books as of the end of Q3 is a good number heading in the holiday, now next Q1 that may not be the right number but we expect our inventories to come down in November and December as we sell through and achieve our forecast; in terms of Mattress Firm we don't have any inventory that’s sitting with any third parties other than our distribution partners; all the inventory at Mattress Firm is owned by Mattress Firm.

And as it relates to Mattress Firm, more broadly, that sounds like good news that it’s been a relationship there, how many stores do you anticipating being in, of theirs when you fully roll up?

We have not set a number to cap this out. As is known well in the press they have a pretty enormous fleet of stores which we still think a very opportunistic for us. So we are in a few hundred stores now as we're rolling out and there is a plan to get into many, many of those when we sort of hit the saturation point as I'm clear but we are going to continue to move forward at the pace we have been rolling out.

The next question is from Peter Keith with Piper Jaffray. Please go ahead.

You had mentioned in the prepared remarks around some fulfillment capability issues delivery issues and those are being addressed immediately. Could you just help us understand exactly what's going on? And maybe what some of the fixes are?

Yes, it’s a -- hi Joe here great to meet you as well, thank you -- it's been as I said in my remarks it's been a confluence of things. Mark just talked about some of the inventory and what kind of get to aggregate it up it's much more complex when you look down to the SKU level. And part of our inventory levels and cleaning things up on the inventory side is making sure we have got the right inventory at the right SKU level and aligning our production much more tightly with demand which we have made some really incredible improvements on. So it's all the -- that sourcing side and production and raw material to how we are actually getting mattresses out the door we're part of the warehouse management system and a lot of the operational improvements inside have cut literally days out of the delivery time and just getting it out of the building. And dealing with the heavier mattresses that we have where we had to rely more on white glove service it's been a learning process for us. And we outsourced really the entire end customer experience and it didn't go as well as we would like is the simplest way to say it, which meant that it was taking longer than consumers were expecting well more than two weeks in many cases, and the communications we had on top of that which was another challenge we are lacking. So in terms of the things we're looking to change obviously tightening up the delivery times dramatically, some of which is working with our delivery partners on the experience and then some of it is shifting how and with whom we deliver. But it's also even at the fundamental communication level and what we are telling the customers when in the process managing expectations, keeping them informed on the process and making sure that there are open lines of communication to assist them throughout. So it's really been an end to end capability. We have a bit more work to do, but we are very, very focused on getting this right.

Okay, that's helpful. And maybe just following upon that point. Is this -- the delivery issues primarily with a lot of the newer more expensive products that launched this year? Or is it across the board as even your traditional Purple mattress?

Some of the issues are work systematic but in terms of the real challenges we have had absolutely leaned much more toward the newer mattresses and related to their weight and the delivery mechanisms we use.

And then I wanted to change topics just on the sales and marketing. So intriguing that the dollars there were flat year-on-year, I guess kind of a two part question. Number one how are you finding some of the search costs with regard to the competitive environment? And secondly, is this bit of air pocket with marketing that you anticipate this will start to now grow year-over-year or you’re happy holding it flat?

No I am not happy holding it flat but I think it’s less about the amount though that will grow, it’s more about how and where are we spending, so I think there’s an enormous amount of opportunity here and we’ve been holding it back we’ve been managing more to cash and more to where we were as a company in terms of our EBITDA targets and as we’ve cleaned that up and reducing overhead and pulling -- and improving COGS, and finding ways to grow the business. We are producing cash that allows us to now invest into growth. So even into Q4 now we will be getting a bit more aggressive but I also think we have been sort of just playing in the auction marketplace alongside everyone else with very similar messaging against competitors who are fighting primarily on price and that’s not our game, we’re not on the low end and we are -- we have no interest in the race to the bottom. We are more premium offering and there is a lot of opportunity in looking at the channels we can play in, our messaging and how and where we spend, the audiences we go after, to get the right messaging in front of the right customers and we’re already seeing some great results testing into that.

The next question is from Brad Thomas with KeyBanc Capital Market. Please go ahead.

I wanted to ask first about some of the operational efficiencies that you talked about here, I guess my question would be around sort of the timeline and obviously recognizing you’re still getting up to speed here but what would you think a reasonable timeframe might look like to start to really improve some of the efficiency -- inefficiencies you’re seeing in the business here today?

Yes it’s -- and yes, I’ll unpack that a little of some of that is, when do we see the benefit and when do those flow through the financials for example I’ve been taking a very-very close look at overhead, and we’d over built a little, I think we’re very young company and maturing quickly and I think some of the early expectations had our growth levels higher than they realized and built into some areas especially in production which are creating a bit of an anchor on the business, so we’ve made some pretty significant changes in overhead and including headcount which will have some significant savings, but obviously what we've executed on that already with severance and the departures it’s going to be towards the end of this quarter we’ll see a little benefit and going into 2019 we’ll see a much of that benefit. And I think that’s true to many of the changes we’re making, some of the process improvements we -- we’re finding opportunities to reduce our cost and sourcing raw materials both in the mix of the vendors we’re playing we have had multiple suppliers where we haven't necessarily taken advantage of strategically going with the best prices as well as just getting into -- as we’ve become a more volume player, leveraging that volume for better pricing in general, so we've already renegotiated some of those contracts but because of inventory on hand, raw materials on hand, and when the order set -- again it’s going to be a few months before we see that start to flow through but it’s -- we’re -- this is early days in these improvement there is a lot of low hanging fruit if we can take that cliché. And we are going to continue to attack this over the coming year.

And as you look at and think about the product architecture and the number of models that you are selling and the price points of them what's your sense of what may be the optimum assortment looks like here today? And should you be taking some price increases as many others in the industry are right now?

Yes, I'm not prepared to talk about new product launches at this point but I think we have learned a lot from the assortment changes we have made in terms of strategically as I mentioned earlier, I'm much more interested in the premium side of the market I mean just loosely speaking about 75% of the units are sub a thousand but only generating about 25% of the industry revenue. And the other side of equation the $1000 plus is much more interesting to us and we've got a differentiated premium offering. So if we are going to lean anywhere, it'll be leaning more in that direction in terms of how many choices we have at a given price point and how many price points we have. I think there's some learnings we have to get that a little easier and more clear for our customer and we are absolutely testing into that and we will continue to do so.

The next question is from Budd Bugatch with Raymond James. Please go ahead.

I'm looking at the MD&A and looking at the results and I was curious a little bit about the sales breakdown. I think you have told us that the wholesale sales were about 14% of revenues so I heard you right? Is that correct?

[Multiple Speakers]

So a little bit more than $11 million or so. And you told us that I think that the direct was up 10% is that correct in the quarter?

What was the question Bud, I didn’t quite catch it.

The revenues in the direct channel were up about 10% in the quarter is that year-over-year?

That is approximately correct.

So that was what I think you said in the MD&A. I'm curious what caused the slowdown in revenue growth in the direct channel? That sounds pretty modest for fast growing ecommerce type company.

I think the short answer is we deliver a late pull back investment on the topline pretty significantly as we were trying to get a control of costs in the business. And for a brief period of time really just managing the cash. It falls right through, our audiences that we are reaching are significantly lower this year than we had in the prior year and it's just in terms of the topic fall metric so we are going to be bring fewer people in. So that’s really through Q3 as I mentioned we are turning that back around in Q4. Now that we have done some rightsizing of the business and are getting the fundamentals back in line, my expectation is especially Q4 being so important around holiday that we’re going to be investing in heavily and it includes even some pre commits that we’re now weighing into such as the partnership with Disney that I mentioned which is some pretty significant broad marketing that’s going on right now. So certainly our expectation is that was a period in time that we’ve now come out of and we expect that we will be fueling back in.

Just to make sure I understand what you mean by the audience is less than year than last, are you talking about the number of visits to the site or you -- is that what you’re talking about?

No.

It’s a little more complex than that but yes it ultimately results to the number of visits to the site but as we’re trying to build brand awareness and be in the consideration set and be top of mind this is a considered purchase, that typical consumer may take 30 days during the decision process and a lot of that is getting in on the early side of that which is how do we even make sure the customer knows we exist and understand how we fit into the ecosystem and that’s the top of the funnel and we invested much less into that this year and our metrics reflect that.

And can you talk a little bit about the customer returns how does that metric look are we seeing any issue on that, you were talking about inefficiencies, if you have inefficiencies in production that often times, works its way into product issues; so how does that look?

So we -- returns and this has come up in the prior quarter earnings call as well; returns have put pressure on our margin and more so with the newer mattresses at a higher price point, a heavier mattress, a more of a considered purchase, we’ve seen return rates higher than we’ve historically seen and more importantly higher than we believe they should be, another pretty significant initiative I launched about four weeks ago is really attacking returns and getting that back down to the levels that they should be in the industry. I’ve got over a dozen different dimensions we are looking at, product quality is one of them. Fortunately that has not been a signal we’ve seen as the primary reason. The delays in delivery and the delivery times have certainly factored in, there’s some messaging and communication, we’re looking at some pricing and promotional factors, we’re looking at the break in period and our customers understanding how to get the benefit of our mattresses. There’s a number of different dimensions and the good news is on the initiatives we’ve launched we're already seeing measurable improvements and I expect will continue to see that until we get returns back to appropriate levels so that will absolutely help with margins.

So can you provide any help to us on gross and net, how does that look in terms of what was the growth to get down from the 17.8 million of net revenues?

So we don’t share all the details Budd, but what I have shared and happy to share now is our return rates have been historically in the high single digits and after we launched the new mattress models we’ve settled in the low teens and so that’s the delta that we’ve seen takes place roughly over the last eight or nine months is that shift.

And has there been any measurable change in that Mark or not?

We initially expected that the return rate was going to pop and then come back down, instead we saw increase and then stayed relatively flat, over the last six months, we have not seen a dramatic shift. It's been fairly flat. We did have some themes some signs of optimism just in the last two months where it ticked down a little bit but too early to tell. But as Joe mentioned we are focused on this and the amounts are big enough so this will have a dramatic impact as we can improve that over the course of 2019.

And as Mark said, the pull away through working on this is not enough to get a true signal but again some of the initiatives we launched have some very positive early results and we remain optimistic that this is an execution challenge on this probable.

Just a couple of more questions from me. The Mattress Firm can you talk about what their sales orders been? I know you have been populating the stores with I think there are four models on the floors at least in the stores that we've seen. Can you talk a little bit about the velocity or how customer take up of that business.

Some of them have two on the floor, some of the smaller footprint stores and some have four. I don’t believe we have disclosed specific sales velocity through what I'll say is Mattress Firm has been and continues to remain very excited about the partnership as are we. It’s a mutually beneficial relationship. Our brand strength is brining interested customers into the stores specifically looking for Purple and we are getting plenty of data evidence on that and just with the reach and local presence that Mattress Firm has it's been a phenomenal way to allow potential customers of ours to see and feel the product as well as many get introduced to Purple by being in the floor in their stores. So far its been a win-win on both sides and it's been in an industry that has not had a whole lot of innovation for the last two years it's been a nice training star on their floor.

I have been in number of the stores already and the displays look very nice, so I agree with you. I just wanted to know how the take up is going to look. You said you were in eight Bed, Bath and Beyond are they the next NexGen stores cause I've been in several of those and I haven't seen Purple in there. Which stores have..

Consider it more of a test rollout right now and we have chosen the stores a little more strategically and testing a variety of markets and store formats. So it's at eight stores it's obviously a very small penetration. We are using some new interactive displays while there is a bed on display we have got some interactive videos that our consumers can engage with which is just a different approach and as we are getting the consumer. So again we are learning. It's very recently rolled out but we are excited about the test.

This concludes the time allocated for questions on today's call. I would now like to turn the conference back over to management for closing remarks.

Thank you, and thank you to everyone for their questions. Just quickly closing, I just want to restate that I remain incredibly optimistic about this company and this brand. I'm thrilled every day that I have joined here and if I think about having a great company in this space it comes down to having meaningfully differentiated product, having a true lifestyle brand and having a legitimate retail capability, and I think we are executing well in the direction of each three of those. We grew very fast. We need to mature this business and we are working very hard at that. I have been very impressed with the team and how they have been able to get heads down and focus on execution and I remain confident on our ability to deliver there and finally, this is the company with some solid lags, we’re in very early chapters in the story, right now we are focusing very heavily on our great mattress products, but I remain very enthusiastic about our ability to innovate and the portfolio we have of technologies and capabilities that could extend far beyond what we’re doing now. So very-very interested in where we take this next. And with that thank you very much.

This concludes today’s conference call, you may disconnect your lines. Thank you for participating and have a pleasant day.