Greetings, ladies and gentlemen. Welcome to Purple Innovation's Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] It is now my pleasure to introduce your host, Brendon Frey of ICR. Please go ahead.

Thank you for joining Purple Innovation's second 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 second 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 today is John Legg, our Chief Operating Officer; and Craig Phillips, our Interim Chief Financial Officer. Following our prepared remarks we'll be happy to take your questions. As you saw from our earnings release, the top line momentum we experienced earlier in the year continued during the second quarter. Our growth was fueled by the combined work we've done to heighten awareness of the Purple brand and create even greater demand for our differentiated product offering and to strengthen our manufacturing and fulfillment capabilities. Financial highlights from the second quarter include net revenue increasing 36% year-over-year to $103 million, gross margins expanding 80 basis points compared with the first quarter, operating expenses as a percent of net revenue declining to 44% from 48% last year, this was achieved even as we incurred a significant increase in non-cash stock expense and the shift of approximately $3 million in marketing spend out of the first quarter this year into the second quarter. Finally on a non-GAAP basis adjusted EBITDA which excludes stock-based comp and certain nonrecurring items improved $9.7 million to $6.2 million which was ahead of our expectations. Looking at our recent success in more detail, starting with our top line revenue is once again driven by growth in our wholesale channels as this business continues to benefit from the addition of new doors and strong sell-through at existing locations. In the beginning of 2019 we have added more than 650 new doors to our wholesale footprint including just over 180 in the second quarter. As we stated in prior quarters, we believe that an omnichannel approach to retail is essential to our brand and that includes providing a convenient way for our customers to feel for themselves how different…

Thanks Joe. It is a pleasure to be addressing everyone again. As I outlined on the Q1 call, our team made great strides earlier in the year enhancing product quality, operational efficiency and timely fulfillment. During the second quarter, our work continued to yield improved results. First, we posted another quarter of record production which enabled the company to capitalize fully on the increased demand for our products and we achieved this output without increasing our labor costs, thanks to efficiencies in our production line from improved processes and increased automation. This has allowed us to better control costs and further improve yields on both a year-over-year and sequential basis. Second, we've continued to realize greater savings through better sourcing of our direct materials, for example, in our domestic raw materials and sourcing agreements. Third, following a significant improvement in group Q1 when we achieved our fulfillment service level agreements over 90% of the time, we've continued to get better, hitting approximately 96% in the second quarter. The successful execution of our internal initiatives combined with the work being done by our new 3PL partner has helped with accuracy, timeliness and cost. I am confident that we can maintain and I anticipate continued improvement upon this current high level of performance. Finally, in response to our heightened outlook for 2019 and increased optimism around our long-term growth prospects, we are pleased to report that we completed the build out of our proprietary Mattress Max machinery and it successfully went online a few weeks ago. In addition, we have already started the process to further increase production capacity by kicking off the projects through building our sixth and seventh Mattress Max machines and expect to bring them online in early stages next year. I'm pleased with the advancements we have made towards becoming a world class manufacturing organization in this short period of time. While there is more work to be done, I'm very optimistic about where Purple is headed and I'm confident that our team can continue achieving our strategic objectives. Thanks and I'll turn it back over to Joe.

Thanks John. Looking ahead, we are committed to further strengthening our growth platforms and capabilities with a focus on four key areas; product innovation, omnichannel retailing, organizational effectiveness, and brand development. Let me provide an update on each of these. Starting with product innovation, we have many technologies and products in the pipeline that we are excited about starting with the new Purple Pillow expected to launch in the fourth quarter, we believe will be our best pillow yet, both in comfort, innovation, and mass appeal. With mattresses, our pipeline includes a reassortment strategy which will roll out in Q3 that will simplify and better articulate the benefits of our current models, as well as all new mattress models coming over the next year ranging from improvements driven from our years of listening to customer feedback to new inventions that we are very excited about. Beyond mattresses we are also leaning hard over the next year into our existing non-mattress categories, such as cushions as well as new categories that we expect to launch in 2020. For our 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 opening company-owned showrooms. With respect to wholesale, on top of growing same-door sales, our current focus is both deepening our relationship with our national players while building relationships with strong regional players that will allow us to expand our physical reach in areas of the country not serviced by our existing partners. We have found a great symbiotic relationship between DTC and wholesale with each channel supporting the other. As such, we will continue to invest in the development of our online showroom capabilities. Last month we hired Jimmy Drake [ph]…

Thanks Joe. As you mentioned earlier, for the three months ended June 30, 2019 net revenue was $103 million up 36% compared to $75.8 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. The second quarter of this year also benefited from the earlier start to our July 4th sales compared with the same quarter last year. Gross profit dollars were $42.8 million during the second quarter of 2019 compared to $31.8 million during the same period in 2018 with gross margin of 41.5% versus 42% in the second quarter of 2018. The slight year-over-year decrease in gross margin was mainly attributable to a shift in sales mix to more sales with wholesale pricing, partially offset by efficiencies in options and logistics. Wholesale general revenue comprised approximately 38% of net revenue for the quarter compared with approximately 11% last year and $36% in the first quarter of 2019. Operating expenses were $45.1 million in the second quarter of 2019 versus $36.5 million in the prior year period. The increase in operating expenses was mainly driven by a $6 million increase in non-cash stock-based compensation expense as well as the incremental $3 million in marketing investment we discussed on our last call which shifted out of the first quarter and into the second quarter. The increase in noncash stock based compensation expense relates to Class B common stock distributed by InnoHold, the current and former employees of Purple during the second quarter of 2019 in exchange for the cancellation of their units in InnoHold. This transaction is explained in more detail in the 10-Q under InnoHold incentive units. Marketing and selling expenses as a percent of net revenue improved 570 basis points…

[Operator Instructions] Our first question comes from the line of Seth Basham with Wedbush Securities. Please proceed with your question.

Thanks a lot and good afternoon. Hello?

Hi Seth.

Hi there, congrats on a big quarter. A couple of questions, the first one is thinking about the trajectory here for the DTC business, obviously you've shown some great strength in wholesale DTC is down less than it was in the first quarter on a year-over-year basis. Should we be thinking about that business reflecting to positive growth year-over-year in the back half?

Yes we, so yes we are expecting the second half for positive growth overall as we continue to reinvest in it, again with the new team we've put in place and some new partners we're bringing on board ready to really take us seriously again, so that is our expectation.

Got it, and from a marketing standpoint on the DTC side, can you touch on what you plan on doing differently to get better returns on that advertising as you start to propel that business higher again?

Yes, so certainly part of the decision as we've weaned very successfully into our wholesale-retail strategy has been a choice to pull back on some of the marketing at DTC and reallocate that investment elsewhere. Part of it is going to be putting some of that money back in the DTC as well as the showrooms that we have to continue to build that brand demand which is driving traffic, both to our sites and to our partners in their retail stores. So some of it is just a matter of spend, some of it is we've been getting much more focused on the efficiency of what we do, as get more sophisticated and I spoke through, as I mentioned in the prepared remarks and a digital agency that we're working with now just to up our game in terms of our sophistication levels as well as new technologies and tools, we've continued to invest in, in terms of better attribution and efficiency measurements. And finally, it comes down to the site itself as well as we improve our landing pages, the site journey, better service our customers as they engage with the brand and learn about our products. There is a tremendous opportunity for us to just get more laser focused on, on getting it right for our customer as they engage with us online.

Got it, that's a full perspective. Thinking about gross margins here, we're continuing to see a little bit of pressure, but nothing as much as in the first quarter. Going forward would you expect gross margins to start to inflect positively with all the operational improvements you've made?

Yes and Craig can chime in as well. But I mean, we, yes first of all let me say we're very pleased with the work we've done on getting more efficiencies out of the business, both in terms of scale as well as just the overall economics and John and his team have done a terrific job in really maturing this company. I do want to be clear, we are not a mature company trying to squeeze out efficiencies, we are still very much in aggressive growth mode. So as we continue to invest in growth that creates some opportunity for choice and now we're optimizing for margin or growth and growth is our priority. We do still believe that we will continue to get scale efficiencies regardless. Craig, do you want to add anything?

Yes, no I agree with you completely and what I want to add is that in the second half of the year we are going to be bringing on positional equipment that should adds some more efficiencies, so we do expect the gross margin to continue to improve.

Got it and then last question from me for the time being is just regarding actually in particular the G&A line excluding the stock-based comp looks like you had some material reduction in G&A. Can you give some more color as to what's going on there and how we should think about G&A going forward?

Yes, I mean, obviously we've brought it down substantially since I joined the company. As I said back then we were a little top heavy and had tremendous opportunity for just efficiencies and improvements in G&A. I think we've been able - in some areas we've been able to successfully grow the business with what we have, which has helped that we expect we're going to be a lot of investment as we grow the business it's obviously going to require more labor and just more at the corporate level. Craig, do you have anything specific that I'm not thinking of?

Yes, when you compare to prior year, a lot of the improvements you're seeing a lot of it in the prior year they were costs that were not recurring related to the transaction. So we do have few open headcounts that we're looking to fill, but and so as Joe mentioned it may come up a little bit, but as far as comparing it to the prior year, the prior year was just higher due to that transaction.

Understood, I'll leave it there for now, thank you.

Thanks so much Seth.

Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed with your questions.

Hi good afternoon everyone and congratulations on the continued nice results here this year.

Thank you, Brad.

I wanted to followup some on what's going on in DTC clearing making some nice improvements there, operationally and starting to reaccelerate the growth. I guess where have you found the greatest opportunities for efficiencies in DTC and as we start to drive more growth where do you think there still are more opportunities to fund efficiencies?

Yes, we, I mean, honestly we're in very early chapters with what's possible if you were to take a look at site as it was up presented and the content on it when I joined, it's been a very modest bit of changes, really just some lightweight optimization as we've really been focusing much more on the fundamentals of manufacturing and operations and scale. So I think there is an enormous amount we can do. And I mentioned in the prepared remarks that we are planning to completely relaunch purple.com and that's a relaunch from a technical platform capability. It's a relaunch from a design capability and we're continuing to tune up our brand presentation. So I mean it's really on all dimensions, we expect us to be better servicing our customer and make sure we're effectively articulating what's so differentiated about our product. Today it's really been mostly on the marketing efficiency side, just slightly better landing pages and focusing much more on effective spend and cross channel attribution of that spend, but again very, very early chapters. There's – it's a pretty big opportunity for us.

That's great. And then on the wholesale front, I guess could you talk a little bit about the pace of door growth that you're driving right now and perhaps with more manufacturing capacity coming online, your ability to potentially accelerate additional door growth as we look forward to next year or so?

Yes, we – well, certainly the growth has been pretty spectacular considering end of last year we were in the very well sub 100 range, so the pace we've been able to bring stores on in terms of just our ability to load in, in the beds on the floor and get these stores trained, has been impressive and Kudos to the team for their ability to scale in this regard. We continue to see a lot of demand out there from our retail partners, certainly with our largest partner Mattress Firm. They’ve continued to express interest and expanding our relationship as we continue to build lot of capacity, we intend to support that. And we've had a number of regional strong players around the country who continue to express interest as well. So we most importantly we're making sure that we are managing to what we can deliver to make sure we are continuing to keep quality where it should be and make sure we're delivering timely to our customers and our record now is phenomenal. That's a big thing we've cleaned up, but as we mentioned with Max 5 now fully operational and our work toward getting Max 6 and 7 done early next year we will have a lot of capacity coming online.

That's great. And then just lastly from me, my question on capital structure, obviously a much more positive outlook for both revenues and EBITDA today than a couple of quarters ago, much more solid financial footing, who are you feeling about the capital structure and any potential areas that you may want to change going forward?

Yes, well, I mean certainly from a balance sheet point of view that we're producing cash and continuing to stabilize the business. We believe we've got good opportunity for continue to invest in and the work we've taken on many initiatives, beyond that and from a broader capital structure we are continuing to explore options in terms of ways to vitalize that, but there's nothing specific that we have in mind right now.

That's helpful. Great, and thank you so much Joe.

Our next question comes from the line of Peter Keith with Piper Jaffray. Please proceed with your question.

Hi thanks, good afternoon everyone. I had a couple of questions, and just for start off with the updates sales guidance, so nice work on raising the outlook. So it looks like there is implied some pretty acceleration in the back half of the year from the first half and I was hoping to get a little more color around that, is this just a function of easier compares or as you mentioned maybe DTC should be stronger or even wholesale accelerating further?

Yes, I think it's – first of all hi, Peter. Thanks for your questions. I think it's a little of all of the above. I mean we've just floated in significant number of new stores and on the wholesale side, and the expectation is that those will ramp meaningfully and a few more stores we expect to continue to add. We're continuing to see strength in our existing store footprint, so same-store sales are continuing to be promising. With Max 5 coming on line, I mean we've got a decent amount of more capacity. So in terms of making sure we're fully supporting the demand that's out there, we see a lot of opportunity. And we're – again as I mentioned in the earlier comments, we had shifted spend a bit and do investing in wholesale and now that we've got the team in place and we're vesting back into our digital marketing capability in DTC, we expect to meaningfully increase our spend against a capability that we will perform.

Okay, that's helpful. Looking at the wholesale opportunities, certainly the door growth is impressive. If we just go back a year ago, it seems like you guys may have been one of the first digitally native players that was looking to go wholesale that does seem to be becoming a more popular themes amongst digital native players, are you finding it with some of the broader negotiations becoming a little bit more competitive or on your side you feel like you are starting to get some momentum where you've proven yourself out?

Yes, it's a great question and thank you for that. It's a little of both. I mean we early on and this is what we said at the end of last year as we started to lean into wholesale, as you think of the newer internet players, what we were observing was much more of I would think of is a CBT [ph] strategy which is really a distribution model of getting boxes on shelves and which has been a game of linear inches and presentation. Ours was a very different strategy in that we felt we had a premium meaningfully differentiated product and our goal was to get as many beds on the floor on display as we could as close to as much of our target market domestically as we could and that, which meant a different group of retailers and a different kind of partnership. And what we found is it worked, it was the biggest single demand that our customers are saying is, we get it, but we'd really like to try to lay on it first and do that in a in a well presented way and our partners have been terrific in helping to present that and educate the customer. But also, we are driving significant foot traffic into our partner stores and we think that's terrific, and we're converting well. So it's been – it really has been very symbiotic in that we've got great retail presentation and great sales associates out there who understand the benefits of our product, but we are doing our part and driving the demand on the brand side and driving the foot traffic.

Okay, that's helpful. The separate question is, just on the antidumping duties that were assessed on the imported Chinese mattresses, you guys don't have a ton of exposure sub 1000 or even no better sub 500, but Joe I wanted to just get your thoughts on how you think those duties if they may or may not have any impact on your demand trends looking out of the next year or two?

Its, I mean as I think you stated, since we're not really competing in the bottom portion of the market where I think you've had these lower cost fully imported foam mattresses hasn't really hit us. We certainly do some components that we have sourced overseas and some nominal impact that we've seen but nothing that has been overly concerning. What we – we do like that we're seeing more push on domestic in general as a U.S. manufacturer all U.S. labor and sourcing a significant number of our components domestically, the shift into the domestic manufacturing market has been great for us as it's just building more scale and capacity for us as well. But overall I think we've been pretty immune to it and we will let the bottom shakeout as it does.

Okay, very good. Lastly from me, just how are you guys viewing input costs? It seems like some players are starting to see some relief on that front, some downward pressure on certain inputs, insight there would be helpful?

On inputs on raw materials type inputs or…?

Yes raw materials, that's right, yes.

Yes, we've – and this is part of the terrific work that John and his team have done. I mean, I think we, as we've both grown in scale and have had a much better sourcing strategy and picking the right partners, we've been able to continue to negotiate more stable and better terms and I think that has helped. I think in some areas we have found opportunities to overseas, not necessarily into China as there are less risky areas we have been able to go into, but we've been able to dramatically lower costs on some components by going overseas which has been helpful certainly on packaging and some things that are little less core to the quality of our product. So yes, it's been a combination of maturing the business and it turns out there was quite a bit of headroom which is just part of what's flowing into our margin improvement.

Okay, very helpful.

One other point while I'm thinking of it, we have also been able to just in general get more out of labor is a perfect example of that. We have competitively increased our labor rates pretty dramatically, but alongside that we've been able to have significant improvements and the truth in attrition which means we're getting higher quality labor and more stable labor and as a result have meaningfully reduced the labor cost per unit.

All right, that's helpful Joe. Keep up the good work. Thanks a lot.

Thank you.

[Operator Instructions] Our next question comes from Keith Hughes with SunTrust. Please proceed with your question.

You made several references to the Mattress Firm, they have obviously had to do a big product change putting Tempur-Sealy back on the floor, do you have any feel of how that's going to affect your position in 2020?

Yes, so high Keith, thank you. So we obviously have something that I'm sure they discuss a lot and we've discussed internally. I mean our general view is we think Tempur has a great product and I think they've got a good customer base. Our belief is that getting more qualified customers looking for premium offerings into the store is very good for us. Yes, we'll happily put our bed up against any premium bed out there and I think in a setting lime mattress firm and with our proven track record there, we've got a good momentum into their fleet. I think we overall think it's a positive thing.

You don’t expect to lose any slots as a result of this?

Retail has some fundamental roles and so long as we continue to both strive for traffic and meaningfully convert and we see no sign whatsoever of that slowing, we don't expect to see any decline whatsoever. And as we've stated and continue to see we're continuing to lean into more and more stores.

Okay, congratulations on the numbers, thank you.

Thank you, so much.

Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to Joseph Megibow for closing remarks.

Thank you, so much and to reiterate we are very pleased with our progress and we believe our strategy is working. We're thrilled with the growing demand for amazing products and the ongoing support of our very happy customers. I've continued to state that this is a foundation building year and we are successfully executing against that. Certainly we still have more to do and our confidence continues to grow regarding our ability to execute and pursue our many planned initiatives. We have a great team and I'll thank them again for their hard work and positive results. So thanks again.

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