Greetings, ladies and gentlemen. Welcome to the Purple Innovation third quarter 2019 earnings conference call. [Operator Instructions] Please note the conference is being recorded. It is now my pleasure to introduce your host, Brendon Frey of ICR. Please go ahead.

Thank you for joining Purple Innovation's third-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, including in our third-quarter 2019 earnings release, which was furnished with SEC today on Form 8-K, as well as with 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 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 is available within the earnings release which can be found on our website. With that I will turn the call over to Joe Megibow.

Thank you and good afternoon everyone. I’m thrilled to have started my second year with Purple and look forward to discussing our continued positive momentum. With me on the call today is John Legg, our Chief Operating Officer and Craig Phillips, who has recently joined us as our full time Chief Financial Officer. Following our prepared remarks we will be happy to take your questions. Following strong gains during the first half of the year, our pace of growth accelerated significantly during the third quarter with both wholesale and direct to consumer channel sales contributing to our performance. The combination of our outstanding top line results, improved efficiencies throughout all areas of the business and the shift of certain discretionary investments into the fourth-quarter drove a substantial improvement and profitability. Financial highlights from the third quarter include net revenue increasing 66% to 117 million compared with the same period last year. Gross margins expanding 530 basis points year over year and 350 basis points compared with the second quarter and operating expenses as a percent of net revenue declined to 36% from 45% last year, aided in part by a shift of approximately $4 million in marketing investment to Q4. The combination of these improvements and the marketing spend shift resulted in operating income improving over 14 million to 11 million, net income improving over 12.7 million to 8.4 million and non-GAAP adjusted EBITDA, which excludes stock-based comp and certain nonrecurring items of 15.3 million. Looking at our recent success in more detail, starting with our top line, we experienced robust year-over-year growth in our wholesale channel, while at the same time, direct-to-consumer sales, which have been improving as the year has unfolded, returned to growth in the third quarter. Since the beginning of 2019, we have added approximately 650…

Thanks, Joe. It's a pleasure to be addressing everyone again. As you saw from the results in our earnings release, and as Joe touched on at the start of his comments, the work we've done over the course of 2019 to improve product quality, operational efficiency and timely fulfillment helped fuel strong gains in revenue and gross margin compared with a year ago. First, we posted another quarter of record production, which enabled the Company to capitalize on the increased demand for our products. We achieved this output, thanks to efficiencies in our production line from improved processes and increased automation. This has allowed us to better control cost and further improve yields on both the year over year and sequential basis. Second, we've continued to realize greater savings through better sourcing tactics including dual sourcing and large-scale purchasing of our direct materials. Third, we remain on track to bring our sixth and seventh Mattress Max machines online early next year. At the same time, we are actively evaluating locations for additional facilities to house Mattress Max eight beyond in order to stay ahead of our growing demand for our product portfolio. Fourth, we recently launched with our new 3PL partner to help with accuracy, timeliness and cost of delivery. I'm pleased with the advancements we have made toward becoming a world-class manufacturing organization in this short period of time. On top of the work I just mentioned, we are now realizing the benefits from the new warehouse management system that we launched in late September. This was a significant undertaking that will further bolster our future fulfillment performance. I'm extremely pleased with the work our team is executing and confident that we are on track to achieve our strategic objectives. 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, I'm thrilled to reiterate that J.D. Power's recently named Purple has the highest-ranking mattress in their bed-in-a-box segment of the J.D. Power 2019 Mattress Satisfaction Report. Not to rest on our laurels, we continue to have many technologies and products in the pipeline that we are excited about, starting with the new Harmony Pillow, which just launched November 1st that we believe is our best pillow yet in terms of comfort innovation and mass appeal. We tested more than 50 iterative prototypes over the last year and not only found the best pillow through this process, but have developed and applied for yet another completely new cushioning patent and found several manufacturing innovations that will extend well beyond this product. Innovation is alive and well within Purple. With mattresses, we implemented a reassortment strategy during the third quarter that simplifies and better articulates the benefits of our current models, upgraded our original mattress with some of the benefits of the premium mattresses and are continuing to work on 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 leaning hard over the next year into our existing non-mattress categories such as seat cushions, as well as new categories that we will launch in 2020. For omnichannel retailing, we look to continue our efforts to service the customer whenever, wherever and however they want, including continuing to aggressively expand our retail partner doors, significant…

Thanks, Joe. As you mentioned earlier, for the three months ended September 30, 2019, net revenue was 117.4 million, up 65.8% compared to 70.8 million in the prior-year period. The revenue increase was primarily due to continued wholesale door expansion, combined with higher replenishment orders following strong sell-through during the quarter. Gross profit dollars were 52.9 million during the third quarter of 2019 compared to 28.1 million during the same period in 2018, with gross margin at 45% versus 39.7% in the third quarter of 2018. The significant year-over-year increase in gross margin was attributable to efficiencies in operations and logistics, along with benefits from product mix, partially offset by changes in channel mix. Wholesale channel revenue, which carries lower gross margins than our direct-to-consumer channel, comprised approximately 42% of net revenue for the quarter compared with approximately 16% last year and 38% in the second quarter of 2019. Operating expenses were 41.9 million in the third quarter of 2019 versus 31.6 million in the prior-year period. The increase in operating expenses was mainly driven by investments in marketing and advertising, resources and infrastructure to drive sales growth, as well as 2.9 million increase in noncash stock compensation expense related to the conversion of Class B shares held by current employees. Marketing and selling expenses as a percentage of net revenue improved 660 basis points to 29% from 35.6% in the third quarter of 2018, driven by improved efficiencies in our marketing initiatives and higher net revenue from the wholesale channel. Compared with our forecast, marketing and selling expenses were lower than planned by approximately $4 million of discretionary spend we may use in the third quarter of 2018, after adjusting for primarily legal fees, equity incentive compensation, interim CFO costs and severance and executive search for 2018. During the…

[Operator Instructions] The first question comes from Seth Basham of Wedbush Securities. Please go ahead.

Thanks a lot, and good morning.

Good morning, Seth.

Thanks. Congrats on a good quarter. My first question is related to the DTC business. It seems like you guys turned the corner there. Posting some nice year-over-year growth, as well as sequential growth. As we think about the outlook for DTC for the fourth quarter, do you expect that momentum to persist?

Yes, I think momentum is the keyword. We chose at the beginning of the year, which we had said to shift our investment more into expanding our wholesale business, which has worked terrifically well for us and really giving us some great partnership in getting our bed out there for customers to see and much more access to them to purchase. With our stronger balance sheet now, we've been able to reinvest more into DTC, and that's included hiring our new VP of E-commerce, who's already on our existing platform, but able to make the site itself. Dramatically better as we continue to reinvest and replatforming, and we've also been able to build back up our digital marketing capability, both through a partnership with an outside agency and just building out the team, and that's given us the ability to invest back into DTC from the acquisition side as well. So yes, we continue to see it moving forward. Craig, Craig did you want to add something?

Just along those lines, with opening new stores.

Yes. We, and that's important as well. Thanks, Craig. We really view all of DTC as an integrated capability. So part of our investment in growing DTC is not just in the computer screen sense, but also, we've been investing in our call center capability. We've hired a Head of Sales for the call center. We believe that there is a lot of power and the ability to talk to human beings and learn about what makes our product different and view that as a strategic side of our ability to sell online. We've also, as we mentioned in the prepared remarks, have, in addition to our factory outlet store in Salt Lake, opened two more showrooms and have a couple more opening this year, a few more actually opening this year, which also just really give an opportunity to bring the brand and the product to life in a way that we can do across the entire assortment, and all of that comes together and driving that momentum forward at DTC.

As it relates to the wholesale business, it sounds like the vast majority of the sales improvement was driven by the expansion of a number of doors. As we roll forward to the fourth quarter, would you expect that to be the same? Or we're going to start to see a majority of the wholesale sales be for replenishment?

We have continued to open additional stores, and we continue to look at the timing of that. We, as mentioned in the prepared remarks, we've been investing heavily in expanding our capacity, which we continue to do and are balancing our door openings against that. So we have access to many more doors, and we'll continue to have that. There's ample demand that we found, and it's really just been a pacing question, which is a lever that we can pull as appropriate.

The next question comes from Dave King of ROTH Capital Partners.

Maybe sticking with that line of question a little bit on the wholesale doors. So how should we be thinking about the potential for further near-term door growth? Do you expect that, Joe, to decelerate a bit? Just given the ability to fulfill that demand, or do you expect to be able to maintain that pace? And then more importantly, how should we think about the potential for longer-term wholesale, I guess, a number of wholesale doors between Mattress Firm, some of these regional accounts you've talked about, etc.?

Yes. I'd say there's a lot of opportunity that is still out there, both near-term and long-term. With Mattress Firm, we're in over 800 of their stores out of a fleet of over 2,500. So clearly, I'd say, nowhere near the saturation point with Mattress Firm, and there are some great regional players, nearly all of them have reached out to us at one point or another, who have customers who are interested in having access to our product in their stores. So we continue to see strong demand. It's really been driven on just pacing our own business. And I expect that there may be some more balance of this year, we absolutely expect to see some early next year. And I'd say we are a ways away from hitting any meaningful saturation point on total domestic store count.

Switching gears then on the direct-to-consumer side. How much of the growth this quarter was driven by the new factory store versus continued or reacceleration in e-commerce? And then how is the initial productivity? I know it's early been on both that store and then the two showrooms you opened in October?

Yes. So are you asking about their specific contribution?

I'm thinking sales per square foot or revenue? Or I mean, on an annualized basis, something that give us context on how they've been performing? I think the factory store was pretty strong out of the gates and got stronger, once you put up the billboard, if memory serves. So just any kind of numbers you can draw around that.

Yes. So the stores, the two new stores have only been opened a few weeks, and our experience with our brand is we opened very, very strongly, as there's a lot of interest and demand. And we've seen that, which is terrific. The store we've had opened the longest is our factory outlet store, which is a little larger format and also has the draw for seconds. Although interestingly, the vast majority and has held that the vast majority of sales in the factory outlet store is new presentation product at full price. What I'd say is, from our analysis in the industry, we'd say the range of store sales per year for a mattress store, it ranges somewhere in the sort of $1 million a year to on the high end, say, 5 million a year. Looking at some of the higher-performing stores of other retailers out there. And what we've seen so far is we're on the higher end of that spectrum. But again, it's all relatively early, and we're just thrilled that it's so far exceeding our expectations.

Perfect, thanks for taking my questions. Nice quarter and good luck to the rest of the year.

The next question comes from Brian Nagel of Oppenheimer. Please go ahead.

Hi, good morning, thank you for taking my questions. The question I had. Just a couple of questions for the P&L. First off, with regard to gross margins, again, nice expansion here in the quarter. Maybe talk further about just the underlying drivers. So I think, Craig, you may have mentioned in your prepared comments, but further color on the underlying drivers there and the sustainability of gross margins. And then secondly, with regard to -- you mentioned in your release in the prepared comments, I think, a shift in expense just from Q3 to Q4? Just a little more color on that dynamic as well.

Yes. So on a gross margin basis, a lot of the pickup that we've had this year has been from primarily efficiencies in production, some improvements in our delivery methods and our delivery partners. So we've been able to increase production substantially without having a dramatic increase in labor. Certainly not an overhead at the manufacturing facilities. So we expect the gross margin percentage to hold pretty strong or hold where it is now at a minimum. And then from the deferral of expenses in the prepared remarks, what we said were, there were some savings in the third quarter. We did not reach the 32% in marketing and selling that we had expected, came in at around 29%, but we know that the fourth quarter is going to be around 35% for marketing and selling. We may use some of those savings from the third quarter in the fourth quarter. It just depends on how the season is going -- the holiday season. So we do have that available and may use it, but right now, we expect to be around 35%.

Great. Thank you very much.

[Operator Instructions] The next question comes from Brad Thomas of KeyBanc Capital Markets. Please go ahead.

Hi, good morning and congratulations on the quarter here. I was hoping to talk about sort of the financial outlook as we think about the next few years. Clearly, 2019 seems to be shaping up as a year where you deliver continued strong top line growth, coupled with some nice operational efficiencies. As you think about the financial algorithm in the next few years, any guideposts or color you might be wanting to share about how to think about modeling the business going forward?

Yes, we -- I mean, we have not given our guidance for next year yet, clearly. So some of this is speculative. That said, what I'd say is we have not seen any softening in demand out there as of yet. And we, this has been more a function of just the continued capacity that we built out to meet the existing demand. So positive momentum we expect to be moving into the immediate future. I think it's also a good opportunity to remind that we're not just a mattress company. And as we started to lean in with the prepared remarks, our ability to, now with the strength of the business to invest on the innovation side, which is both expansion into new categories, as we mentioned, which we expect to be doing a lot more of as we test into new areas in 2020, as well as just strengthening our offering in our core space. We see a lot of headroom out there still in our ability to build a meaningful long-term business. So I'd expect as we close down the year, we'll get more guidance for next year. But again, between our patent portfolio, our ability now to invest in continued growth and the continued demand that we're seeing out there, we feel very optimistic about the future.

That's great. And if I could ask about the mattress firm relationship, a major change happening in the industry right now, of course, is Tempur Sealy products being rolled out on Mattress Firm floors. I recognize that's still very much in the early innings here, but I was curious if there are any insights or observations or data points, you're able to share about how that relationship with Mattress Firm maybe evolving or how that, your performance in their stores may be tracking?

Yes. That's clearly well discussed out there. We, so it is Tempur-Pedic is going back into the Mattress Firm stores. The rollout is not yet complete, but we are seeing it roll out there. As of yet, we haven't seen any headwinds related to that at all with one notable exception, and that's Mattress Firm needed to sell down slots on the floor of other manufacturers beds to make room for TEMPUR. We did not lose a single slot on the floor of any of their stores. And that just creates some good values on mattresses that suck the wind out of the sales momentarily for many brands in the store as they cleared out that inventory. Outside of that blip, we continue to see demand to expand with Mattress Firm, and I want to reiterate that, on average, we've got more than three beds on the floor. Which means we're getting significant placement in the store, which we have seen a softening of. And frankly, from our point of view, and we think TEMPURs, It's a great brand. It's a great product, and that means it is bringing in more premium, more qualified customer into their stores. And we think that's terrific. So that their stores are moving more premium and that in general, they're getting a better quality customer coming into the door, aligns very much with our product and who we're going after. So overall, we see it as a very positive thing.

That's very helpful. Thank you so much, Joe.

Sure. Thanks.

The next question comes from Peter Keith of Piper Jaffray. Please go ahead.

Hi, thanks, good morning. Congrats on the results, guys. Joe, I apologize, I did miss your prepared remarks, so hopefully not that too repetitive. But I wanted to just dig into average ticket and maybe if you want to provide specifics or maybe just directional. Curious how you're seeing average ticket shape up, whether it's through your three different channels you have now with online, your own stores and then with the wholesale channel?

Yes. We're still, again store, our own stores are younger, newer, so it's hard to talk about trends. I think the most important thing that we've been seeing consistently is just the ASP of our core product, the mattress has gone up dramatically over the last couple of years, which is really a combination of several things. We've expanded the assortment into much more premium mattresses, but more importantly, we successfully executed on driving a continual upward mix shift. Wholesale has been terrific for that as when we see customers coming into the stores, their wholesale partners and can see the benefit of the more premium beds and how that sales associate who can really assist that customer and understanding the benefit of our more premium breads, beds, we've seen that up. But what's really great is even on our own side of DTC and certainly, in our own stores, we're seeing a meaningful mix shift up to our more premium products as well. In our stores, we would have expected that, but see that we've been able to do that through the online channels is terrific as well. And we think that's both an output of the partnership we have with our wholesale doors and really educating customers on the product. We also have been able to get much more, say, relevant in our promotions, by targeting the right people with the right offers, which instead of just sort of doing one-size-fits-all type of promotions, which historically is where we had started, we've been able to realize promotions into the premium mattresses, and it's working terrifically. It's both driving revenue, it's shifting the mix up and is accretive to the bottom line.

Very interesting and helpful. And then I wanted to follow-up. You had provided some, I guess, quick interesting stats on your stores. And so if I understand you, Joe, correctly that you said the mattress stores on average do somewhere between 1 million and 5 million of unit volume annually in Europe, I think you said you were tracking toward the high end of that. So I wanted to just clarify that comment because that's a pretty impressive number. And then just even thinking about maybe on an annual cadence now stores seem to be working, how many you might want to open per year going forward?

Yes. So you did hear that correctly. And I think I want to reiterate, the only store that we really have long-term data. And by that, it's only, call it, a couple of quarters is our factory outlet store, which is a larger format store and does have the appeal of having the slightly discounted factory seconds. So it has been performing very, very well, far beyond our expectations. And we, I'm sorry, I believe it's open in a few months, not quarters, my apologies. But the new stores have opened very strong, but, again, a matter of weeks. So it's hard to really report on any long-term success on those. But again, if the factory outlet stores, any indication of what's possible. We expect these to be very high-performing stores. As to door counts that we're looking at, we're in test-and-learn mode right now. So we, the stores we have are in Salt Lake, we just opened in Seattle and San Diego, and we've got a couple more opening on the West Coast balance of this year. Our focus is really on major metropolitan areas where we can create brand showrooms, opportunities to really bring the brand to life. And clearly, there are quite a few metros out there we have not entered, and we'll see how that goes. I think we'll continue to, what I'll call, go slow to go fast. And really figure out what works and what's right for our customers and what's right for our other wholesale partners, and we will learn and move.

Okay, just a quick follow-up, too. What would be I guess, the net CapEx on any new opening?

Yes, it's -- today, we've really been leaning into what the industry would call pop-ups, which are really sub 12-month leases. And the economics on those are very attractive and the fixtures we've been putting into them are highly mobile. So not putting a lot of capital investment directly into the store itself, more of just the basic lighting, paint, carpeting and so forth. So it's been very, very favorable economics to the tune of, call it, 12-month or less ROICs. But again, this is our testing strategy as we're doing short-term leases and doing formats that we can easily vary and change. Each of our showrooms right now have deliberate variations as we test, and we're really -- since the focus right now is around show rooming and really bringing our brand to life, that's been our focus right now. But we expect these aren't going to be large inventory carrying stores, the square footage we need is less than typical retail. So we expect the economics to continue to be very favorable.

All right, sounds exciting. Thanks a lot, and good luck guys.

This concludes our question-and-answer session. I would like to turn the conference back over to Joseph Megibow for any closing remarks.

Thank you so much. We are thrilled with how far we've come over the last year. We've built a great team, top to bottom, and we are successfully executing against that strategy that I presented when I first joined about a year ago. This year was intended to be a foundation building year. And it's great to see that we have been able to accomplish that. The strength in our business and our balance sheet is not -- is now allowing us to confidently pursue our forward-looking initiatives and recent successes like the newly opened showrooms, we were just discussing and the innovative and amazing new Harmony Pillow, we just launched are great examples of that. We have a lot more coming. And as always, I want to thank the Purple team for the passion and hard work that they bring every day. Thanks again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.