Purple Innovation, Inc. (PRPL) Q3 2020 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Purple Innovation Third Quarter 2020 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 third quarter 2020 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 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 third quarter 2020 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. It was another very strong quarter with demand for the Purple brand at an all-time high. Our teams did a great job capitalizing on our opportunities as we manufactured and sold more mattresses in Q3 than in any quarter in the company’s history to deliver record revenue. Our top-line performance was driven by incredibly strong gains in our DTC channel, coupled with a resurgence in our wholesale business, as our retail partners experienced improved traffic following Q2’s store shutdowns and limited operating hours. During the quarter, we also executed key operational, strategic and financial initiatives in support of our long-term growth strategies. A few of the many key highlights for Q3, compared to Q3 2019 include net revenue increasing 59% to a record $187 million; gross margins expanding 220 basis points; net loss of $1.2 million with adjusted net income of $17.2 million; adjusted EBITDA growing 97% to $30.1 million; and cash increasing 213% to $98 million, even as we made important investments in the business. We also began work on our new 520,000 square foot manufacturing assembly and fulfillment center in Georgia, acquired the rights to an IP licensing agreement signed prior to the formation of Purple strengthening our IP portfolio, and signed a new five-year $100 million senior secured credit facility including an available $55 million line of credit creating a more optimal capital structure and significantly lowered our borrowing costs. I am also thrilled to report that we just received the J.D. Power Award for highest customer satisfaction with mattress online for a second year in a row. Looking at our performance in more detail, DTC revenue increased 98% to $134 million with strong increases over the prior year period in each month of the quarter. We kicked things off with a very successful 4th of July holiday period, creating a lot of momentum that carried into August before accelerating during an even stronger Labor Day sale. In terms of product performance, across our DTC channel, we experienced fantastic growth. For mattresses, demand was once again strongest for our hybrid premier product line, underscoring the progress we have made advancing the premium nature of the Purple products and brand. The combination of product mix and price increases implemented in early July drove a 14% increase in average mattress order value year-over-year. At the same time, our non-mattress categories posted growth rates greater than 100%. Demand is reaching new heights as we moved quickly to capitalize on the recent focus on home in both the bedroom and home office, which I suppose are sometimes the same by upholding our marketing, merchandizing and selling programs for our premium seat cushions, pillows and sheets. With consumer demand still leaning heavily online, alongside reduced channel marketing cost, we shifted our marketing strategy to better reach those new to online customers, we pulled back on more expensive lower funnel channels and are now able to efficiently cast a wider net in both traditional media and digital prospecting. With this larger addressable market, we were able to substantially increase traffic to our sites, while maintaining healthy conversion rates. This approach once again drove significant growth and meaningful expense leverage. Turning to wholesale, revenue was $53 million, marking a return to growth with an increase of 7% compared with a year ago and up 165% from Q2 this year. Our sales in this channel rebounded strongly from Q2 levels as retail traffic steadily improved and consumers shopping our brick and mortar accounts increasingly chose the Purple brand. This was evident by the strong sell-through trends we witnessed at both existing accounts and recently launched retailers in the third quarter, especially during the key July 4th and Labor Day sale periods. As we discussed on our last call, the strong demand for our brand and products is outstripping capacity and in Q3 likely reduced our wholesale performance. We were also challenged with both foam and coil supply shortages that reduced production levels below our intrinsic capacities. The addition of Max 7 and June Health alleviates some constraints, but until production at our new facility is up and running and supply shortages are alleviated, our ability to significantly expand with existing customers and add new accounts is constrained. We recently made the decision to allocate a portion of production in order to bring on our first international wholesale relationship and I am excited to announce that as of yesterday Purple products are available at Sleep Country, Canada’s leading omni-channel mattress and bedding retailer with over 265 doors throughout the country. This includes the launch of an all new mattress the Purple Plus, which adds a premium cover that is cool with the touch and even more breathable, along with an advanced new premium comfort foam under the Purple Grid that along with the high air dissipation supported by the grid further pulls heat away from the body. It’s a great new mattress. And in support of our expected growth in Canada, we have expanded our partnership with Leggett & Platt, who will provide Canadian assembly capacity augmenting our in-house assembly capacity. We look forward to further expanding our wholesale door count in 2021, once Max 8 and 9 come online at Purple South. To provide an update of the status of our new facility in Georgia, I am now going to turn it over to John.

Thanks, Joe. Since I last spoke with you in August, we have been extremely busy preparing Purple South to commence operations. Right now, we are fully engaged in the build out of the facility and are close to completing the foundations that will eventually house the six mattress max machines at this location. We are pleased with the progress we have made on Max 8 and 9, and expect to have Max 8 online within about 90 days along with first of four new assembly lines. Max 9 is being built in parallel and we expect to bring it online shortly afterwards. These two additional machines will increase our current production capacity by roughly 25% to 30% allowing us to better meet near-term D2C and wholesale channel demand with future growth further supported by two more max machines slated to be added later in 2021. On the logistics side, we are and continue to prepare our warehouse management system, physical location solution and hardware in preparation for first quarter distribution and fulfillment activity. Finally, we have ordered additional injection molding machines used for seat cushion and pillow production that will double our current capacity. This will allow us to better meet the growing demand for these two categories. We are very excited to be making progress on this critical infrastructure investment that when completed will significantly expand our U.S. manufacturing and create many new jobs. I am pleased to say that the staffing of the local management team is on track and proceeding as planned and we’ll be further tapping into the areas large talent pool as we continue to build out the workforce. With that, I’ll turn it back to Joe.

Thanks, John. Along with the activity in new Atlanta, the organization is gearing up for a strong finish to the year. The momentum the business has experienced since early April has not let up and we are expecting another strong holiday season. Our focus is on meeting both DTC and wholesale demand, continuing our omni-channel strategy of supporting our customer wherever they choose to engage with our brand. We’ve already discussed the imbalance between demand and capacity that we are facing until we bring on the additional Max machines. For the fourth quarter, we are still dealing with constraints on our supply of foam, which we use in the core of the Purple mattress. This shortage is related to upstream chemical supply challenges facing all foam manufacturers. We are also now facing coil shortages, where our specific fabrics used for the coil suite has only recently been reallocated for PPE product, which has limited our capacity of our hybrid mattresses. That said, we currently believe we have ample finished goods and the inbound supply to meet our holiday needs and are aggressively pursuing alternative sourcing option should demand exceed our expectations. As we navigate this challenge, our teams are also executing key initiatives that will set the company up to start 2021 from a position of strength to continue our market share growth. As John just outlined, we are rapidly building out our new facility and remain on track to begin manufacturing and fulfillment activities in the Southeast early in the New Year. With Max 8 and 9 online, we will be able to resume our wholesale expansion strategy in earnest, which includes selectively increasing our door count with existing partners and adding other leading furniture and bedding retailers in regions of the country where our brick and mortar presence is underpenetrated. Our fourth quarter plans also include accelerated investment in new creative and website design that will serve as the foundation of our 2021 brand positioning. Throughout this year, we evolved our messaging in order to better support the premium nature of our products, as well as our unique innovations with the Purple Grid and our hyperelastic polymer and the very real benefits they provide. The work is currently underway. We’ll continue to advance these themes as we capture more of the premium end of the market and look to attract new consumers to the brand. As to the website, we continue to make improvements, as well as the larger replatforming effort, which we chose to delay initial rollout until early 2021 to avoid any unnecessary risks through the holiday months. We do continue to evolve the existing platform and we believe these efforts have set us up for a strong holiday, starting with our new Kids’ Corner, featuring our new lighter and more affordable kid mattress paired with our kid pillows and kid sheets. We have historically seen strong kid demand for our brand which is unique in the category. We have a beautiful holiday gift guide with elevated branding which includes our just released Purple Pajamas literally made from our soft stretch sheets in partnership with Sleepy Jones. Our soft stretch sheets are so comfortable, you can now wear them and we continue to lean into bundles, which offers a great value for our customers and continues to drive up order value and units. The fourth quarter marks the resumption of our brand showroom expansion, which we paused at the outset of the pandemic. We recently opened two showrooms that feature our latest evolution in store design. The new design looks amazing with elevated presentation and continued focus on meeting our customers’ needs. The first new showroom is in Austin, Texas and the second is in Tysons Corner, Virginia. We have two additional showrooms under construction that we’ll launch in Q4, one in the Midwest and one in the Pacific Northwest. This will bring our showroom count to nine by the end of the year. All of our showrooms are performing very well and are now exceeding pre-pandemic sales volume. We anticipate starting the New Year with similar momentum of around five new showrooms opening in Q1. Finally, we are continuing to invest in new product developments that we anticipate launching in 2021. With our healthy balance sheet, we are also expanding our investment into research capabilities and we have many exciting programs underway ranging from new and improved manufacturing processes to improved materials and novel new gel formulations, as well as entirely new consumer technologies. I’ll now turn it over Craig, who will review the financials in more detail.

Thanks, Joe. As Joe outlined, we had another very strong quarter from both the revenue and adjusted profitability standpoint. As you will hear later, during the quarter, we had a significant non-cash adjustment related to the fair value of outstanding warrants driven by the increase in our stock price, as well as a loss in extinguishment of debt associated with the replacement of our previous debt agreement. For the three months ended September 30, 2020, net revenue was $187.1 million, up 59.4%, compared to $117.4 million in the prior year period. The revenue increase was driven primarily by strong growth in mattresses in our DTC channel, along with higher demand for pillows, sheets, and seat cushions. Our wholesale business also returned to growth following a difficult Q2, when COVID-19 severely disrupted our partner store operations. For the quarter, DTC channel net revenue increased 97.5% year-over-year, while wholesale channel net revenue grew 6.9%. Gross profit dollars were $88.3 million during the third quarter of 2020, compared to $52.9 million during the same period in 2019 with gross margin at 47.2% versus 45% in the third quarter of 2019. This gross margin increase of 220 basis points year-over-year can be attributed primarily to the higher proportion of DTC channel revenue, which carries higher gross margins in our wholesale channel. DTC revenues comprised approximately 72% of net revenue for the quarter compared with approximately 58% in the same quarter last year. Additional positive contributions to the gross margin improvement came from a modest product mix shift as we continue to increase our non-mattress revenue, a July price increase on several of our models, an improvement in our overall return rates in our DTC channel. This was partially offset by headwinds from higher freight expenses, an incremental overhead associated with our new Atlanta facility. Operating expenses were 34.2% of net revenue in the third quarter of 2020 versus 35.7% in the prior year period. This improvement of 150 basis points was achieved through ad spend efficiencies, open headcount and leveraging our expense base on higher net revenue, partially offset by an increase in marketing cost aimed at driving demand and increased brand awareness, as well as the addition of company-owned retail showrooms in the fourth quarter of 2019. Marketing and sales expense as a percentage of net revenue decreased to 27.4% compared with 29% last year primarily due to efficiencies in our advertising spend created from enhanced marketing strategies and lower rates in certain marketing channels in which we advertise. For the third quarter, we reported an operating income of $24.3 million, compared to $11 million in the third quarter of 2019, an increase of 120.9% million. Net loss for the quarter was $1.2 million compared to net income of $8.4 million in the year ago period. The third quarter 2020 included an $18 million non-cash expense associated with the change in fair value of warrant liabilities, as $5.8 million loss on the extinguishment of debt related to the retirement of the company’s previous debt agreement and the $0.6 million non-cash expense associated with the tax receivable agreement. The third quarter of 2019 included a $1.4 million non-cash expense associated with the change in fair value of warrant liability. Excluding these items, adjusted net income was $17.2 million or $0.27 per diluted share based on a fully diluted share count of $64.4 million, compared to an adjusted net income of $7.3 million, or $0.14 per diluted share based on a fully diluted share count of $53.7 million. Adjusted net income has been adjusted to reflect the estimated effective income tax rate of 25.2% for the current period and 25.6% for the comparable prior year period. EBITDA for the quarter was $2.5 million, compared to $10.5 million in the third quarter of 2019. Adjusted EBITDA, which excludes non-cash expenses associated with the change in fair value of warrant liabilities, tax receivable agreement expense, and stock based compensation expenses, as well as expenses primarily related to loss on extinguishment of debt, a technology vendor impairment, legal fees, Interim CFO and consulting costs, severance, previous period sales tax liability and COVID-19-related expense was $30.1 million versus adjusted EBITDA of $15.3 million in the same quarter last year. Moving to our balance sheet, net inventories totaled $50.8 million at September 30, 2020, compared to $47.6 million at December 31, 2019. As of September 30, 2020, the company had cash and cash equivalents of $98 million, compared to $33.5 million at December 31, 2019, and an increase of 192.6%. As we announced on September 3rd, we entered into a five-year $100 million senior secured credit facility. The new facility consists of a $45 million term loan, and a $55 million revolving line of credit. On the full amount of the term loan in closing and utilize the proceeds to retire our previous credit agreement. We have not drawn on our line of credit. Our borrowing rates are based on the company’s leverage ratio and our initial rate of LIBOR with a floor of 0.5%, plus 3% is 850 basis points lower than our previous rate. Based on our strong cash position at the end of September, continued demand for our products and our new $55 million line of credit, we feel we're well positioned to continue investing in our business, which includes our new Atlanta manufacturing facility, company-operated showrooms. Purple branding and innovation initiatives. Due to the continued uncertainty in the overall economy, we are continuing to refrain from providing guidance at this time. However, I do want to highlight a few important points about our fourth quarter. As Joe commented, the mattress industry is currently experiencing a shortage of foam and coil supply, which has impacted Purple as well. To reiterate, we are working diligently to secure enough supply in order to meet consumer demand, but based on current market conditions, it is possible this shortage may impact our ability to do so and therefore it may impact our ability to meet realized demand. For the fourth quarter, as we have seen in comparable periods in prior years, we expect to see contribution margin headwinds from advertising rates that are traditionally higher during the holiday season. As our wholesale partners continue to see expansion of their business, we also expect that continued increase in wholesale demand where we experience lower margin rates. Additionally, we are continuing to invest in our new Atlanta manufacturing facility that will dramatically increase our capacity next year. However, till that facility is fully operational and producing at rates similar to our Grantsville facility, we will continue to see margin headwinds from this investment. Also, the incremental website and creative spend Joe touched on, as well as higher go out marketing expenses, our new channel partners utilized dollars not spent however in the year, will likely push our marketing and selling expense for the fourth quarter above our target of 30%. For the year now, we expect to be at or below that target level. These factors will cause our adjusted EBITDA margin to trend closer to the fourth quarter a year ago, versus the margins we’ve experienced in the previous three quarters of 2020. However, with our strong momentum coming out of Q3, we expect year-over-year quarter y growth rate similar to Q3 in revenue and adjusted EBITDA, balanced with a planned investments in people capacity, showrooms and infrastructure just discussed. I also want to spend a moment discussing our share count. Locked over warrants for October 26th of this year of approximately 8 million public warrants were exercised resulting in an issuance of 4 million Class A shares in generating proceeds to the company of approximately $45.6 million. On October 27, we announced that we will redeem the 11 million outstanding public warrants which are exercisable on a 2 for 1 basis, and a 2.6 million incremental loan warrants which are exercised on a 1 for 1 basis. For the warrant agreement, any exercise of warrants between the notice date October 27 and the redemption November 30 must be executed on a cashless basis. As of November 9, 2020, approximately 1.7 million public warrants and all 2.6 million incremental loan warrants have been exercised since October 27, resulting in an additional 3.1 million Class A shares being issued. Considering the impact of these exercises, we had approximately 60.9 million Class A shares outstanding as of November 9, 2020. If all of the remaining aforementioned public warrants are exercised on a cashless basis prior to the redemption date, we estimate we will issue an additional 2.9 million Class A shares. This would increase the total also in the Class A shares to 63.8 million as of November 30. It’s important to note that there are still approximately 8.5 million sponsor warrants outstanding, which are exercisable on a 2 for 1 basis, but are not redeemable. I’ll now turn it back to Joe for his closing comments.

Thanks, Craig. We are on track for finishing off an outstanding year of growth and enhanced profitability despite the initial challenges presented by COVID and operating under capacity constraints for much of 2020. Our performance in these conditions highlights the growing awareness and desirability of our differentiated products and the strengths of our omni-channel distribution strategy, particularly our advanced digital capabilities. Importantly, the work our teams have done over the past twelve months has significantly strengthened this foundation and put the company on a clear path to maintain our pattern of profitable growth. While there is still health and economic uncertainty in front of us, we believe that the positive momentum already demonstrated early in the year remains in place. So regards of recent positive consumer shifts resulting from the pandemic, we believe our intrinsic business is well set up for continuing to take share into 2021. I want to thank all of our nearly 1,500 employees for their relentless hard work and dedication and the commitment they’ve shown to maintaining our operational excellence under difficult circumstances. At this time, we will open up the call to questions.

Thank you. [Operator Instructions] Our first question is from Bobby Griffin with Raymond James. Please proceed.

Good morning, everybody. Thank you for taking my questions and congrats on another great quarter.

Thanks, Bobby.

Thanks, Bobby.

The first thing I want to ask about was just the sequential change in gross margin understanding the mix up in wholesale from in 3Q versus 2Q of this year. When we think about modeling out 4Q gross margin and you’ve talked about another mix up in wholesale. So, could we use that change in 3Q as a good kind of starting point? It looks like, I don’t know for every five percentage change in wholesale mix, it’s roughly 50 or 70 bps worth of gross margin pressure. Or is there other items in there that I should keep in mind when we are trying to kind of pinpoint where gross margin should be in the fourth quarter based on our wholesale estimates.

Yes, well, did you ask Craig that?

Yes, whoever, it’s Craig or you Joe, whoever you think, whoever wants to take a stab at that.

Sure. I’ll take off, since I jumped in, but Craig can fill in. So, as you are trying our Q4 I think you need right, it’s not just a gross margin story. As you stated, we are anticipating continued shift back toward, call it normal channel mix where our wholesale which in Q3 was more like sub-30% around 28% wholesale where in Q4 getting back to more of that third of business being in wholesale is current trends, which is where we have always said, we like to be. So, I think that does creates some gross margin pressure of course. But I think the other things to keep in mind as you think about Q4, Q4 has seasonality that’s just –and it’s consistent if you look back at our prior two Q4s in 2018 and 2019. Q4 just looks different than other quarters. It’s a more promotional quarter. Marketing expense is typically higher and as compared to Q2 and Q3 where we saw very attractive marketing costs. Things are also shifting back to much more normal marketing expense in Q4 on top of the increased dollars that are in the marketplace. So where we’ve been sub-30% of net revenue in advertising and selling, in the last couple of quarters, we expect to be back into that more 30% mark. Then the other thing is, we are back into investment mode. We’ve got a healthy cash – healthy balance sheet where we are investing and building out as we’ve said our new manufacturing facility, we’ve ramped back up investment and to getting the new site platform built out and some of the crate and the design around that, as well as reinvesting in R&D and our research capabilities. Some of which is leaning into growth and some of which is catch-up things that we have deferred early in the year which does make prior quarters look a little more attractive. So the key is, everything is healthy and normal. There is nothing about Q4 that is really surprising at least to us, it’s just a very different kind of quarter than we’ve seen in prior quarters. Craig, I don’t know if you want to add some color to that?

I’d say – I think your question was more around gross margin and if it was, I’d say, the only real difference, I don’t think you are thinking about it correctly, but one of the probably biggest difference is on the gross margin level will be the operating cost in Atlanta as we only start to ramp that up heavy to get it operational, that will put pressure on the margin. The shifts from DTC more into wholesale that shifts economics more change from the shift in prior quarters.

Okay. That’s helpful. And then, maybe just to follow-up and I just want to make sure, we are all on the same page from a capacity standpoint, but the plan is to have the 8 to 9 machine up and running here. I think you guys mentioned 90 days or in the ninth a little after the 90 days. And then, what’s the number of machines that would be added after that in the Georgia facility? So I am just trying to get a sense of where the goal is and how many machines will be up and running by the end of 2021, because that will help us then gauge where we should try to put our revenue estimates that based on where we estimate for each machine’s productivity?

Yes. So, we – the facility itself can hold six machines and there is a number of things that we are doing upfront and in parallel. So, for instance, part of retrofitting, holidays, is digging and reinforcing some fairly large pets to contain them and we’ve already dealt and ported – built up and port in for all six pets. So we are setting ourselves up to be able to build out in parallel. As of we look at this year, we are modeling a little more conservative pace. So, we are expecting to get committing to say, one a quarter or might accelerate a little faster than that. So four more Max machines from a operational to the point that they are contributing to the year next year. We may have a fifth online right toward the end of the year, but not in a way that it would be part of the modeling for the year.

Okay. That’s helpful. Congrats on the quarter and I appreciate all the details and great to see some of the investments coming back given the growth outlook. So, best of luck in the fourth quarter.

Thank you.

Thank you so much.

Our next question is from Brad Thomas with KeyBanc Capital Markets. Please proceed.

Hi, good morning, Joe, Craig and John and let me add my congratulations on a great quarter and then which is shaping up to be a really great year. I was hoping to dig into just the sales trends a little bit more. I was wondering if you could get some color on how the different channels had performed through 3Q. And what you were seeing out of the each channel thus far in 4Q?

Sure. First of all, hey, thanks for joining. Channels, meaning, sales channels you said wholesale versus…?

Yes, sales channel. How did – exactly how did you see it performed by month and how it was going so far through October and starting November and the same for wholesale. Just as we try and get our arms around the trajectory of these businesses in the fourth quarter?

Got it. Yes. So, I mean, as we said in the prepared remarks, I mean, DTC will continue to remain very, very healthy. In Q3, such that it also, as we mentioned put pressure on our wholesale ability. We are still through much of Q3. Had our wholesale partners on some level of allocations as we just continued through the quarter to be supply constrained. We – going into Q4, are on the capacity side feeling much more confident that we’ve got what we need for a healthy Q4 both in terms of getting the new Max machines and the labor back up and working through some of the upstream supply challenges that we have had. So, we – one of many reasons we expect wholesale to continue to grow into Q4 is we are better able to service our partners. In terms of sort of tailwinds going into this quarter, I mean, it’s things don’t change overnight. So, the strong performance we’ve had and strong traffic levels we’ve had have continued into the quarter. And I think everyone is waiting to see exactly what holiday is going to look like something that we did see in Q3 is just – I’d say, demand seem to be spread out a little more. The peaks of holiday tended to be a little less and the customer demand seem to be more balanced which we view is a very good thing. But exactly what that looks like heading into Black Friday, Cyber Monday, we are prepared for it. However it goes, everyone seems to have gone a little promotional earlier this year and we’ve joined in with that partly driven by just challenges in fulfillment networks. But so far, what we saw through Q2 is driving on.

Very helpful, Joe. And if I could follow-up on the new Purple Plus model and the brand architecture in general, it’s been my belief that you all saw a tremendous opportunity ahead of you to refine the assortment that you have and add more premium models. I guess, could you talk a little bit more about what sort of testing in R&D you did on Purple Plus? I know it’s new to the market. But when you think it will be available in the United States? And how you are thinking about continuing to expand and add more premium products over time?

Yes. The Purple Plus, it’s a great new mattress. One thing to consider with it is, we nearly to do to put the customer at the center of everything we do. And that was a mattress specifically built in partnership with Sleep Country for the Canadian market. And one of the things that has performed very well for Sleep Country is premium foam core mattresses. So, it was designed to be a premium mattress that was a hybrid, which again is a different kind of design consideration than what we’ve done in the States. In that regard, it’s a phenomenal mattress. It’s a much more premium cover. It’s just elevated design. The covers, as I mentioned in the prepared remarks has a cooling capability that just feels wonderful to touch. And we found a novel new foam that we put underneath the Purple Grid that is really sort of a balance between it’s a novel new technology we found that the balance between some of the best of both latex and memory foam. It has the balance that you would want from latex and it draws heat away, but has some of the shaping capabilities that memory foam and pairing that up with our grid was just a magical combination. So, it’s got elevated features, elevated design. It’s a much more premium mattress overall. But the key is, it was designed as a premium foam core mattress which is exactly the right product for Sleep Country in Canada. That said, will we bring it down to the States? I think, let’s see how it goes in Canada. But there is no reason we couldn’t in the States, we are much more focused right now on more U.S. focused premium expansions and as I mentioned, we are leaning very heavily into our product design and research programs right now.

Very helpful. Thank you, so much, Joe.

Thanks. Take care.

Our next question is from Curtis Nagle with Bank of America. Please proceed.

Very good. Thank you very much for taking my question guys. So, you had just – maybe a quick one first in terms of just how many doors you have at the moment. It doesn’t sound like there were any changes somewhere, I guess, above 1800 – around 1800. Should that be roughly the same in 4Q and kind of how do we think about expansion into next year?

Sure. So, we – I think we ended last quarter just shy of 1700, although in the earnings call, I think we were already over 1800 which is what we announced. We - with the addition of Sleep Country, which we just launched this week actually, it gets us closer to 2100 doors. At this point, we expect that will carry us through the end of the year, really as it’s always been until we get additional capacity built out, we sort of hold the line on that kind of expansion. Once Max 8 and 9 come online, we continue to have interest with both existing partners, as well as some regional players in areas where less penetrated. That said, we continue to say what we said all along, which is we are a retailer first and foremost leading with digital channels and aiming somewhere between that two-thirds owned to maybe as much as 60% own, versus retail and we are going to do everything we can to keep that balance. But we also have done extremely well with our wholesale partnership and as capacity grows, we will continue to lean into wholesale as appropriate.

Okay. Very interesting. Yes. And then, in terms of your comments on your own story, I thought we’re really interesting, I think you said that they were heating pre-COVID levels which is encouraging. I guess, would you be able to kind of frame kind of where that productivity is per boxing? And how should we think about own store growth in 2021?

Yes. It’s still something that’s in early days. We – I mean, our original plans were a little more aggressive this year as we have said, we were aiming to open about five a quarter and given the pandemic, we put that entire plan on pause for obvious reasons. This quarter we are back into business and we are thrilled that we are opening four more. Again as I mentioned, we just opened Tysons Corner in Austin and it’s a completely revamped showroom design and we are very, very pleased with how it’s come out. Right now, our expectation is to get back to the pace we originally said, which is about five a quarter. So, again these are brand showrooms really trying to bring the brand story to life in key metros. The economics remains, as we said, very good. We’ve just lapped our first year on some of them. The specific economics, we haven’t talked about. We’ve been testing a lot and revising as we go, which has been sort of our test and learn conservative approach here. But I’ll reiterate we are seeing industry standard economics here, right in line with other specialty mattress retailers and we are very, very pleased with the results and just to be clear, they are producing profitable results.

Thanks very much. I appreciate.

Thank you.

Our next question is from Brian Nagel with Oppenheimer. Please proceed.

Hi, good morning. I too want to add my congratulations on another very nice quarter.

Thank you so much.

So, the question I have – I mean, I understand not giving guidance here, give the fluidity in the environment. I just want to have on sales and then clearly another very strong sales period here in Q3 and good commentary on Q4. But as we are all looking at this COVID crisis very much continues, hopefully we are working towards some in this side now some of this vaccine news. Either in your data as you talk to your wholesale partners, are you seeing any indications that the consumers – the consumers maybe starting to back away from this category and refocus elsewhere. Or does underlying demand for mattress category is good as it’s been?

Yes, it’s – well, of anything, I’d say, demand appears to be very strong right now, which I think is focused on home and health and sleep in general. So, I think there is some good strong tailwinds there. I think who has won in that consumer demand has shifted a bit as over the last few quarters those who have the ability to reach and service the customers through difficult channels have done – have been able to arbitrage that demand better. And certainly, we believe we’ve done very well in leaning into that. But we remain optimistic that this is a category that’s healthy with sufficient demand and sufficient opportunity for growth. Craig, if you want to add something to that?

No. I agree. There is still opportunity there. I think you covered it well.

And the second question I have was, there is a lot you’ve been talking about the supply constraint in certain, say components in the mattresses. So I guess, I am looking it and given what a Purple mattress is and that’s so much of manufactured in-house. Is that puts you in somewhat of an advantage against the backdrop of supply constraints versus others who are outsourcing much more of the components of their products?

I am sorry. That cut out a little in my end. Can you say that one more time?

Yes, I mean, obviously, we phrase it too. So you were talking about the supply constraints, and the impact that’s had upon your business, but so much of your product is manufactured in-house vertically. Does that dynamic against the backdrop of supply constraints? Is that dynamic is what Purple added advantage versus other mattress companies who are outsourcing a much larger portion of their products?

Yes. We certainly believe so. I mean, we think part of our - part of how we have been able to manage through the ever-shifting and uncertain environment we’ve been in is the fact that we are deeply vertically integrated. And can manage our cost structure and our output on nearly a day-by-day basis. The majority of the raw materials and our IP is stuff that isn’t where we’ve been supply constrained and we are able to source those materials fantastically and having ample supply, which again is part of being vertically integrated that where we need to stockpile raw materials to protect and ensure that we can manage through any shortages in the industry we have those opportunities. So, overall, absolutely, we believe this is a competitive advantage of ours. That said, there are some components that are important ingredients in our mattress that we don’t manufacture such as, coil and in our Purple mattress, our entry-level mattress, it is a foam core mattress and then even our coil mattresses are encased with foam rails to provide a terrific edge support. I mean, there is some foam in our mattresses. It’s not the primary feature. But there is some foam and the foam challenges that have been out there we felt, mostly where we got opportunities to lean in and expand similarly coil which sits mostly around the fabrics that’s around the coils have been in short supply primarily in support of PPE, the fabrics that we were using, we had chosen a quieter fabric by design. We felt it continue to make our mattress more premium and we were somewhat insulated on those fabrics as we weren’t using the same old fabrics that everyone else was using. But even just the demand for PPE has gone even deeper and even the fabrics we are using now were finding are suddenly being sucked into other PPE needs. So even that’s been something that is recently been a challenge. But nothing that we haven’t been able to work through. So yes, I’d say very much, we believe it’s part of our notes and part of what makes our business attractive.

Well, thank you. Congrats again.

Thank you.

Our next question is from Seth Basham with Wedbush Securities. Please proceed.

Thanks a lot and good morning. My question is around that near-term outlook that you have. First on the top-line, just making sure I understand your perspective here to reach similar growth rates, in the fourth quarter versus third, so 59-ish percent year-over-year, do you have high visibility to that with the supply constraints that you are considering? And if you are able to secure additional components, could there be upside to that perspective?

Yes. John, do you want to jump in on that?

Sure. Thanks for the question. Yes, we are able to react accordingly based on additional supply capabilities. So we build according to our build plan on a daily, weekly, monthly and quarterly basis. And if we see our position on materials improve, we’ll increase our build plan and react accordingly.

Got it. Okay. And

And we have the ability to forward buy if we need to stockpile those resources that are scarce. A year ago we did that.

Sure. And then, so there is some component constraints, if you secure this component potentially you could see higher revenue. You have the capacity to drive a little bit more production then the 59% revenue growth implies?

Craig?

Yes. I think it’s possible. But again, that’s a short-term scenario. We are talking about less than two months left in the year. So, being able to buy way in advance and stockpile inventory, there is a raw material inventory that’s a little bit tougher in the short-term.

Understood. Okay. And second, as it relates to EBITDA expectations for the fourth quarter, at one point, Craig you said that you expect the margin to be similar to the fourth quarter of 2019? And in your press release you commented you expect the growth rate to be similar to the third quarter so 100%-ish. If you get to $10 million in one case and $12 million in the other, what would the different – can you just tell us which one is we should be thinking about here?

Sorry. I understood the last part of that. So, the – can you just repeat it one more time? I am trying to follow all, the schedule I am following it

Your fourth quarter EBITDA expectations, should we be thinking about double year-over-year on dollar basis or similar margin rate to the fourth quarter 2019 which you referenced.

Similar growth rate is what we said on an EBITDA basis. So, the growth rate from 3Q-to-3Q is similar growth rate in the fourth quarter that we saw or comparable that we saw in the fourth quarter – sorry, in the third quarter. So, I mean, you are in a ballpark, but you also need to consider that we – that – it will be the similar growth rates but there were some additional considerations that need to be looked at, we outlined – so we are adding capacity. So there is little bit of inefficiency there. Ad spend is different from third quarter. But, I mean, growth rate in fourth quarter, as we said, should be similar to what we saw for the third quarter.

Fair enough. And last related question, thinking about the EBITDA trajectory going forward, when you think about these additional cost that you are incurring the fourth quarter to invest in growth. How should we think about your growth-related investments in the first half of 2021? Will we continue to see pressure in EBITDA during that period or could we see much improved results?

Well much improved, it’s how you define much. We should begin to see more efficiency out of Atlanta as we open and start producing and having output from that facility. And as we said, we are always trying to improve our efficiency in the existing locations in Grantsville and Alpine. So, we don’t expect there to be as much pressure going forward. But there is no way Atlanta will be as efficient as the existing facility or has six machines and three or four assembly lines running with full fulfillment capabilities.

Understood. Thank you very much.

Our next question is from Susan Anderson with B. Riley FBR. Please proceed.

Hi. Nice job on the quarter. I was wondering if you could talk a little bit more about the expansion in the international markets. So, it sounds like now you are in Canada, I guess, how many more wholesale doors can you be in there? And then, also is there opportunity to expand into other countries?

Yes. Sure. Happy to take that. Thanks for joining. So, in Canada, we are in a two year exclusive arrangement with Sleep Country, both online and in showrooms. So, we’ve really locked arms with Sleep Country for Canada for the moment, given their incredible presence there. On the premium side, they’ve got about half the market share. So, we feel very confident that we picked the right partner and this really sets us up for long-term opportunity in Canada. But that’s our current arrangement there. We did launch fleet-wide with them. So we are in all the way to me - that’s as of now about 280 doors. So, that gets us going in Canada. As to beyond as we talk about other countries, absolutely, this is always been part of our stated strategy. Given our manufacturing constraints, our job one has been to service our demand we have locally here which we believe there is still a lot of upside. So, we’ve taken a very cautious approach in terms of expansion. We are expecting 2021 in addition to continuing to build out our presence in Canada that we will begin the process of starting to build the infrastructure we need for more international expansion. But we really don’t see any meaningful expansion happening until 2022 and beyond.

Great. That’s helpful. And then just a follow-up on the OpEx. So, with the higher marketing and investments in fourth quarter, I guess, we should expect some additional deleverage of expenses from third quarter to fourth quarter. Is that how we should think about it?

Yes. Certainly, when you are comparing a quarter where wholesale still wasn’t fully back to normal. There was still very attractive marketing rates and you didn’t have the seasonality that just is part of Q4. Q4 has more days of promotion. Q4 has a much more competitive marketing environment. So, yes, and by the way, this will be true likely in every year comparing Q3 to Q4. So that seasonality is just part of the business. And again, we’ve seen that each of the last two years. On a year-over-year basis, we are fully expecting to get leverage. So we continue to see our business improve top to bottom and we think Q4 will not be an exception on that.

Great. That’s helpful. Thanks so much. Good luck next quarter.

Thank you so much.

Our next question is from Atul Maheshwari with UBS. Please proceed.

Good morning. Thanks so much for taking my questions. Joe, can you provide some thoughts on how revenues could play out in post-vaccine world? What do you think – is really the normalized growth rate for the company going forward, so I ask this question in another way, Purple grew revenues that 50% prior to the pandemic. That was in 2019. Is that’s something that’s achievable as the environment hopefully normalize at some point next year?

Yes. We – what our exact growth rate is, we are not giving specific guidance on. But on a trajectory basis, the – I mean, what we believe happened over Q2 and Q3 was just channel shift. The demand remained and the limiting factor on our growth has been and continues to be fundamentally, how many mattresses we can make? So, we have not seen any waning in demand either on an end-consumer basis or in opportunities for wholesale partners to engage. We have a long list of regional terrific players out there, furniture stores and others who would love to be able to put our product on their floor. And we love to be able to support them. That’s why we are investing in this additional 0.5 million square feet in Georgia and as we build up that capacity, we will continue to lean in. Similarly, we’ve got great national players who we are not penetrated all the way. And there is a lot of opportunity for expansion with our existing players. So, our number one job right now is, continue to build out this capacity. Continue to get our Purple Soft facility outside of Atlanta up and running. And do everything we can for our partners and our customers to service that demand. But we see good tailwinds, so.

Great. Thank you. And as my follow-up, Joe, as you look forward to the next few years, can you rank which of your long-term initiatives really have the most potential? So, what is that that you are most excited about? And then, how do you manage the execution risk associated with simultaneously working on all of these initiatives?

So, a terrific question. Thank you. Long-term, it gets us much more excited. We are – there is a lot of just operational efforts right now to build out capacity and service our customer. We – the name of our company is Purple Innovation and we were founded on innovative products with our patent portfolio of nearly 300 patents now. And there is a lot of untapped potential we have in our labs right now in both the sleep category which we see tremendous opportunity for innovation and advancement and beyond. And an example we talked about how we are up over a 100% in our non-mattress categories, which includes sleep like our remarkable pillows, which we put a lot of design into, as well as like our seat cushions which is an example of how our capabilities extend well beyond the bedroom. So, on product expansion and category expansion, we continue to believe we have tremendous opportunity, given our core capabilities. And as we just spoke in the prior question, we’ve been basically just the domestic company and the international opportunities we have, we believe are significant. There is very little about our product given that we are a product first company that isn’t something that can be quite easily extended into markets outside the U.S. This isn’t a marketing play or a brand play, it’s a product play with differentiated premium better product and we believe there is tremendous opportunity for growth beyond the U.S. as well.

Excellent. Good luck for the rest of the year.

Thank you so much.

Our next question is from Jeremy Hamblin with Craig-Hallum Capital Group. Please proceed.

Congrats on the strong results here. I wanted to ask some questions about the wholesale business. It looks like you’ve seen a pretty steady recovery there. But I think productivity per door still looks like it was negative in Q3. But I think based on the commentary that you had here for Q4, it looks like that might shift to getting back to positive on a kind of sales per wholesale door. Can you just comment on that? Part one. And part two is, when you think about the Sleep Country relationship, they generate kind of higher sales per door that your current largest partner. So, how do we think about the expectations around productivity for those doors?

Yes. There is – this is hard to back into. There is a lot of nuance here in part because not all doors are equal as you are suggesting with Sleep Country. Also, how we post our P&L is not exactly the same as flow through. So, for example, one of the things we saw going into Q2 is, a lot of orders that had come in, some of which got deferred into Q2. Some of which was burn down of inventory on hand. So there is some timing that goes into the quarters on this. All in, we added Q2 to Q3, I think about 200 doors. So – but all in, we also saw that we saw the return to growth in wholesale revenue. So, call it, a mix of seeing a rebound in existing doors, plus some new doors coming on, and again, accounting for some of the timing that goes into how those load-ins occur. But all in, we are back to growth and we are back to expansion with Sleep Country coming on. So, we feel like we’ve hit that pivotal point where this is getting back on track and we see the right momentum. We do – and then, in Sleep Country, the other challenge is, as of right now, as part of our launch, we got two beds on the floor versus say, like, most of our mattress foams where we have typically four beds on the floor that does impact the sales per door as well. Sleep Country does produce more per box on average, just looking at their overall numbers. And we’ve got good price points with Sleep Country and are selling our full assortment through the digital channels and are available for sale at any of their stores, as well. We just don’t have all four on the floor or five really on the floor, out there, excuse me, with our new Purple Plus mattress. So, we just launched, literally yesterday. So it’s a little early to say, what we are going to see there. But we think there is tremendous potential.

Okay. Got it. And then, as a follow-up, with quite a bit of capacity coming online in 2021, in terms of – you’ve been somewhat restrained by capacity limitations in adding wholesale doors this year. But as we look forward into 2021, it sounds like you could be in a position to potentially add like a 1,000 wholesale doors. Can you kind of reflect on that? And give us a sense for – I mean, demand continues to be very strong and you are making these adjustments on capacity, where I think you are catching up to demand. But, can you give us a sense for what kind of the wholesale door add potential is for 2021?

Yes. Certainly, the idea that we get at is as you said the 1,000 more doors is absolutely in the realm of possibility. There is – as I mentioned earlier, sufficient existing demand out there from our existing partners, I mean, just from existing partners, we’ve got more than a 1,000 doors right there. So, for sure, we see lots of opportunity there. The key is just balancing it against our sort of baseline demand growth we are seeing in DTC in our existing doors, as well as building out, just healthy capacity. I mean, part of our capacity expansion plans is, and part of being a good supplier to our partners is making sure that we’ve got predictable capacity. And when you are running all machines, all shifts, at maximum capacity all the time, it doesn’t allow for high tolerance, if unexpected things happen or there is sudden shifts in demand, which happens all the time in the real world. So, part of our capacity plans is to actually build a little more surplus into our overall capacity where we can both flex in to additional equipment and additional lines, as well as allow for tolerances as we need to do maintenance beyond what’s normally planned. So, just – and as modeling out the expansion, we are expecting on average slightly less productivity per machine, not because we are not getting the output we can, but because we’ve been operating in a way that’s just isn’t healthy for the long-term. We’ve got to have a certain amount of surplus that we can lean into appropriately and protect our ability to support demand at any given moment in time.

Thanks for taking the questions guys. Best wishes for you.

Thank you.

And our final question is from Matt Koranda with ROTH Capital Partners. Please proceed.

Yes. Hey guys. Thanks for squeezing me in. Lot of questions have been asked and answered. But I did want to dig into the sort of the guidance for fourth quarter just one more time and maybe attack it from just a different angle here. So it sounds like the right number on EBITDA is around $11 million and I am just trying to get there with the revenue guidance that you guys provided of just below $200 million. Even if I include marketing, sales and marketing to north of 30% of sales, and keep other expense items sort of flat versus 3Q, it seems to imply that gross margins would be in the low 40s or somewhere around like 600 basis points of leverage sequentially. I am just wondering if you guys could comment on sort of the right way to think about the margin profile of both gross margin and OpEx to get to that $11 million level. Can you do that?

Yes. It’s – right, let me start by saying we are not giving formal guidance for Q4. We’ve given a directional nudge, which is basically more of the same on a growth rate basis. We continue to see a healthy business here and we continue on a year-over-year basis to see both leverage and consistent growth rates. So, I just – I want to make sure we are completed on that. The – Craig, do you want to perhaps jump in?

Yes. So, there is a couple of ways to look at this. So, there is a way look at it is, growth in volume and growth in channel and there are lot of components. And again, we are not giving guidance, but what we are trying to do is. Look at as – the growth rate that we saw in third quarter is going to be very similar to what we expect to see in the fourth quarter, but also considering those factors in the fourth quarter that we start to also expect as, it’s a more promotional quarter. It’s a more expensive ad quarter. So, it’s not going to cost us any more or less to make the product and we are going to distribute it and fulfill the same way. So, the gross margin pressure that we are going to see it’s going to come from the fact that we are putting a lot of investment into the Atlanta facility, which is going to be some gross margin pressure, but not extraordinary. And then, on the marketing and advertising side, there is going to be pressure from higher ad spend and as we talked about some of the investment in brand. So, there are puts and takes. And we are trying to help you understand for your modeling purposes that, the growth is going to be there. There will be a shift in the channel mix and there are going to be some headwinds in gross margin from Atlanta and from ad spend in marketing and advertising. So, those are the components that we want you to understand as you are building those. But that was the best way that we can feel to help give at least some indication.

Yes. And the channel shift is meaningful here. I mean, this quarter, it was at 28%, getting back to the close of a third, you are talking close to 500 bps or so of shift right there. And we saw it going into COVID on the enhanced margin and profitability as this dramatic shift happened away from wholesale and to DTC. We are now, as we’ve been saying along, expecting that things will get more back to normal and we are seeing things go back to normal which remains a very healthy business.

Okay. That’s helpful guys. And then, just, maybe if we break apart the gross margin pressure that we are seeing from the wholesale mix shift, which I think is, is maybe understood, versus the deleverage from Atlanta and the ramp up and the cost in for there, maybe that would be one way to help us understand that that gross margin directionally?

We haven’t publicly announced where we are on a channel mix shifts. And I referred to it earlier in the call and I don’t think they are completely off the reservation on what that amount is. They are certainly within the range. And then, the pressure from Atlanta, it will be a little more significant than it was in the third quarter. But again, we haven’t broken down gross margin on how much of the pressure is coming from Atlanta.

Okay.

Again, it’s a significant expense out there. With the press release, the Georgia release that was around $21 million of investment, obviously, a lot of that’s CapEx. But, we’ve got full-time labor out there now that is building out and there is some of that just rolls into OpEx and it’s just part of the start-up cost of getting this going.

Okay. Just last one real quickly on the marketing and sales front. I just wanted to be clear, it sounded like you said it was headed back into sort of the 30% of revenue range. Any reason that we would go to the levels that we saw last year in Q4, I think they were relatively elevated in 4Q of 2019. Just help us understand that dynamic. And then, maybe, why would we be stepping on the gas on marketing if we are potentially supply constrained?

Well, I wish the implication there were true that we could just turn off advertising and sales just comes in. I think, most CFOs ask that question to any marketer every quarter. We continue to need to fight for mine share. We are a young brand. I mean, we – by no means are we suggesting that we are a commonly known brand as people come into the consideration set. And this is a category, I mean, given that the majority of our revenue is mattress. This is a category that, on average people are buying every seven to ten years. So, there is new people entering the market every year and as a young brand, many of them have never heard of us. So, we fight the good fight every day to get more and more consumers educated as to who we are and our premium product offerings and that’s never going to end. The reality is, what it takes to do that? Last quarter, it’s less expensive than what it takes to do in Q4. There is just more noise, more advertising out there which is seasonal. And then on top of that, we have had very attractive marketing rates as dollars were pulled out of the market over the last two quarters, that’s been phenomenal. But we are getting back to more normal marketing environments and that’s just – again that quarter-over-quarter increases marketing costs, but year-over-year we still expect to see marketing leverage. So, as you look at Q4 last year, we fully anticipate leverage over last year.

Great. Very helpful, Joe. Thanks guys.

Sure.

We have reached the end of the question and answer session. I would like to turn it back to Joe for closing remarks.

Thank you so much. We’ve built a very effective foundation and our ability to keep successfully executing and maintaining growth is something our whole team is very proud of. We have not had to figure out how to shift from being a start-up to becoming a mainstream manufacturer, but have also had to figure out how to operate in a very challenging environment. The outpouring of satisfied customer feedback keeps us going every day. I am also thrilled that we’ve been able to continue to invest domestically in our people having hired over 500 employees since the pandemic began. Looking forward, we remain very optimistic. We believe our core business is very healthy and regardless of how this uncertainty plays out, we believe we are well equipped to continue to innovate and take share. To all of our customers and partners, as well as our employees, stay healthy. Be safe and sleep well.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.