Purple Innovation, Inc. (PRPL) Q3 2021 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Welcome to Purple Innovation Third Quarter 2021 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]. As a reminder, today's conference is being recorded. It is now my pleasure to introduce your host, Cody McAlester of ICR. Please go ahead.

Thank you for joining Purple Innovation's third quarter 2021 earnings call. A copy of our earnings press release is available on the Investor Relations section of Purple's website at www.purple.com. I would like to remind you that certain statements we will make in this presentation are forward-looking statements. These forward-looking statements reflect Purple 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 2021 earnings release, which was furnished to the SEC today on Form 8-K as well as our filings with the SEC referenced in that disclaimer. We do not undertake any obligation to update or alter any forward-looking statements whether as a result of new information, future events or otherwise. Today's presentation will include reference 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 evening, everyone. With me on the call today is Bennett Nussbaum, our Interim Chief Financial Officer. After our prepared remarks, we will be happy to take your questions. First, my apologies for the last-minute change of schedule for this call. As we disclosed in our earnings release within the last hour, we are pleased to announce that we have entered into a new agreement with Mattress Firm that creates significant new mutually beneficial opportunities to sell our full assortment of sleep products with Mattress Firm while also allowing for new opportunities beyond Mattress Firm. This new agreement has been months in the making, and we just closed late last night and needed today to tie up all the financial details before our call. I will speak more about our partnership later during the call. I would also like to thank Bennett for joining as our interim CFO. We continue to actively search for a full-time CFO, but in the meantime, Bennett has truly joined the team, bringing a wealth of relevant experience and is helping to build a strong foundation for a full-time CFO once he or she joins. Moving to the business. The third quarter was one of the most challenging periods the company has experienced. As a result of the hard work and resiliency shown by our teams as we address the production challenges that severely constrained our manufacturing capacity for over 2 months, along with another month of backlog as we caught up. During this period, given our inventory issues, we significantly reduced our marketing spend by more than $10 million from the same quarter last year, which materially impacted our DTC business for the quarter. With this disruption behind us, we had hoped to quickly reaccelerate back to prior sales velocity but the pace of recovery proved slower than anticipated. We are now ramping back up our marketing spend, taking pricing opportunities and are proactively managing our cost of goods sold. I'm going to spend a few minutes reviewing the drivers of our third quarter performance and our expectations for the remainder of this year. Then I'll spend time discussing our initial thoughts on 2022 and the key building blocks for achieving our financial objectives over the next 3 to 5 years, after which Bennett will review the financials in detail and outline our updated outlook. Our priority in the third quarter was returning our production capacity to pre-incident levels. After completing these critical tasks, we quickly ramped up production and exited our backlog position by the end of August as planned. The lack of inventory for much of the third quarter, combined with tough year-over-year comparisons, led to net sales being down 9% to $171 million compared to Q3 2020 and -- By channel, wholesale revenue increased 10% compared with Q3 2020, continuing the positive trends we experienced in our existing and new wholesale partner doors during the first half of the year. This was offset by a 16% decline in DTC revenue, primarily driven by our intentional 25% year-over-year reduction in advertising spend for the quarter due to our capacity constraints as previously mentioned. Also, our digital business was up against an almost triple-digit increase in the year ago period. And as communicated in prior calls, we expected the DTC wholesale mix to normalize as consumers continue to return to stores post-pandemic, and we are beginning to see that. Compared with a more normalized third quarter of 2019, DTC revenue was up 66%, underscoring our multiyear progress expanding our industry-leading position online and contributions from our accelerated showroom rollout. During the third quarter, we opened 7 additional showrooms and all 23 of our current locations are performing ahead of our internal expectations. I'll speak more to our showroom strategy shortly, but it is quickly becoming another key differentiator for Purple and an important high-margin growth vehicle. From when we exited backlog through today, we have been busy expanding our market presence in brick-and-mortar retail. Unfortunately, it has taken us months longer than anticipated to get back to expansion and growth with wholesale. Both wholesale and DTC demand were adversely impacted by the production issues we experienced in the second and third quarters of 2021, as our ability to manufacture and deliver our products was interrupted. In addition, in response to production delays, we temporarily reduced our marketing spending, which also impacted demand, particularly in the DTC channel. But while delayed, we are making meaningful progress now. Over the past 2 months, we opened 270 new wholesale doors and have another 210 doors contractually committed to open in Q4. What has been particularly promising is more than 80% of these new doors are taking all 5 of our mattress models on the floor with our new elevated displays that we first presented at Las Vegas market last August. The new accounts include over 200 Ashley furniture locations, 27 living spaces and 3 Nebraska furniture mart, among others. We are very pleased with our early partnership and results with Ashley and anticipate expanding meaningfully into their fleet of home stores. As I mentioned at the start of the call, we have also entered into a new agreement with Mattress Firm, our largest wholesale partner. Our original agreement from September of 2018 was signed just before I arrived and predates much of the current leadership team at Mattress Firm. When we originally signed, we were a young company, new to wholesale with a much less certain future. Over the last 3 years, Purple has grown substantially, and Mattress Firm's national scale and reach has helped contribute to that. As we look forward together, we realized that our initial contract could be improved and after many months of working through the details we now have a contract that creates significant additional mutually beneficial opportunity to expand sales of Purple's full assortment of sleep products within Mattress Firm and eliminates prior restrictions on Purple's growth outside of Mattress Firm, which allows us to pursue our strategic growth plans. We are pleased to continue our relationship and grow both our businesses. For our DTC business, -- In hindsight, we waited a little too long to start reinvesting and growing traffic again, which, coupled with significantly higher media rates versus last year has resulted in DTC reacceleration slower than anticipated. With that being said, we remain confident in our ability to continue to grow our direct-to-consumer channel and under the leadership of our new CMO, Patrice Varni, we have identified actionable opportunity to increase our brand awareness and expand reach through a new advertising campaign and more top of funnel reach. For the last 18 months, we have concentrated our resources on lower funnel performance marketing We are now starting to lean more heavily and increase spend into brand campaigns aimed at reaching a wider audience and educating consumers on the numerous benefits of our comfort technologies. We are confident the additional investment on -- in top of funnel -- we're confident that the additional investment in top of funnel programs will provide the business good momentum heading into 2022 and improve the efficiency of our bottom funnel spend going forward. Although this investment will likely create some EBITDA headwinds in Q4 as we need to rebuild momentum from our Q3 cutback and the response curve from top of final advertising just takes longer. As to costs, consistent with the inflationary supply chain and labor issues that are problem across most industries today, we have also been impacted our overall COGS, including direct materials, freight and labor have increased more than 25% since the beginning of the year which has substantially outpaced the price increases we have taken throughout the year. Amidst the production challenges, we missed several opportunities to better manage against rising costs including further opportunities to increase prices. We anticipate increasing prices again early in the first quarter of 2022 to help offset those cost increases. All combined with online spending moderating, particularly for home-related categories following record growth during the height of the pandemic combined with the impact on our trends from the slower-than-anticipated recovery during the third quarter, we are adopting a more conservative top line view for 2021 and we now expect full year revenue to increase approximately 13% over 2020 within a range of $720 million to $740 million, which includes the impact from what we estimate to be no less than $60 million in lost sales due to the isolated production challenges we faced as a result of the incident and follow-on actions we took subsequent to that. Excluding this, full year growth would be closer to 22%. And our outlook for adjusted EBITDA is now in the range of $15 million to $25 million, reflecting the reduction in sales, the planned increase in fourth quarter marketing plus pressure on gross margins from inflationary pressures throughout the supply chain and projected channel mix. We believe the additional market investments are important for the long-term health of the brand and the business. While the second half of 2021 has proven to be more challenging than we anticipated, with demand trends improving this month and anticipated next month we remain very optimistic for 2022 and expect to have growth across all our major channels, digital showroom and wholesale. We have made important advancements throughout our organization, improving our foundation for growth. We'll end this year in a stronger position to support the 3 big moves across expanded distribution, product and increased margins that will drive sales to $2 billion to $2.5 billion and adjusted EBITDA margins to the mid-teen range within the next 3 to 5 years. Starting with the first big move, expanded distribution. I will begin with our high-margin direct-to-consumer business. We have built the leading premium digital mattress brand in the industry in less than 6 years, and we built this off of a kickstarter campaign and a basic Shopify e-commerce implementation. Just over a month ago, we finally launched our new e-commerce platform, including our all-new proprietary promotions engine. And just over a week ago, we completed 100% cutover to the new platform. With the new platform, we have a new content capability and we'll be significantly advancing the content and usability through the beginning of 2022. After the explosive growth in digital sales we experienced in 2020, driven in part by the change in consumer buying behavior during the pandemic the expected shift back to physical shopping this year, followed by the impact from the recent production challenges have masked the underlying strength of this business. DTC revenue is projected to reach $475 million for 2021, about flat to 2020 and an increase of 79% compared to 2019. Even as we left a meaningful amount of sales on the table this year due to the temporary shortage of inventory and reduced marketing spend, Also, we expect to be able to drive more revenue per marketing dollars as we take advantage of upsell and cross-sell opportunities given the launches of our new adjustable base and complete set of bedding accessories, including our category-leading Harmony pillows. At the same time, we are forging enhanced direct-to-consumer customer engagement through our Purple showrooms. Our new store designs continue to look amazing the elevated presentation and ability to tell the full brand and technology story across our complete assortment is resonating with consumers. The concept is proving to be highly successful and highly profitable with unit economics that are tracking above our stated plan average sales per door of approximately $2 million and a payback period of less than 15 months on a $600,000 initial investment. We remain on track to end 2021 with 28 locations and plan to accelerate expansion by adding more than 30 additional locations in 2022. Establishing a strong Purple showroom presence in key markets is a meaningful enabler toward achieving our long-term strategic plan. While we are intently focused on accelerating DTC growth increasing our wholesale presence remains a key component of our distribution strategy. Our primary objective in 2021 was servicing our more than 2,300 existing partner doors demand continues to be strong. Now that we are on a backlog, we have started adding new doors with a focus on retailers that best support the premium nature of the Purple brand and are committed to showcasing our full lineup of mattresses. We have line of sight to meet our target of 400 to 500 incremental doors by the end of 2021, bringing our total to nearly 2,800 doors by year-end. Based on our current plans, we anticipate we'll reach our stated goal of approximately 3,500 wholesale doors by the end of next year. Moving to the second big move, product. As I stated earlier, for the first time in Purple's history, we have successfully expanded our manufacturing capacity ahead of current demand and are well positioned to meet the increasing demand for our products which we have been working toward for years. This is partly due to our next-generation MAX machine the HMax, which is fully operational at Purple South in Georgia. HMax 1 has output that is more than 50% higher than our first-generation Max machines with about half the labor and robotic extraction. We are already in construction of HMax 2, which will come online next year. In addition, we have Max 8 and 9 fully operational at Purple South and MAX 10 will be online next week. MAX 11 is coming along nicely and will be online in Q1 of 2022 with MAX 12 and 13 coming later in 2022. We are also making progress with the design and build-out of our new Purple Labs facility, which will house our expanded R&D capabilities Specific to R&D, we continue to build out the team and are actively investing in new research, prototyping and testing equipment and capabilities. In August, we launched our new Purple Plus mattress, our fifth mattress model in the U.S. it fits between our entry-level Purple mattress and our hybrid and enable new price points and overall assortment expansion -- It has successfully traded entry-level buyers up with almost no cannibalization down from the hybrid despite raising hybrid prices. We also launched the Harmony Pillow in expanded sizes, specifically the King size and Tall standard and low heights. We continue to be impressed with the incredible high customer satisfaction of this innovative pillow, and we were honored with the Good Housekeeping's 2021 Best of Bedding Award for the Harmony. We continue our efforts on our new higher-priced mattress models and look forward to speaking more about them during the first half of next year. Moving on to our third big move improved margins. As I stated last quarter, one of the most beneficial things we've learned from working through these manufacturing challenges this year is how much opportunity we have to meaningfully increase yield and reduce labor dependencies. And with the higher cost of goods sold up more than 25%, our focus on margin improvement is even more urgent. We are working with a top shelf consultancy and have identified significant near and midterm opportunities to reduce labor costs, improve yield and lower our supply chain costs. We are beginning to execute on some of these findings, and we'll realize most of the benefit in 2022. In addition, we continue to roll out autonomous and semiautonomous improvements in raw material feeds, mattress assembly and fulfillment. Also with increased production in our Georgia facility, we are now able to fulfill nearly all mattress models out of the East Coast in addition to Purple West and Utah, which is improving our SLAs and is helping to offset increases in freight costs. Finally, with all of the high growth and corresponding change of purple, we have been very focused on talent and organizational capability. To support these efforts, in addition to our CMO announcement on our last call, we recently hired Jack Roddy as our new Chief People Officer, reporting directly to me. Jack brings a ton of organizational enablement and transformation experience, and we are privileged to have him join the team and help us be more successful on our high-growth mission. There is a lot to be optimistic about as we head into 2022. We'll provide a more detailed view of our expectations for next year on our Q4 call, likely in March, but we are confident that with the production challenges and inventory constraints behind us will be back on the annual growth trajectory we outlined in June. I'll now turn it over to Bennett Nussbaum, our interim CFO, who will review the financials and our outlook in more detail.

Thanks, Joe. Since joining Purple as Interim CFO, a little over two months ago, I've been very impressed by the energy and dedication displayed throughout the organization, especially in the face of some challenging circumstances. Echoing Joe's comments, I believe the company is on stronger footing, having successfully navigated the recent production issues and is now able to focus entirely on executing the long-term strategic plan. Turning to our results. With the third quarter of 2020, providing context due to the extraordinary impact Covet had and consumer behavior, I'm going to provide certain comparisons to the third quarter 2 years ago. For the first 3 months ended September 30, 2021, net revenue was $170.8 million, down 8.7% and compared to $187.1 million in the prior year period, reflecting the difficult year-over-year comparison. Revenues were adversely affected by the production issues we experienced in the second and third quarters of 2021, as our ability to manufacture and deliver our products to both DTC and wholesale customers was interrupted. -- compared to the more normal 2019 period, net revenue was up by 45.5% from $117.4 million. By channel, wholesale net revenue grew 9.6% and as our wholesale business was favorably impacted by wholesale partner expansion, combined with the reopening of wholesale partner doors, partially offset by a slower-than-expected reacceleration of demand from our wholesale customers. DTC net revenue declined 15.9% year-over-year as our intentional pullback in advertising spend disproportionately impacted digital demand, partially offset by increased contribution from our purple showrooms. On a 2-year basis, wholesale revenue increased 17.1% and DTC revenue increased by 66.1%. Gross profit dollars were $61.1 million during the third quarter of 2021 compared to $88.3 million during the same period in 2021 with gross margin at 35.8% and versus 47.2% in the third quarter of 2020 and 45% in the third quarter of 2019. The decrease in gross margin over the prior year can be attributed primarily to the recent manufacturing issues, rising shipping, raw material and labor costs and a higher proportion of wholesale channel revenue, which carries lower gross margins than the DTC channel. Wholesale net revenues comprised approximately 34% of net revenue for the quarter compared with approximately 28% in the same quarter last year and 42% in the same quarter 2 years ago. Operating expenses were 39.6% of net revenue in the third quarter of 2021 and versus 34.2% in the prior period and 35.7% in 2019. The increase in operating expenses as a percent of net revenue compared with the prior year period, was driven primarily by lower revenue combined with an increase in legal and professional fees associated with increased expenses for consulting, professional staffing and executive placement costs. And an increase in personnel costs related to the planned growth in our workforce, partially offset by a $10.1 million decrease in advertising costs. For the current quarter -- for the current year quarter, marketing and sales expense as a percentage of net revenue was 28.6% compared to 27.4% a year ago and 29.0% 2 years ago. While we did pull back on our ad spend for the third quarter, while inventories were constrained, we exited backlog in late August and have begun to accelerate our ad spend, as Joe referenced, to support growing brand awareness and driving DTC demand. In the third quarter, we reported an operating loss of $6.6 million compared to operating income of $24.3 million in the third quarter of 2020 and operating income of $11 million in the third quarter of 2019. Net income for the quarter was $2.1 million compared to a net loss of $87.2 million in the year ago period and net income of $11 million 2 years ago. As disclosed earlier this year, based on the SEC statement dated April 12 of this year, regarding warrants issued by SPACs, we determined that our outstanding warrants should be accounted for as liabilities and recorded a fair value on the date of the transaction and subsequently remeasured to fair value at each reporting date. For the 3 months ended September 30, 2021, we recognized a noncash gain of $5.4 million associated with the change in fair value of warrant liabilities. -- while for the 3 months ended September 30, 2020, we recognized a noncash loss of $104.0 million. On an adjusted basis, net loss in the third quarter of 2021 was $4.9 million or $0.07 per diluted share based on an adjusted weighted average diluted share count of 67.3 million. compared to adjusted net income of $17.2 million or $0.27 per diluted share based on adjusted weighted average diluted share count of $64.4 million in the prior year period. Adjusted net income for the third quarter of 2019 was $9.5 million or 17% -- $0.17 per diluted share on an adjusted weighted average share count of 55.8 million. Adjusted net income has been adjusted to reflect an estimated effective income tax rate of 25.4% for the current year period compared to 25.6% for the comparable periods in 2020 and 2019. EBITDA for the quarter was $2.4 million compared to an $83.5 million loss in the third quarter of 2020 and EBITDA of $9.3 million in the third quarter of 2019. Adjusted EBITDA, which excludes certain noncash and other items we do not consider in the evaluation of our ongoing performance as detailed in today's earnings release, was $0.1 million compared to $30.1 million in the same quarter last year and $15.3 million in the third quarter of 2019. Moving to our balance sheet. As of September 30, 2021, the company had cash and cash equivalents of $83.6 million compared with $123 million at December 31, 2020. The decrease was driven primarily by planned capital expenditures related to manufacturing capacity expansion and showroom expansion, combined with investment in inventories ahead of the holiday season. Net inventories totaled $84 million at September 30, 2021, compared with $65.7 million at December 31, 2020. With finished goods making up the majority of that inventory increase as production levels normalized in the quarter. Turning to our guidance. Based on the third quarter results and our performance fourth quarter to date, we currently expect 2021 net revenue to be between $720 million and $740 million representing an increase of 11% to 14% over 2020 results, an increase of 68% to 73% over 2019 results. Based on our revised sales outlook, additional pressure on gross margins from rising input costs and an even greater channel mix shift toward wholesale, our planned increase in marketing investments during the fourth quarter, adjusted EBITDA for the full year 2021 is now expected to be between $15 million and $25 million. We expect capital expenditures for 2021 to be in the range of $55 million to $60 million as we invest in expanding production capabilities in the Georgia manufacturing facility and an additional showrooms. Year-end liquidity, inclusive of availability under the company's existing line of credit, is anticipated to be between $85 million and $95 million. I'll now turn it back to Joe for his closing comments.

Thanks, Bennett. This has been a very challenging quarter for us, continuing into Q4, and I'm personally disappointed with the results. Fortunately, underneath the challenges, we are still executing on the necessary building blocks that enable our long-term strategy presented last June, and I am pleased that we have been able to continue to make progress with releasing new products, opening new showrooms, wholesale door expansion with partners taking all of our mattress models and all new displays new brand work and an entirely rebuilt e-commerce platform. In addition, we have successfully launched multiple initiatives to improve margins through fundamental improvements in manufacturing processes and sourcing strategies. We are a values-driven organization with deep focus on both our employees and our customers and improving the lives of both. It has therefore been legitimately hard to have unmet customer demand because of lack of inventory of our amazing mattresses. And as we have come out of our inventory constraints, it has been equally hard to win back the confidence of our wholesale partners, which is understandable after months of delayed or missed fulfillments. Fortunately, we are seeing progress month-to-month, which gives us grounded confidence going into 2022 with our dedicated more than 2,200 employees now who continue to be the backbone of our business, we remain very optimistic toward our strategic goals and will remain laser-focused on the product, channel and margin opportunities we presented as the drivers of our growth strategy with which we still have complete confidence. At this time, we will open the call to questions. Operator, are you still there?

I'm here. Thank you. [Operator Instructions]. We'll now take our first question from Bobby Griffin of Raymond James. Your line is open. Please go ahead.

Joe, just first, can you help me just connect the dots on the inventory constraints that you're referencing and kind of their impact? Because when you look on the balance sheet, inventory is up pretty meaningful year-over-year. So just trying to understand where the constraints came in and how inventory was constrained with it being up 50-some percent year-over-year?

Bobby, thank for joining Sure. Let me try to commit the thoughts there. So we -- through the summer months, so end of May into June, July, we had significantly reduced manufacturing capability. And through the end of August, we're in just a very tough backlog situation, which meant on our website. We were showing 4- to 6-week delivery times it meant for our wholesale partners. We were significantly behind on POs and saw a significant reduction in orders as there's not much confidence in ordering against inventories that you're already not getting the inventory from POs issued weeks before. So there was a big halt in our business. We also, at that same time, reduced our marketing spend, as we talked about in the prepared remarks, just to try to slow demand as, again, when you're already not able to ship the mattresses purchased weeks before driving incremental purchases on units you don't have is tough. So by the end of August, we were finally back to a place that we were manufacturing more mattresses every day, then we needed to ship out the door. So that's sort of the nature of coming out of backlog. The intent at that point, a little bit of a bet, but the intent at that point was let's see how quickly we can get our wholesale partners throughout September to get back to pre-incident levels. Sort of, okay, you can trust us now. We've got the inventory. We know it's been a rough 3 months, but we've got the inventory, let's go. And that's -- we spoke about this on the last earnings call, and that was really what we spent the entirety of the back half of September and into October trying to engage on. This also included a large number of wholesale doors that we either had already contractually signed. But we couldn't open because we didn't have the inventory or wholesale doors we had in the process of negotiating that we wanted to get going on right away. What actually happened -- and throughout this process, we continue to build up our inventory stores there was no scenario that if everything went back to normal, that we were going to suddenly find ourselves in backlog again. So we built, as we've got more capacity than we've ever had in the company and are able to produce more mattresses per day than we've ever been able to in the company. We build up quite a stockpile of inventory in anticipation of a rapid reacceleration. What actually happened was a little more conservative. What actually happened is new store to opening, said we'd love to go, but we're going to phase it over the next couple of months or we'll kick things off 4 or 6 weeks from now. And existing doors instead of sort of the floodgates opening, what we saw is sort of some testing periods where they did slightly larger orders and saw that, yes, we actually met our SLAs. And in fact, right now, we are hearing back from our wholesale partners after they've been testing into us. We have with some of our partners, the highest SLA achievement of any of their suppliers right now. We have inventory, and that's actually a unique asset we have, especially going into holiday. We have ample inventory sitting here domestically ready to go out the door. It just took longer to win back the confidence and get the orders going. What you would expect to see in this situation, though, is month-by-month improvement as we continue to exit this period and get back to the accelerated levels we should be at. And that's in fact what we're seeing. It's just happening throughout Q4 and the intent is to exit Q4 at a much better rate and then hit 2022 where we should be. And you will see, as we exit that inventory levels should come back down to appropriate levels as we burn down that inventory and align with now a cleaner line of sight on our growth rate.

Okay. That's helpful. I appreciate all the details on connecting that. Secondly, you called out the new mattress from contract, congrats on getting that done. Can you maybe put some context around that? How many stores, are you in with matches from today? What do you see the potential store count could be under this contract and some of the new things that this contract might have in there that's beneficial for both companies?

Yes. It's -- I mean, so as with most of these contracts, these are -- it's a contract that is confidential between the two of us. However, what I will say is we have set it up in ways that are generally mutually beneficial. There's a lot of traffic. There's a lot of demand coming in. We've set this up with the right incentives and the right behaviors that this becomes a very attractive opportunity for both of us. And some of it is door expansion. And as we go more national, we would -- there are markets -- key markets that we have not yet entered with Mattress Firm, and I would anticipate opportunities to do that. But it also gets into driving more same-store sales. We've continued to beat that drum that this isn't just about a door count strategy, but how do we continue to demonstrate with new price points, with new models, with expanding accessories that we can drive up both ticket price and number of units per week or number of units per swap per week. And that's a big part of our efforts as well as we've been fortifying our wholesale team a lot better presentation, a lot better presentation and a lot better representation in the field from our side. So we see a lot of opportunity even in existing doors to expand our share.

We'll now take our next question from Atul of UBS. Your line is now open. Please go ahead.

Joe, so now that you have additional machines, you're going to be ramping up marketing and the manufacturing issue seems to be behind you. You have the inventory. Were you still guiding to a decline in DTC sales for the fourth quarter, even with an easier compare? So does it really mean that the channel is essentially getting saturated at least from a Purple perspective? Is that -- Is that a fair statement? And if most of the growth going forward is really going to come from wholesale expansion. How does that impact your ability to get to mid-teens EBITDA margins given the lower profitability of that channel?

Yes. And your question is more, call it, long term, call it, how do we get to where we've anticipated several years from now?

That and then just even for the near to medium term, if really, most of the growth is essentially coming from wholesale. And how does that really impact your profitability?

Yes. So we have not given guidance clearly for next year yet, but we are clearly indicating, as we said in the prepared remarks that we anticipate getting to a full 3,500 door count next year. The short-term opportunity is wholesale expansion, and that is exactly what we laid out year by year in our Investor Day that we had last June on our growth strategy. It was -- there is enormous opportunity for us to get national penetration, build our brand and take share in brick-and-mortar to do that ourselves, which we have modest goals for with a couple of hundred doors over the next few years, takes time. Again, we we'll end this year at 28 of our own showrooms. We'll add about 30 -- a little more than 30 next year. So I mean that takes time. And our intent is to have a balanced channel strategy with wholesale, and this is a predominantly brick-and-mortar category. Part of what that means, and we will see that through next year as margin expansion. How do we get more margin out of the products we have as well as new product offerings with more margin built in as well as more premium products that have more margin expansion so that we can collect more. We absolutely believe there is DTC headroom. It just has to be balanced in an omnichannel way. I mean we have been very successful in depending on how you do the math, you could argue that we're upwards in premium mattress that were upwards of perhaps 20% share. premium DTC sales right now, whereas arguably, we're probably closer to 5% share in brick-and-mortar and wholesale. And again, there aren't clean numbers on these, I call those sort of rough ratios, but likely directionally relevant to each other. So part of this is building where the bulk of the customer is. I mean, call it, 80% of the addressable market is in brick-and-mortar. We have to be there. And that raises all tides. The stronger we are in overall share, the stronger we are in our penetration in brick-and-mortar, the more headroom that also creates for our DTC business, which, yes, is higher margin. Alongside intrinsic margin expansion through both operational efficiencies and through product refreshes, and we see a lot of opportunity. And again, this is very much in support and no change to what we laid out last June.

Okay. Got it. That's helpful. And then as my follow-up question, Joe. There have been some recent announcements from one of your major competitors that they will be entering the gel bedding space. So just trying to better understand how easy or difficult is it for someone to jump in and start producing the best that you are -- that are comparable to what you are producing just so that we get a better understanding of the barriers to entry for this category?

Yes. So I mean what is easy is announcing a product that doesn't exist with no clear price point strategy or SKU count, which is what was announced. What is hard is actually making what is the category leading disruptive technology we have that we continue to believe is the next generation of meaningful comfort support and sleep and other cushioning. We've been at this for 25 years. We've been perfecting our manufacturing for multiple decades. We have trade secrets along this that are decades in the making that are probably worth more than our patents. And it has taken us years and years and years of capital investment and experience to get to scale. And it's not just the manufacturing process, it's our unique polymers, our unique properties, the gels we create and on each of our products. Our mattresses, our pillows, or seat cushions are all very different technologies, very different geometries, very different formulations, which is why we've got rooms full of material scientists and chemists as well as innovation and industrial manufacturing and so forth. So will somebody do this someday? Of course, they will. We don't believe we're the only people who can figure this out, but it is hard to do. It's really hard to do at scale. And as of this moment on any quality product out there, we're the only ones who figured it out, and we anticipate we're going to have a strong lead on that as the category leads here with the best technology around us for many, many years to come.

[Operator Instructions] We'll now take our next question from Seth of Wedbush Securities. Your line is open. Please go ahead.

Joe, and Bennett, maybe if you could please give a little bit more color on the gross margin bridge year-over-year, the key drivers? And then how we should think about it in the fourth quarter and into 2022, if you care to comment.

I think for the quarter, the primary driver was the increase in raw materials and the pricing we took came in the fourth quarter after that. Further, in the third quarter, we had the disruption costs of trying to bring those factories back on in July. And finishing ramping them up in August. And then, of course, with lower production of the overhead spread over fewer units. In addition, as I'm sure you're aware, freight costs of inbound ocean freight as well as full truckload domestic freight rates have expanded very dramatically. So it's a combination of things that drove the margin this period.

Right. And then so some of those things have changed in the fourth quarter. You mentioned pricing after one, your production is back up to at least pre-incident levels. So should we see a huge snapback in gross margins here? And how do we think about 2022?

No. Our -- there are some things that aren't going to change in Q4. I mean COGS all in are still up more than 25%, and that doesn't change. We raised prices all in maybe 10%. So I mean the cost increases have grown faster than our price increases. And I don't anticipate at this point any incremental price increases until early next year. We're pretty much locked for the balance of this year. So there's some intrinsic calendars there. I mean we're operating an organization that would really set up to be at a higher revenue level right now. So there is overhead we're carrying that part of being a vertically integrated manufacturers, there are things we could do to scale back. But at this point, we don't have evidence that that intrinsic demand has slowed to the point that we should be running a smaller company. We're continuing to ramp up to the levels that we anticipate will be at next year. But in carrying the slightly larger company, the increased COGS and the slower than planned ramp-up that we're nearly halfway through the quarter. This quarter is just creates headwinds. On top of that, there are investments in the next year we're doing. So we mentioned the increase in brand spend. One of the opportunities we've identified, and Patrice has already done some terrific work on this is the -- when you have a very call it, mid funnel and bottom funnel or performance marketing-driven strategy, you can attract the people you can reach and convert them, but it's much more difficult to acquire audiences that aren't already engaged directly with your business. And there is a lot of relevant addressable market that our advertising just wasn't reaching. And even on those we reach, getting the battle on mid-funnel to low-funnel conversion is always the most expensive way to go. So we are investing quite a bit this quarter into higher funnel, more brand awareness building efforts that increase awareness, consideration and trust with a much broader group of potential customers as there is addressable market, we're not -- we're just not reaching right now with our current marketing strategy and that opens up sorts of possibilities. It's just, as I said in the prepared remarks, that's a longer time cycle to realize the return on investment on that. And we absolutely believe to set up for 2022. This is very good and strategic investment that's in the best interest of all stakeholders that we are holding firm on in Q4. And again, that does create some Q4 headwinds on margin that will get benefit into next year.

We'll now take our next question from Brian of Oppenheimer. Your line is now open. Please go ahead.

So the first question I want to ask, just with respect to the sales. And Joe, I mean, you all went very well. Thank you the challenges that the Purple has faced over the last now, I guess, few months, several weeks, whatever, And then obviously, we have the new guidance. But the question I have is as you look at all this and step back, I mean, what gives you confidence? What can you tell us this should give us confidence that underlying demand for the product remain strong, and the weaker sales we've seen are indeed a function of internal missteps?

Yes. It's a fair question. And I think part of this is what comps are you looking at over what period of time. And I think part of it is kind of looking under the hood on where you really see demand. I mean there are qualitative things are hard to dispute that we're seeing. So the pace at which we are getting interest in signing on new contracts and expanding our wholesale doors, and the fact that they are not testing us out with a better 2 on the floor, which is what was happening in our heyday, 1.5 years, 2 years ago. They're taking every bed will give them. They're taking all 5 beds with elevated displays. I mean it's almost in some of these stores on a store within a store concept. They're taking all 5 beds and committing all that square footage to us -- It doesn't just happen unless there is intrinsic confidence they're seeing. There is underlying demand that's out there. The challenge has been in wholesale, getting the wholesale expansion back out there or in the case of some of our existing suppliers that frankly, got a little burned with demands that they couldn't meet and shifted local interest elsewhere. It doesn't change the fact that the demand is there. So it's getting that alignment. The inventory we now have, getting these wholesale doors open, of which we've got thousands coming with incredible interest. DTC is performing well. Part of the challenge is just how the approach has been. I mean we -- as I was just saying on the last question, the marketing expenses are up year-over-year, call it, upwards 50%. So even spending 50% more you're still describing similar traffic conversion rates are down to last year just because there's more brick-and-mortar opportunity. I mean, that's just kind of getting back to more normalized levels. And sort of the field day of growth in the category is over. We're getting back to more normal growth levels. What's interesting is if you don't model it out on a strictly sequential quarter basis or a year basis. When we look at our business over the last 6 years, there is a very clear trend line that we have been hugging of sometimes a little above like we were last year or a lot above last year. Other times, we dip a little below. But we've been hugging a really healthy growth rate quarter-on-quarter, year-on-year as you look at it over the last 6 years. And we are still on that trend line. And it's -- we were up a lot last year and that produced a lot of cash and a lot of profitability. But we basically normalize back to the trend line we've been on, and we are seeing our growth rate continue against that trend line. And that is what gives us a lot of confidence.

That's really helpful. And then the second question, I think -- and maybe somewhat of a follow-up to Seth’s question. If you look at the gross margin pressures now and then what you telegraphed recognizing there's a lot of unique aspects to the current consumer backdrop broadly. But how -- and also I understand you haven't given guidance past '21. But should we expect that some of these gross margin pressures are likely to prove structural, I mean they'll stick around and basically change the margin profile of the business over time?

Yes. I think the question, I'll stick around for how long. I don't think many of these elevated are going away in 3 months. And I think some of them are going to stick around for the next year, but seeing container costs going from $4,000 or $5,000 a container to $20,000 to $25,000 a container that's obviously not sustainable for the long haul. The question is, is it months, quarters or a full year before that comes back? And I don't know that anyone has the answer to that right now. So I think there are structural costs we're going to carry into next year for sure. I don't know that they're structural indefinitely. But that is -- that's a headwind. Everyone in our category is facing, and this is where there are moves we can take. There's opportunities for increased vertical integration that we are moving forward with to build more margin into our business in a very direct way. Are sourcing and economies of scale opportunities we are looking at and some meaningful. This is the operational improvements, labor reduction, as we improve yield and performance as well as just automation in general, all of which is underway. So long term, that's real margin expansion, which is where we remain more optimistic in sort of the 3- to 4-year mark. But all of that helps offset the rising costs. And we are going to have to take pricing I mean when COGS are outpacing our price increases by this degree, we and everyone in the category is taking pricing actions. And back to the demand question earlier, we are hearing from our wholesale partners high confidence that they can sustain the price increases. So it's a series of actions that we, I think many in the category are taking and that we have line of sight opportunities in front of us.

We'll now take our next question from Brad of KeyBanc. Your line is now open. Please go ahead.

I wanted to follow up on margins and initially talk about the short term and then follow up on the long term. And Joe, I was hoping you could just talk a little bit more about kind of the timing of the price actions you can take and the degree of investments in advertising and how long you may continue to make those investments. And I say I think from the perspective of when we look at the implied EBITDA guidance for fourth quarter, it looks like the margin trends are going to be worse in the fourth quarter than what we just experienced in the third quarter despite sales starting to reaccelerate. And so that does imply probably a tough start to 2022. And so just wondering if you could give us any more context on your ability to kind of get margins under control and how you're thinking about that initially for 2022.

I mean I think broad strokes, you're thinking the right way. And we do have some challenges in front of us as we get back to profitability. We are going to be running a profitable business. And our entire strategy is around significant expansion of margin and EBITDA margins over where we were a year, 1.5 years ago. So I mean that is very much in line. There are some near-term challenges that we're facing, and we've been trying to articulate. Pricing actions, I think we don't have it fully worked out exactly how much that is, but we need to take pricing actions to offset our costs, and we're going to do that. And frankly, at a time, I mean, wholesale, we see much less elasticity on these price actions for a whole lot of reasons that are well documented in the industry. So as we're leaning more into wholesale anyway, it's a great time to take these pricing actions. But we also -- we have new models coming next year with new margin profiles and call it, some opportunity for reassortment of existing models. So we're going to build through both pricing actions and lineup changes next year anyway, opportunities to continue to grow margin, which in the near term helps offset costs and in the long term, creates opportunity for meaningful long-term margin expansion.

Great. And Joe, is there any additional work you've done around the longer-term margins? Or just feeling like all the work that you've done, your time at the company still points to those margin targets that you outlined back to your Analyst Day earlier this year?

No. Yes. I -- what I would say is my confidence in the expansion that we laid out in June has only grown. As we've really dug into -- we have really put our manufacturing and operations and sourcing and supply chain and logistics, it's all been under a microscope over what we've been through. And as is often the case with a young growing business is there's lots of low-hanging fruit and some of it is very material opportunity. So my confidence has grown dramatically. We're working with some great, very experienced consultancies. We have identified very actionable, very definable opportunities, both near term, midterm and long term to fundamentally change how we operate, how we manufacture on the floor how we source and our sourcing strategies, our labor balancing and labor yields, automation capabilities, equipment improvements, that are all just using best-in-class manufacturing techniques. And I think I said this on the last call, we make best-in-class product, but I would not characterize this as a world-class manufacturer. And we are on a path to become a world-class manufacturer, and that will yield intrinsic benefits that my confidence grows every month in that regard.

We'll now take our next question from Sven B. Riley. Your line is open. Please go ahead.

It's Alec Legg on for Susan. My question is just related to how you're balancing inventory between your existing wholesale customers, your new customers and then also within your own DTC channel?

Yes. We -- so balancing inventory the way we used to have to, which is we didn't have enough to go around and how did we try to be as fair and reasonable as possible in any allocations or distribution decisions. Right now, that's a nonissue. I mean we have ample inventory and can lean into all channels. So there's a different question as we sort of think about our product expansion strategy and product and price points and margins that that do better or have more opportunity in one channel or another, and we're getting big enough with a large enough assortment that we're able to make some of those choices. For example, our asset base or new base, we finally got a price point and margin profile, and we've had to work with our wholesale partners to get this right. That it makes sense that many, if not most, of our wholesale partners will be showing our bed on our adjustable base. At a price point and margin profile that makes sense for them. Doing that, can, in that case, have be a little slightly harder to sell in DTC, which then you say, okay, well, what's our DTC offering. And we're starting to build our assortment out to have product and price points that make sense in each channel, and that is something we're putting a lot of time on -- into. But we've got ample inventory to go around right now.

Very helpful. And then just my follow-up question. In the release, you indicated that demand at wholesale didn't ramp up as fast as you liked. I guess, what were the key drivers of that? And what type of levers can you guys pull to help reaccelerate that?

Sure. So we had stated last quarter that this was always a risk. The idea that you've been a poor supplier that you have customers who want to buy product, and we've got retail partners who want to sell those customers the product and they place orders and we don't fulfill those orders. Does not make for a reliable trustworthy partner. And we -- through the manufacturing challenges, we couldn't make the product as fast as demand was out there and demand consequently waned substantially. And that's -- again, it's just basic supply and demand impacts. So the hope was that the faith in our product and our company was strong enough that we could sort of flip a switch and say, sorry about all that, let's get back to business. And we said we weren't sure how that was going to go. We're going to do our best to get everyone 1 back over as fast as possible. And in reality, as is often the case is when things don't go well, which harmed the businesses of our partners as well. They're a little more cautious on the ramp back up, and that's what happened. It was -- just -- I mean, when you're trying to fit everything into a 90-day period, just merely waiting 30 days is one-third of the opportunity vaporized, and we were seeing 30 to 60-day delays on we'll get the order in next month, and we'll try it out or we'll do a small order now. And if you actually meet the SLAs because you haven't for months, then we'll do a bigger order next month, and we went through these sort of prove ourselves back out cycles. Long term, that's just a blend. I mean, long term, that just means where we're a month or 2 or 3 behind on the growth trajectory short term in the quarterly view that, that had a meaningful impact. And that's -- there's nothing we've seen. We haven't lost slots on the floor. They haven't replaced us. We're not seeing any indication that consumer demand is shifting elsewhere. It's just been reearning trust with retail partners that themselves have to hit their goals, and we're doing it. It's just taken a few months longer than we had hoped. You also asked about what we can do about it. There's a lot we can do about it. There's incentive programs. There's contest we can run. There's marketing we can do in store. There's education. And as we built up the team, I mean, just at the beginning of this calendar year, we had basically 1 field sales associate for every 200 to 250 doors we had -- And there's not a lot you can do to really support the field at that kind of level. We've dramatically improved those ratios. We've got a structure and a process for supporting our stores now, and we're putting industry-proven programs in place as we've hired more and more industry talent into our company to begin to revitalize and fuel that kind of growth. And we're doing it and holiday time is a great time to do that, and these programs work, and we're already seeing success with that. Operator, are we still there?

Yes. There was no response from Alex earlier. We'll now move on to our next question from Matt of ROTH Capital. Your line is now open. Please go ahead.

Just wanted to clarify, maybe I missed it earlier in the Q&A portion. But could you just explain why the fourth quarter gross margins are potentially going to be sequentially lower than the third quarter. I guess you had production shutdowns for several weeks in the third quarter. And I appreciate there is cost of goods headwinds and whatnot. But has it intensified so much quarter-to-date that we should see gross margins lower sequentially before they start that recovery in 2022?

Yes. I don't think the big change in Q4 would be on gross margin. There may be a little channel shift as wholesale comes back and the higher the percentage of wholesale, there's some gross margin impact. I think the bigger impact would be more EBITDA margins as we invest in things like marketing and showroom expansion.

Okay. Got it. So sequentially flat roughly and then OpEx is the driver of the decline. Got it. And then, Joe, you made it sound earlier a bit like your hands are tied on price increases in the near term. And I assume you're alluding to the wholesale channel specifically. I'm just curious if maybe you could comment on sort of why the confidence that you can get price next year along with some of the door penetration that you guys had put out in the press release. It seems like you may potentially have to trade some price for growth in the wholesale channel in the near term, just given some of the difficulty delivering, but just wanted to see if you could expand on that.

Yes. It's -- yes, so this is certainly for balance of this year. We have -- we often have anywhere from 60 days or even sometimes longer than 60-day sort of price notice periods with our wholesale partners before we see the benefit. And I mean, the other side is we we're locked and loaded for holiday and there's a ton of content creative promotions and so forth that include price points that to muck with price right now would derail a whole lot of things. So I just we're so close to holiday here with Black Friday kicking off for many of our peers already, and we'll be going live this week as well. So I just -- this isn't the time that you start mucking with prices. But I think as soon as we get through holiday here, we can quickly start making some changes. Some of it is the confidence we have from our wholesale partners, they're good partners to us. We engage and we are hearing a lot of interest that they can take on more price change. So some of it is sort of the spot checks in the field. We've done 4 price changes now. So we're getting pretty good at it and understanding the elasticity curves on those. And then price changes tend to have far less elastic response in wholesale, sometimes even beneficial in wholesale as this becomes more attractive to the area of sales reps. But in wholesale door expansion, where we feel very good about. We've got really strong line of sight. As I mentioned, we've got hundreds of doors already contracted for this quarter, and we're already got planning well into Q1. So I mean there's a lot of interest and demand on the wholesale side. But there's -- we've had price changes that had no elastic response, which surprised us, and we do the other price changes that were more responsive. You never really know on these things until you test into them, but all signs as there's headroom. And frankly, I don't think there's a better time to take price changes as everyone else is doing it, too, across multiple categories.

We'll now take our last question from Keith of Truist. Your line is now open. Please go ahead.

It's Keith Hughes of Truist. guess, in terms of overall pricing, you talked about not 1 we put again ahead of Black Friday. -- what -- I mean, do you have a date of when you're going to have your wholesale partners raise prices and in addition to online, is that on the beginning of the year before President's Day. Can you give us any sort of feel on that?

We're still doing the math right now with some of our partners, we need to give them the new price sheet before this kicks in, and we're running the models right now. So we don't have a specific date, but it is of utmost urgency that we figure this out. So I assure you, this is not something that we don't start looking at until January 1. We are well underway on this.

Okay. And I guess second question, back to the gross margin comment earlier coming in the fourth quarter. Can you give us any idea how much sequentially you think input cost will go up from the third to fourth.

Input costs, did you say?

Yes.

Yes. I mean, we are -- right now, things seem pretty stable. I don't think if you had asked us in Q1, would we expect our cost to be up more than 25% by the end of the year? I don't know that anyone who would have predicted that kind of in-year acceleration. So there remain risks that raw materials, direct materials, labor otherwise could go up. But right now, it's trending pretty stable. And we're far enough in the quarter. I think we have decent confidence. So I don't think there's going to be significant input changes into Q4.

Okay. So I guess, back to the question, why is the gross margin continuing to come down so much of your inputs are not getting any worse.

Yes. Well, some of it -- Yes, go ahead, Bennet.

Yes. I think you will see a little improvement in the fourth quarter as our manufacturing comes back to levels and as some of the pricing we took that became effective in the fourth quarter flows through. So I don't really expect a decrease. I'm optimistic we love a small increase in the margins in the fourth quarter.

Well, it looks like your EBITDA is going from 0 to negative or where you are in the range 15. So is that all more [Indiscernible].

That's right. The biggest impact is the incremental marketing costs. I mean there are -- we're starting to lean into a much higher pace of showroom expansion, which has some OpEx components and marketing around those, which will start to sort of comp over as we get into a more typical rate of expansion there, but this is something we've been heating up lately. But as I've been speaking through the call, there's some, call it, some revitalization of our brand marketing expense that's long overdue that with Patrice Varni’s leadership, we feel very good about this quarter, but that is really trading a high-return future sales for in-quarter expense and marketing is the largest impact there.

Thank you. I'd now like to turn the conference back to you for any additional or closing remarks.

Thank you so much. Reiterating my prior remarks, this has been a very challenging period for us. And while disappointing to all of us we are emerging stronger and better equipped for success. On the recent recovery we are starting to see, we remain optimistic toward 2022. I would like to thank our customers, our partners, for working with us and we -- as we got our manufacturing back on track. Fortunately, underlying demand remains strong, and our customers continue to love our products, which includes our wholesale partners. Most importantly, I want to personally thank our over 2,200 employees for their incredibly hard work and unwavering passion for Purple to all of our customers, partners and employees stay healthy, be safe and sleep well.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.