Purple Innovation [PRPL] Conference call transcript for 2022 q2
2022-08-09 21:07:12
Fiscal: 2022 q2
Operator: Good day, everyone. And welcome to the Purple Innovation Second Quarter 2022 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. Todayâs call is being recorded. And it is now my pleasure to introduce your host, Cody McAlester of ICR. Please go ahead.
Cody McAlester: Thank you for joining Purple Innovationâs second quarter 2022 earnings call. A copy of our earnings press release is available on the Investor Relations section of Purpleâs 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 Innovationâs judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of factors affecting the Companyâs business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements included in our second quarter 2022 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. Todayâs 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, Iâll turn the call over to Rob DeMartini, Purple Innovationâs, Chief Executive Officer.
Rob DeMartini: Thank you, Cody. And thank you and good afternoon everyone. With me on the call today is Bennett Nussbaum, Purpleâs Chief Financial Officer. As you saw from our earnings release issued earlier today, we reported a meaningful improvement in adjusted EBITDA compared with the first quarter on similar revenue. While we had expected to deliver quarter-over-quarter increases in both revenue and profitability, the selling environment has become more challenging over the last past several months. Given the deterioration in the overall market demand, we are especially pleased with the approximate $10 million recovery in adjusted EBITDA to near breakeven in the second quarter, in line with our expectations. This performance compared with Q1 results we reported roughly 90 days ago reflects the work weâve done since the beginning of this year to get our cost structure in the right place and be profitable at these revenue levels. With respect to revenue, like the rest of the mattress industry, weâre facing a continued shift in demand away from home-related categories at a time when inflation is also pressuring consumer discretionary spending. Weâve seen estimates that domestic mattress volumes are down 20% to 25% year-to-date, Purple has experienced a similar pullback over the first six months of the year, in addition to a shift in spending habits from online, a position of strength for Purple, to in-store where we are still in early stages of developing our capabilities. Bennett will review the numbers in more detail in a moment. But from a channel perspective, e-commerce was in line with our expectations, which is encouraging, given the recent industry trends and our purposeful reduction in advertising spend. Showroom performance improved quarter-over-quarter, primarily driven by the addition of six net new locations added in the second quarter as well as new doors from Q1 ramping up. And wholesale revenue was also up quarter-over-quarter, driven by roughly 700 net new doors we added in 2022. As I think about my first six months with Purple, Iâm encouraged with the progress weâve made, building the framework for sustained growth and consistent operational results. The quarter-over-quarter improvement in profitability we reported today, underscores how much healthier the Company now is compared with the start of the year, even as the macro environment is delaying our top-line recovery. While we still expect further positive progress quarter-over-quarter, given the current external headwinds, weâre adopting a more conservative view of the remainder of the year. Weâre adjusting our full year revenue guidance to $570 million to $590 million and adjusted EBITDA to a negative $15 million to a negative $5 million. Despite our revised outlook, we remain confident at our four strategic initiatives: operational excellence, brand elevation, channel development, and accelerating innovation remain the right building blocks for sustained profitable growth. Iâll detail some of the progress weâve made this quarter and expect to see in the coming quarters with these initiatives before our Q&A section. But overall, weâre encouraged with the direction company is headed. Iâll now turn it over to Bennett whoâll review the financials in more detail after which Iâll provide an update on the strategic initiatives ahead of our question-and-answer session.
Bennett Nussbaum: Thank you, Rob. For the three months ended June 30, 2022, net revenue was $144.1 million, down 21.1% compared to the $182.6 million in the prior year period. This decrease was due to a number of factors, including a challenging comparison to a stimulus assisted second quarter of 2021 coupled with changing demand for home-related products, inflationary pressure on consumer wallets and our intentional decrease in advertising spend, which was down 56% compared with a year ago. By channel versus prior year, wholesale net revenue declined 5.9%, primarily driven by lower door productivity that was partially offset by opening approximately 1,000 net new doors. And direct-to-consumer net revenues declined 29.8%. Within DTC, e-commerce declined 39.2% in part reflecting the aforementioned pullback, in ad spend. This was partially offset by 150% increase in showroom net revenue, driven largely by the opening of 27 net new showrooms over the past 12 months. Gross profit dollars were $48.8 million during the second quarter of 2022, compared to $81.7 million during the same period last year, with gross margin at $33.9% versus 44.7% in the second quarter of 2021. The decrease in gross margin from the prior year can be attributed primarily to lower revenue and a higher proportion of wholesale channel revenue, which carries a lower gross margin than revenue from the DTC channel, and unfavorable cost absorption from lower than planned production volumes in prior months. Additionally, the decline in gross margin reflects the impact of elevated levels of materials, labor and overhead costs, partially offset by benefits realized from our workforce restructuring. Wholesale net revenues comprised approximately 43% of net revenue for the quarter, compared with approximately 36% in the same quarter last year. Operating expenses were 42.3% of net revenue in the second quarter of 2022 versus 46.1% in the prior year period. The decrease in operating expenses as a percent of net revenue compared with the prior year period was driven primarily by our intentional reduction in advertising spend to improve marketing efficiency and stabilized profitability in the current environment, and the restructuring of the marketing organization that happened at the beginning of the second quarter of this year. Advertising spend for the second quarter was reduced by $24.1 million year-over-year and $4.8 million from the first quarter of 2022. Net loss for the quarter was $8.3 million compared to net income of $2.6 million a year ago. As previously disclosed, based on the SEC statement dated April 12, 2021 regarding warrants issued by specs, we determined that our outstanding warrants should be accounted for as liabilities and recorded at fair value on the date of the transaction and subsequently remeasured to fair value each reporting date. For the three months ended June 30, 2022, we recognized a non-cash gain of $0.3 million associated with the change in fair value of warrant liabilities. For the three months ended June 30, 2021, the Company recognized a non-cash gain of $4.9 million associated with the change in fair value of warrant liabilities. On an adjusted basis, net loss in the second quarter of 2022 was $8.5 million or $0.11 per diluted share based on an adjusted weighted average diluted share count of 83.2 million compared to an adjusted debt income of $3.6 million or $0.05 per diluted share based on an adjusted weighted average diluted share account of 67.3 million in the prior year period. Adjusted net income has been adjusted to reflect an estimated effective income tax rate of 31.7% for the current year period compared to a 25.4% rate for 2021. EBITDA for the quarter was a negative $8.8 million compared to a positive $3.9 million in the second quarter of 2021. Adjusted EBITDA, which excludes certain non-cash and other items we do not consider in the evaluation of our ongoing performance and as detailed in todayâs earnings release, was negative $0.3 million compared with positive adjusted EBITDA of $11 million a year ago, and negative adjusted EBITDA of $9.6 million in the first quarter of 2022. Moving to our balance sheet, as of June 30, 2022, the Company had cash and cash equivalents of $41.2 million compared with $91.6 million at December 31, 2021 and $62.7 million at March 31, 2022. The $21.5 million decrease from the end of quarter one was driven primarily by cash used in operations of $8.5 million and capital expenders of $13 million, primarily related to showroom expansion. In addition to the $41.2 million in cash at the end of the second quarter, we also have the full $55 million amount available under our credit facility and we believe our cash is adequate for the next 12 months and beyond. Inventories at June 30, 2022 were $84.9 million, a decrease of 14% compared with $98.7 million dollars at December 31, 2021 and a decrease of 19.8% compared with $105.8 million at March 31, 2022. The decrease in inventory since the end of quarter one was driven by a reduction in both, manufactured as well as resale finished goods and raw materials as we right size our production and inventories due to current demand environment. Turning now to our current outlook. Recent inventory trends and the strengthening of certain macroeconomic headwinds have caused us to take a more conservative view of the rest of 2022. We now expect net revenue to be in the range of $570 million to $590 million, compared to our prior range of $650 million to $690 million with the change, primarily reflecting a reduction in projected wholesale volume to reflect the aforementioned change in industry trends. For the second half of the year, we expect gross margins to improve compared with the second quarter levels and anticipate exiting 2020 with gross margins between 37% and 38%. In terms of profitability, we now expect adjusted EBITDA to be between negative $15 million and negative $5 million compared to our prior guidance of $21 million to $27 million dollars. Now, Iâll turn it back to Rob.
Rob DeMartini: Thank you, Bennett. While the current macro environment has proven to be more challenging than weâd have anticipated, I remain confident in the progress weâve made against our four strategic initiatives so far in 2022 and the benefits theyâll provide in future periods. I want to close today with an update on our progress this quarter, starting with operational excellence. The work we are doing to improve execution is aimed to driving more effective and efficient capacity utilization, delivering higher product quality and enhanced returns on the capacity investments weâve made. Eric Haynor, our new Chief Operating Officer, has hit the ground running since joining in June, building on the work the team has made with raw material, and operational cost improvements. Previously, many of our raw material purchase contracts were exposed to potential inflationary pressures. While not a significant factor for most of the history of this company, inflationary dynamics of the current environment have begun to impact our raw material costs. Weâve been able to offset some of these inflationary impacts with a series of negotiations on our larger spend items as well as some value engineering to structurally reduce costs in our component purchases. Looking ahead, we have a pipeline of procurement and innovation projects that will enable continued input cost reductions. Operationally, we undertook a reduction in force in our plants that reflected our continued improvements in productivity as well as the current supply and demand balance. This action has positioned us with sustainable structural plant cost position, in line with current demand expectations. We also began to work to consolidate our operations from our Alpine, Utah facility into our two primary facilities in Grantsville, Utah and McDonough, Georgia. This will streamline our overheads and allow us to allocate pillow and seat cushion production closer to our customer base, like weâve done with the mattresses to realize greater logistics efficiencies. Our second strategic initiative is brand elevation through more effective marketing. Weâve discussed the evolution weâre driving with Purple advertising, expanding beyond our historical performance centric vehicles to full funnel advertising that will build more awareness of and preference for Purple, creating new demand in all our sales channels. In the second quarter, we delivered the next step creative weâve talked about in our last call, a campaign called Overnight Success, launched three weeks ago in linear and connected TV, premium online video, and across all social media channels. Overnight Success also includes a toolkit of campaign assets our wholesale partners can tag and run to leverage Purpleâs brand power to increase their share of demand. Though itâs early, the campaign has received a positive response from key partners, and we see new creative quickly matching and surpassing performance metrics compared to recent and historical Purple advertising. In addition, during the second quarter, we completed our brand positioning work, which tested extremely well in qualitative testing. This important work has created an ownable, differentiated, and highly consumer-relevant positioning for Purple that will serve as the foundation for all advertising and go-forward brand communications starting in the later part of 2022. Shifting to our third initiative, developing and expanding our direct channels. Starting with our showrooms, these concepts that showcase our full product line with consistent premium presentation, continue to perform well, while acting as a north star for our wholesale partners. We ended the second quarter with 40 showrooms after opening 6 net new locations during the quarter, with plans to add 14 more showrooms over the remainder of the year. Weâre excited about this emerging growth vehicle for the company, and see a clear path to a store footprint of 200 over time. Wholesale, the second and larger component of our brick-and-mortar retail strategy, continues to be an area of improvement this quarter. At the end of Q2, we were selling through approximately 3,200 wholesale doors, having added 77 net new doors in the quarter. As I mentioned last quarter, while our plan is to selectively open additional doors going forward, our priority is now improving productivity of our existing doors to grow market share and enhance the profitability of the channel. To do so, we identified 3 areas where we could make impactful improvements. First, we focus on improving wholesaler incentives and strengthening our margins for our partners. We believe that we can do this without negatively impacting our margins, as we increase operating efficiencies across the company. Weâve begun working with our wholesale partners to ensure they have a vested interest in Purple helping grow their business. Secondly, we are now working more closely aligned manner with our wholesale partners to meet merchandising timelines to make sure that weâre working together to drive demand for Purple. The July 4th holiday was the first major holiday promotion where we were able to meet deadlines to lock in promotions and messaging, and as a result, be included in all available trade merchandising. While more than one holiday will be required to earn our partnersâ trust, this was proof that weâre able and willing to work together. Additionally, weâve already lined up trade merchandising and promotional offers for the next 2 major holidays, a significant improvement from where we were just 3 months ago. Lastly, we need to develop synergistic approaches to wholesale product with our partners, to ensure a mutually accretive product that simultaneously drives traffic and margins. Weâve been actively meeting with our major partners to enhance relationships and start conversations around channel-specific product. As a result, weâre now developing a product roadmap that reduces channel conflict and places products in the channels where they can be most effective. Our fourth strategic initiative is product innovation. Purple was built on innovation and intellectual property that improves our consumersâ comfort and sleep. Iâm pleased to say that with the addition of Jeff Hutchings as our new Chief Innovation Officer this quarter, we once again have a strong innovation engine that has historically driven our company. Our near-term focus has been on revitalizing our immediate product pipeline with fresh introductions as quickly as possible. In Q2, we developed and began deploying an improved cross-functional new product introduction process that ensures predictable, accelerated execution of our product roadmaps. Team collaboration, speed of execution and quality results, are all at new highs as evidenced by our first new product launch in quite some time, which is slated for later this fall. We have much more to share on the new product in the coming months, but Iâm encouraged about the market opportunity weâll be able to address later this year. I donât want to overpromise here, but we are accelerating innovation, and weâll be ready to share this with you shortly. In addition, weâve been working hard on product innovation and developed a new 3-year product roadmap that outlines our new product introductions for 2022, 2023 and the next 2 years beyond, and setting the stage for a consistent stream of new products from Purple going forward. Looking ahead in Q3 and Q4, weâll implement our new innovation strategy, process and roadmap to accelerate our output of our authentic innovation with a new emphasis on disciplined, predictable execution and delivery, while continue to amplify the disruptive heritage of the Purple brand. Let me close with a word of gratitude and continued dedication for the hard work of each of our employees. The last 6 months have not been easy, but weâre starting to see the benefits of our hard work already. Iâm encouraged by the responses weâre getting from our -- from consumers directly and from our wholesale partners. Wholesalers want us in their doors. Despite the tough macroeconomic environment for everyone, we expanded into 700 net new doors so far this year. Our direct consumers are also responding positively, evidenced by the stabilization of our e-commerce business that weâre starting to see, and the fact that our comp showrooms are performing better than the overall market. We have a great product and the interest is out there. With our continued work on our strategic priorities, Iâm confident weâll see quarter-over-quarter improvement that will lead us through this challenging environment, and position us to capitalize on the many long-term opportunities ahead for this company. Thank you. Cody, do we want to go to questions?
Operator: Weâll first hear from Brad Thomas of KeyBanc Capital Markets.
Brad Thomas: My first question was going to be around -- a little bit more color around some of the revenue trends. And I was hoping you could share for us what the productivity has been at some of the stores that you have -- some of the Purple stores, what revenue rates theyâre trending at, and maybe a little more color on -- I think itâs only about 13 stores that youâve had open for a year or longer, perhaps what same-store sales look like at some of those showrooms?
Rob DeMartini: Our showrooms are clearly showing the same pressure that this category is seeing everywhere, but at about half the rate weâre seeing in a wholesale environment. So our comp store business -- I donât really have a history yet. The comp is about -- maybe down about $100,000 a year, maybe slightly more, but not much, on that 12-month basis, and still well above kind of the minimum performance requirements that we need. You had a couple of other questions. Did you also ask about wholesale because that was justâ¦
Brad Thomas: Yes. And weâve viewed that very much as a bright spot, the productivity of those Purple stores. So thatâs very helpful color. Can you talk a little bit more about the incremental wholesale doors and what youâre seeing so far out of the productivity of them? I donât know if Iâve heard it. Where does the door count stand today? And how things been going in the doors that have opened a bit more recently for you?
Rob DeMartini: Sure, Brad. So first of all, on door. You heard a couple of numbers, and I just want to clarify. We added about 1,000 doors in the first quarter -- excuse me, in the first half, and retracted about 250 that was a negotiated exit from a customer where we were performing well in some stores and not in others. So the net for the quarter was a little bit over 700. And that brings the total active doors to, I believe, just under 3,250, 3,240, something like that. The door performance across the universe is better with our new stores, but soft in total, and that is where weâre seeing the real impact of the category being off 20-ish percent. Our door productivity is not off that far, but it is off 15% on a comp basis from a year ago. Newer stores doing better where weâve launched it, I think, with a more comprehensive support plan, and our leader of the wholesale business is out addressing all of the stores. But itâs the stores weâve been in the longest that have limited bed count where weâre having the most difficulty.
Brad Thomas: And maybe just one last one here for me. Rob, you talked about how youâre refining your partnership with wholesalers and trying to lean into that partnership and encourage the RSAs to pitch Purple as aggressively, as hopefully they are willing to. Youâve really made this point, got one major holiday weekend to look at the 4th of July. But can you talk a little bit more about the learnings about where you are today? And how much work do you think you may have to do to improve that effectiveness of Purple sell-through in your wholesale partners?
Rob DeMartini: Okay, Brad. And Iâm going to come on kind of backwards. I think the root issue -- and I think this is why the doors weâve been in the longest are performing less effectively -- is that weâve got to teach the partnersâ retail sales associate how to sell our product. Weâve been pretty good at capturing the demand that we drove in the door. But if they come in, open, and not committed to us or any other brand, weâve got to make sure that, that sales associate understands the technology and in a way that they can explain in a couple of minutes to get people onto the bed. When they lay on the product, itâs definitely a polarizing experience to people either like or are uncomfortable with, but itâs -- we can sell from there. Weâve just got to make sure that they can make that shift because the product looks different and feels different than everything else theyâre used to. And I donât think Iâm reaching at all to say this is not unlike what the memory foam category faced a decade, 1.5 decades ago, because it was a very different feeling product. Weâve got to make sure that weâre training those folks so they are comfortable at speaking about that, because we do know if they are not, they will avoid the product. Theyâll sample something else.
Operator: Next, weâll hear from Seth Basham of Wedbush Securities.
Matt McCartney: This is Matt McCartney on for Seth. Just a couple of quick questions. Could you maybe talk about your current brand position and whether pricing might have to come down a little bit, especially in light of some of the discounting weâre seeing in the market right now?
Rob DeMartini: First of all, I mean there is a fair amount of discounting in the category, and we had more in Q2 than we had originally planned. I can speak to why. But I donât think -- itâs not a bridge I want to go over yet because we got to get much better explaining why Purple and what its advantages are. And weâre running some tests right now on our e-commerce business that are showing very encouraging results when we lead with wide Purple instead of $200, $300, $400 off. And I think weâve got to give that a chance to be translating through and try to get some of the promotional message. I donât want to say out of the equation, but less distracting to the beginning of the equation. All that said, youâll see in the gross margins a reduction in Q2. That really was driven by some specific discounting we did on the Purple Mattress to learn about the importance of the $1,000 price point, and that fact that promotion is still going on today, and youâll see later why weâre doing that. But we just really need to understand how much business we left behind over these price increases over the last year or so, and kind of evacuating that price point.
Matt McCartney: Just one more for you. The reduction in advertising has been pretty drastic. Just wondering, are we reaching a steady state there? And is there any update you can share on the online customer acquisition landscape?
Rob DeMartini: Yes. So there is steady state. Weâre planning on pretty consistent spending to what youâve seen off late, certainly in Q2. And Iâll tell you, Iâm -- first of all, I want to say this. Iâm a full believer in aggressive effective marketing and spending to drive volume. What we are seeing with a significant pullback in a combination of better planning and better tools, weâre getting very consistent quality sessions with -- even with that significant reduction. And you can also see it in the search -- total brand search where weâre consistent with the leader in the category on this. Itâs a brand that doesnât participate in wholesale, but you can look at Google Analytics and see who it is. Weâre the second highest searched brand on the Internet over the last quarter, half year and end the year, and thatâs held up through those advertising reductions. So, we want to spend more on advertising. We just want to make sure itâs working. And it looks like so far weâve been able to tease out the less effective and keep in the most effective.
Operator: Next, weâll hear from Bobby Griffin of Raymond James.
Alessandra Jimenez: This is Alessandra Jimenez on for Bobby Griffin. First, could we just dive a little bit into gross margins? What is baked into your assumption that second half gross margins will improve from that 2Q level?
Rob DeMartini: I think in the press release, weâve said we exit the year at 37%, 38% in between there. So thatâs 3 points of improvement from where we are right now -- maybe 3 to 4 points.
Alessandra Jimenez: Yes. So what exactly -- are you getting more benefit from pricing, efficiency manufacturing, maybe some related...
Rob DeMartini: Itâs not pricing. At this point, the pricing is all reflected. It is a flow-through of raw material savings that we have already confirmed and will flow through, and then quite frankly, a little bit that hasnât been confirmed but will flow through. And then thatâs a little bit off of what we said last quarter, and thatâs because of the volume challenges that weâre facing, that is overhead absorption kind of soaking up some of the...
Alessandra Jimenez: And then maybe could you talk about how the Georgia facility is stepping up to date?
Rob DeMartini: Yes. We -- Eric Hainer, our new Chief Operating Officer, is actually there this week and next. Itâs a good factory, and itâs going to be a great asset. It was -- as I had previously said, I think it was brought into the equation probably a little earlier than we needed it, and it hasnât had the right leadership on site yet. I expect that to be fixed this month. And in Ericâs hands, Iâm absolutely confident that it will be. It will challenge Grantsville for being as productive as we can be. So, itâs the right place to have it, as we said last quarter. Even at its significantly reduced volumes, it offset -- it more than offsets the shipping burden we would have if we send everything from Utah. So Iâm convinced itâs in our portfolio to stay, and will be a great productive asset moving forward.
Alessandra Jimenez: And then lastly for me, maybe can we highlight like what level of sustainable quarterly revenue do you think you need to generate positive free cash flow? Is that $25 million more quarter, $10 million more? What do you think to get that positive free cash flow?
Rob DeMartini: Yes. I mean, weâre close, and I kind of sit up there. We had the cost structures right. I think $15 million more would get us over that line.
Operator: Brian Nagel of Oppenheimer has our next question.
Brian Nagel: So a couple of questions. So I guess, stepping back, looking at the results, and then probably more importantly, the reduction in guidance for the balance of the year. And this comes after a prior reduction. So the question I have, Rob, is that, as youâre watching the business unfold here, is it -- was worse than expected for you? Is it primarily macro? Or is this also a function of -- thereâs kind of internal challenges of Purple that maybe were not fully recognized initially?
Rob DeMartini: I think this adjustment is primarily macro. In fairness, probably the first quarter adjustment was more driven by what we were facing internally. But this is -- I mean this is definitely macro. And you can -- itâs not only macro, itâs specific to our wholesale door performance. And that doesnât make it any easier or hard. Itâs just -- itâs pretty isolated. Our e-commerce business has stabilized. Our showroom business, while facing some of the category challenges, is outperforming them. It is the productivity of our wholesale doors, and weâve got to fix that. And we do have some plans to address that. Some are in place and some are yet to come, but thatâs where the adjustment is coming from.
Brian Nagel: And then as a follow-up to that then. So with regard to the wholesale doors, I think this may -- a follow-up to a prior question, but are you seeing something really noticeable with regard to geography or any other segmentation of the business which should help explain kind of where the real pressure points are right now?
Rob DeMartini: Weâre not seeing any macro trends geographically. I can say that where customers let us see our performance within their footprint and we can get the retail sales associates up against it, weâre able to improve those results. And so, weâre aggressively encouraging our customers to share that information with us. But no macro geographic differences that weâre seeing right now.
Brian Nagel: And then the final question, again, a follow-up to those 2. Youâve laid out, I think, a very compelling and aggressive kind of repositioning strategy here for the brand, for the company. As youâre watching this now more difficult macro environment unfold, does it change your -- kind of your view on either the timing or maybe intensity of some of the initiatives youâre undertaking?
Rob DeMartini: I think the construct of it stays the same. I have to be a little bit more patient. And we -- I think obviously, we got to make sure the balance sheet can support it, and we believe fully that it does. But Iâd like to see the change happen faster. I know how hard our people are working, and I want them to see this company grow again. We are seeing internal signs that theyâre happening, but when Iâm sitting in your camp, Iâm saying show me. And obviously, in these headwinds, itâs tough to do that right now.
Operator: Atul Maheswari, UBS.
Atul Maheswari: Rob, first, a question on revenue and then I had a gross margin follow-up. So the revenue guidance. If I look at it on a -- compared to 2019 on a quarterly basis, first quarter on CAGR was up 20%, second quarter decelerated to up 12% and now the guidance implies just mid- to high single digit for the back half. So my question is, are you already seeing that material step down versus 2019 in the third quarter, quarter-to-date? Or are you simply being conservative and assuming a sizable slowdown to come later this year?
Rob DeMartini: Let me try to answer it a slightly different way because I didnât hear all of what was inside that, but then tell me if I get there. I mean, with the guidance that weâre giving in total, we expect the quarters to continue to behave the way the last 2 did, and that is driven by macro assumptions around the category strength. I donât have the yearly â19 quarters in front of me. Iâve got the total year, but not the quarters. Theyâve got to be -- is that what you were comparing them to? To â19?
Atul Maheswari: Yes, comparing them to â19, it seems like the back half of this year would imply like -- the guidance would imply a very sizable step down versus 2019. So the back half of 2022...
Rob DeMartini: Revenue in â19 -- Total revenue in â19 was $430 million, $428 million. So I donât see how it could be a step down in the second half. Weâll have to follow up. Iâm sorry, I just donât have that in front of me right now, but we will follow up with that.
Atul Maheswari: Yes, weâll take that offline. And then -- so my follow-up question is on gross margin drop. So granted -- there is expected to be some improvement in the back half of this year. Weâre still ending the year at 37% to 38%. Itâs still some ways off versus where you were in 2019. That was, I think, 44%. So what is the -- what are some of the key factors that have caused this gap? Is it like -- if youâre able to provide some quantification around -- like the majority of this is coming from material inflation and a portion of that is from basically channel mix? And then, what portion of this gap do you believe you can bridge over the next couple of years? And what are some of the structural factors thatâs going to beat you from getting to that level?
Rob DeMartini: So if I look at gross margin in â19, it was at 44.1%. I would think thereâs 3 components, and Iâll have to go offline to size these for you, but the single biggest one is channel mix. And the business in â19 was 62% DTC. Weâre now a little bit higher than that. So to me, itâs channel mix. It is certainly catching up with some of the input costs that we think we have done now. And then itâs absorption with the second factory. And there may be some others, but Iâm sure those are the 3 biggest drivers. The channel mix, I think, is ours to live with. 60-40, something like that is probably something weâve got to be prepared to handle. The absorption and the input costs, weâve taken the action on the input cost and the absorptions. We got to get the volume up, and we should be able to get to those margin historical performances certainly at â19 level. And weâre not throwing the talent on that whatsoever. Itâs just taking us longer because of the top line challenges to get that absorption number right, to get all those input costs fully flowing through. Bennett, I think I missed something?
Operator: Next, weâll hear from Keith Hughes of Truist.
Keith Hughes: So encouraging signs on talking about new product launches with the 3-year roadmap. First, to your comment, can you plan to launch product or products in the second half of this year? And do you have any kind of approximate time when?
Rob DeMartini: I donât think Iâm fully ready to detail exactly when, but we are aggressively chasing new product, and weâll have both a steady stream -- and youâre going to see it sooner than later.
Keith Hughes: And then one other very small question. In the adjusted EBITDA number, thereâs a vendor separation fee. Can you talk about what that was? And is that something weâre going to be seeing any more of those?
Rob DeMartini: Yes. Go ahead, Bennett.
Bennett Nussbaum: Yes. Actually, weâve been working on our functional excellence and our operational efficiency, and we had a contractor in here who was doing a lot of good work with us. And we hired Eric Hainer, whoâs our new VP -- our new Chief Operating Officer. And as we look going forward, we saw that our -- this was more effective to terminate our relationship with our outside contractor and put it in the hands of Eric. So paying this fee in the end will be a much more positive financial decision relative to continuing on more work with our existing contractor.
Operator: Matt Koranda of ROTH Capital.
Matt Koranda: Just curious if we could talk about trends within the direct business, maybe the cadence of growth on a monthly basis year-over-year throughout the second quarter, as you reined in marketing expense? And then just any preliminary sort of commentary around the direct revenue growth on a year-over-year basis quarter-to-date?
Rob DeMartini: Yes. The spend reductions were kind of feathered in starting at the very end of Q1 and through Q2. And our volume has -- I mean, it was definitely challenged early in the quarter, and then itâs gotten modestly stronger. But the most important signal is itâs been relatively stable and predictable, and weâre encouraged by that. And as I said earlier, the quality sessions we get -- we define a quality session by somebody that clicks on more than just the first page when they come to the website. Weâve been able to maintain those at about 90% of the high watermark, with about 30% of the spending. So weâre encouraged by that, and weâll use that to continue to invest behind more quality sessions and trying to drive the conversion rate up.
Matt Koranda: And then just curious if you could maybe give us -- I know these things are maybe hard to discuss on public calls, but just a little bit more color around the wholesale customer exit that you mentioned. How much is that impacting sort of the cut to the revenue outlook for the year? And just roughly in terms of door count, what does that sort of imply in terms of lower door count?
Rob DeMartini: Yes. So, door count is higher net of the reduction. The reduction was about 240 stores, and I mean this respectfully, but neither us or the customer are going to miss that volume.
Matt Koranda: And then maybe just last one from me on the gross margin recovery. You had mentioned 3 points of improvement through the end of this year, and a portion of that has already been actioned. And itâs just sort of timing of flow-through that happens, and then some more has to be actioned. Roughly, would you put it at 50-50 in terms of whatâs already been actioned versus what is on the come? And then, when you say that the 37% to 38% exiting the year, just help us put a finer point on what that means. Is that sort of weâre going to be hitting that run rate towards the end of the fourth quarter, or are we talking -- we should be modeling 37% to 38% in the fourth quarter?
Rob DeMartini: I think itâs fair to model that in the fourth quarter. We do have about half of that captured and the other half still ahead of us, but itâs not unidentified ahead of us. We know how weâre going to get there. And it is fundamentally a combination of some of that work that Bennett referenced a few minutes ago, as well as Ericâs steady hand on how to run a plant safely and effectively for high quality and just the right output when you need it. So we are confident that, that will happen.
Operator: And next, weâll hear from Jeremy Hamblin of Craig-Hallum.
Jack Cole: This is Jack Cole on for Jeremy. You guys talked about inflationary pressures impacting raw material input costs. Just how much of these costs and maybe freight costs increased on a year-over-year basis? And then, could you maybe speak a little bit more to the expectations going forward with some of those negotiations and the procurement pipeline you touched on? As it sounds like you guys do have a pretty good grip on those going forward.
Bennett Nussbaum: Yes. Our costs last year were up about 25% in raw materials and freight, and theyâve continued to escalate a little bit through the first and second quarter. And now weâre seeing -- starting to see them ameliorate. The increase is ameliorate. Weâve seen a little more softness in the international freight costs. Weâre starting to just see some softness in domestic freight costs -- and I think with the more stable oil price, weâll see a leveling for the balance of the year. Thatâs kind of how weâre thinking about it.
Operator: And our final question for today will come from Curtis Nagle of Bank of America.
Curtis Nagle: So I guess just starting off with the own stores, so the plan to do is another 14 or so for the remainder of the year based on prior commentary, I think plus something like $11 million in CapEx utilized. Why not be more conservative? Like, I understand that on the real basis theyâre definitely better and all the rest of it, but does that -- fixed cost and cash flow is negative, environment is uncertain? And then just as a follow-up, from the guidance on EBITDA, what should we imply in terms of the cash position at the end of the year. Does that imply any working at the facility?
Rob DeMartini: Let me take the store question, and Iâll have Bennett talk to you about the cash question. Itâs a fair point. But number one, the showrooms continue to be encouraging, performing better than the category in total, and very close to what we had projected kind of pre and before these headwinds. So weâre very optimistic about that channel over the long haul. The second part, Curtis, is -- and Iâm sure you can understand that store development is -- itâs an engine that it wants to run, and itâs hard to start and stop it. And so, weâve got good locations. The 14 have probably been kind of under development for at least 6 months at this time, and weâre trying to keep our commitments to our partners and get our showroom business as developed as we can. So, we think itâs a good investment. Theyâve been performing well even through these headwinds, and weâre going to keep making that investment at about that pace.
Bennett Nussbaum: Yes. If you look at the cash flow, we think we have adequate cash for the balance of the year even without drawing down the line at this point. If you look at the first half of the year, we used a lot of cash primarily as our -- in addition to CapEx as our EBITDA, as they give in the first quarter, and other payables were very high coming into the year as we spent a lot of advertising and built up inventories last year. Now I think our payables have come down about the level where theyâre going to exist. And as you can see, weâve started to rationalize our inventories that have come down. So I think basically, for the balance of the year, if we can run flat to a really positive EBITDA and spend just a little bit more in CapEx, weâve got cash to go for the balance of the year, and thatâs how weâre thinking about it.
Operator: And at this time, Iâd like to turn the call back over to our presenters for any additional or closing comments.
Rob DeMartini: Yes. I would just like to say to the team on the phone. We appreciate your interest in the company. We are very optimistic that we will get through these difficult headwinds and get this company growing again, and weâre available to help you understand anything further as you see fit. Thank you.
Operator: That does conclude todayâs conference. Thank you all for your participation. You may now disconnect.