Luxury segment helps raise sequential sales during a period of slower industry demand
LEHI, Utah — Like most other companies — public or private — Purple Innovation’s latest quarterly results showcase a mix of opportunities and challenges, on the sales and expense sides of the business.
First let’s address the opportunities related to some of the gains it is seeing in its revenues, albeit on a mostly sequential versus year-over-year basis.
For the third quarter ended Sept. 30, the company reported revenues of $140 million, down 2% compared to the same period in 2022, but up 18.8% compared to the second quarter, representing its second sequential gain in revenues.
Meanwhile, Q3 wholesale revenues rose 2.6% compared to the third quarter last year and were up 20% compared to the second quarter. This was offset by DTC revenue which decreased 5.2% compared to the third quarter of 2022 but up 17.8% compared to the second quarter.
Company CEO Rob DeMartini said that the company is encouraged by the “continued sequential acceleration in revenues and we are focused on driving further improvement across each of our distribution channels for the fourth quarter and into 2024.”
A big factor that is helping to boost the quarter-to-quarter sales gains is the addition of premium products to its lineup, including its new Luxe mattress line, which DeMartini said has continued to represent a larger part of the volume in its showrooms, helping drive both average selling price and margins higher. “This trend is now emerging in many of our wholesale doors with sales of the new higher-tiered offerings steadily improving,” he noted of the higher price points ranging from $5,500 to $7,500.
He added during the company’s earnings call that while the company was hoping for a stronger third quarter, along with higher conversion rates from its double-digit increases in online searches for its products, the higher ticket prices helped drive overall volume.
“This performance, combined with reduced discounting and improved attachment rates with our new base program has helped drive our average selling prices in the channel higher by approximately 12% compared to the first five months of ’23 prior to the mid-May launch,” DeMartini said, adding that September was the strongest month the company has had in the past year and a half with half of its stores comping positively during the quarter.
He said the total store comps were down 4%, which he said is not a good number, but relative to “what we’re hearing about the category’s overall performance, we’re encouraged with the direction the showrooms are going.” With the addition of five new Purple stores during the quarter, overall company showroom revenues rose 26% compared to the second quarter and were up 10% year over year.
DeMartini added that e-commerce also performed well with a 15% increase in revenues compared to the second quarter, which he said was the largest quarter-on-quarter improvement in the channel since more than three years ago.
“Our new product and marketing strategies are positively impacting this channel even as our price points move higher and industry transactions shift more back towards brick-and-mortar,” he said, noting that unique visits to purple.com were up 54% during the quarter compared to the same period last year. He added that the success of the higher price point and higher margin mattresses also has resulted in several of its customers adding more slots to Purple, while also contributing to the overall 20% in quarter to quarter and 3% year over year increases in wholesale revenues.
One analyst on the call noted that one of Purple’s competitors reported that the consumer is becoming more value conscious. This led the analyst to question how quickly Purple can pivot toward products geared toward more value-seeking consumers. In response, DeMartini noted that the company offers products ranging from $1,000 to $7,500 retail, adding that the company sees more price pressure with its e-comm business, with significantly less price pressure in its showroom business with wholesale business falling somewhere in between.
“I don’t think we need to pivot,” he said. “We can shift investment up and down the line,” DeMartini said. “But I am encouraged by the fact that we are taking market share in a down market with premium products. And I do think that long term, that’s a vision for this brand.”
Thus the premium price points appear to be a key area of opportunity for the brand.
But there are challenges, too, namely on the expense side of the business.
During the quarter the company had an adjusted net loss of $19.4 million, or 18 cents per share, compared to adjusted net income of $2.5 million, or 3 cents per share, last year. During the second quarter, the company reported an adjusted net loss of $24.1 million, or 23 cents per share.
In addition, the company reported cash and cash equivalents of $26.6 million as of Sept. 30, compared to $41.8 million as of Dec. 31, 2022. The company said the decrease was associated with cash used in operations as well as capital expenditures of $9.4 million primarily related to additional manufacturing investments and showroom expansions, partially offset by $57 million in cash from its public stock offering in February.
Gross margin for the quarter was 33.8% compared to 41.3% in the same period last year, while adjusted gross margin, which excludes discounts and other one-time product costs, was 37.1% during the quarter.
As part of its overall costs, the company experienced increased labor and airfreight costs and advertising expenses associated with the new premium product launch. Advertising expenses alone related to the new product launch were estimated at $12.6 million. In addition, the company had a $2 million cost in expenses associated with the growth of its showroom network that combined contributed to $79.9 million in operating expenses, or 57.1% of revenues, compared to $58.1million, or $40.7% of net revenues, last year.
As it looks to boost margins, look for a number of actions the company could take in the near future. These include select price increases on certain mattresses and other ancillary products such as sheet cushions and sheets; an increase in the mix of its higher-priced premium mattresses; a reduction in discounting and a reduction in the use of air freight as well as other initiatives to “improve our manufacturing efficiency.”
It is also rightsizing its operating budgets, including its advertising spend and plans to moderate its showroom expansion with only a “handful of new locations in 2024.”
“We are confident that along with the fixed cost leverage that we will continue to realize and higher sales volumes, these actions will result in a sequentially improving bottom line going forward,” said Todd Vogensen, chief financial officer.
With the support of the economy and a consumer that is willing to invest in higher-quality, premium products, the company also could boost its bottom line even further through its incremental sales. But again, that will largely depend on the economy and the spending patterns of the upper-end consumer.