Purple Innovation - Q1 2023
May 10, 2023
Transcript
Operator (participant)
Afternoon, ladies and gentlemen. Welcome to Purple Innovation first quarter 2023 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. It is now my pleasure to introduce your host, Cody McAlester of ICR. Please go ahead.
Cody McAlester (VP of Investor Relations)
Thank you for joining Purple Innovation's first quarter 2023 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 first quarter 2023 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 Rob DeMartini, Purple Innovation's Chief Executive Officer.
Rob DeMartini (CEO)
Thank you, Cody McAlester, thank you and good afternoon, everyone. With me on the call today is Bennett Nussbaum, Purple's Chief Financial Officer. The first quarter played out largely as we expected from a financial perspective. Revenue was down approximately 24% year-over-year to $109 million, as our decision to reduce advertising spend by 50%, combined with softer industry-wide demand and a more challenging macroeconomic backdrop pressured our top-line performance. In light of the lower sales volume this period, I am encouraged by the meaningful increase in gross margin we delivered. The work we've done over the past year, right-sizing our cost structure and improving our supply chain and manufacturing efficiencies, is yielding sustainable benefits.
From a strategy standpoint, the first quarter was productive as we made progress, important progress, setting the business up for improved results as the year unfolds and over the long term. As we outlined in our Q4 call in March, we introduced our broadest, most innovative product line ever at the Las Vegas market in January of 2023, the response from our wholesale partners has been positive. We're receiving orders to expand our existing footprint by over 1,900 slots, a 15% increase in the base. We're receiving orders. In April, we started shipping our new mattresses to partners ahead of their debut at retail in mid-May.
While it is too soon to confirm demand, we're optimistic that consumers will respond to our enhanced sleep products and new brand messaging. We remain confident that we have the right strategic plan in place to drive profitable growth and sustained market share gains. Our strategic plan is comprised of four key components: redevelopment and expansion of our product lineup, new inspirational brand positioning, investment in our wholesale partnerships, continued showroom expansion. Regarding our product lineup, as a reminder, the full Purple product line has now been categorized into three tiers. The Purple Essential Collection represents our most accessible products with prices under $1,800. These products have been engineered for and are primarily being sold through our e-commerce channel.
Our Purple Premium Collection represents our new mid-range offerings with 6 all-new mattresses ranging from $2,000-$4,000 available in both our wholesale and direct-to-consumer channels. Finally, our Purple Luxe Collection features our highest-end products ranging from $5,000-$7,500, available through showrooms, e-commerce, and through our wholesale channel partners. Early sales results of our Luxe Collection in our 4 Utah showrooms have confirmed consumer interest in these super premium products. We're on track for the launch of the new product in our showrooms, on our website, and select wholesale accounts on May 15th. The remainder of our wholesale network will change over their floor sets in the next few months. Sell-in activity with these partners has progressed as planned, and we look forward to sharing the initial reads on sell-through on our Q2 call in August.
Turning now to our brand messaging, we've reimagined the Purple brand to be bolder and more appealing to the premium consumer. We're working to reach this customer set through a shift in messaging that better articulates the unmistakable benefits of our differentiated GelFlex Grid technology. The hallmark of the Purple brand is revolutionary technology that provides a truly differentiated sleep experience, and we're using that innovation to our advantage, positioning ourselves as a true alternative to the premium memory foam mattress segment. This new messaging will be live in market in five days through increased television advertising and will become more prominent, including numerous consumer and trade PR activations that are timed to coincide with the new product launch.
This will be followed by a steeper ramp in marketing spend in the third and fourth quarters as our forecast includes advertising dollars increasing more than 80% over the second half of last year. Another key aspect of our 2023 strategy is strengthening our wholesale partnerships. We've worked with our wholesale partners to ensure improved contribution levels along with enhanced point of sale assets that we believe will drive increased sell-through at higher average selling prices and higher margins for both us and them. The response from our wholesale partners was quite positive, and we are shipping orders for 1,900 incremental wholesale slot placements at this time. Overall, we've received strong positive feedback on the new trade-up direction of the brand and are optimistic about our improving relationships with our wholesale partners going forward.
Lastly, we remain focused on expanding our showroom channel in 2023. Despite the headwinds I've discussed, showrooms performed in line with projections in the first quarter. With a new leader of owned retail joining the team in early January to lead the channel, we have good visibility to improve store presentation and enhance channel margins. Showrooms play a key role in our brand execution and profit roadmap. We ended the quarter with 55 showrooms and plan to add 7 more in 2023. In long term, we envision a store footprint of about 200 stores. While near-term channel challenges persist in our industry and across the broader consumer markets, we believe we've taken the necessary steps to successfully operate in the current environment.
With the upcoming launch of our new products and heightened level of brand and advertising spend, we're optimistic that we have set the business up to achieve incremental top line and bottom line growth in the back half of 2023, even if the macro conditions remain challenged. I'll now turn it over to Bennett, who will review the first quarter financials in more detail. Bennett?
Bennett Nussbaum (Interim CFO)
Thank you, Rob. For the three months ended March 31, 2023, net revenue was $109.4 million, down 23.6% compared to $143.2 million in the prior year period. This decrease was primarily due to an ongoing shift in demand for home-related products, inflationary pressure on discretionary consumer spending, and the intentional 50.7% reduction in advertising spend compared with a year ago. We saw wholesale demand for our legacy mattress models was impacted by the upcoming launch of our new premium product lineup in the second quarter. By channel, versus prior year, wholesale net revenue declined 25.3% and direct consumer net revenues declined 22.5%.
Within DTC, the e-commerce decline of 30.1% was partially offset by a 24.4% increase in showroom net revenue, driven largely by the net addition of 21 showrooms over the past 12 months. Gross profit dollars were $43.2 million during the first quarter of 2023, compared to $51.6 million during the same period last year, with gross margin at 39.5% versus 36.1% in the first quarter of 2022. The increase in gross margin from the prior year can be attributed partially to lower materials, labor, and freight costs compared to the prior year period, along with the manufacturing efficiency and cost reduction initiatives that we implemented last year.
Operating expenses were $65.2 million or 59.6% of net revenue in the first quarter of 2023, compared to $70.0 million or 48.9% of net revenue in the prior year period. The reduction in operating expenses compared with the prior year period was driven primarily by a decrease in marketing and sales expenses of $11.8 million or 23.6% due to the intentional reduction in advertising spend to improve marketing efficiency, stabilize profitability, and align spending with current demand levels and the shift of approximately $3 million in launch-related expenses into the second quarter. This decline was partially offset by a $5.8 million increase in general administrative costs that were primarily attributable to expenses incurred by the Special Committee.
As previously disclosed, the Special Committee was terminated on April 27, 2023. There will be no further costs incurred beyond those that will appear in our second quarter financials. Net loss for the quarter was $23.4 million compared to $13.6 million a year ago. On an adjusted basis, which excludes adjustments for certain non-cash items and other items we do not consider in the evaluation of our ongoing operational performance, including gains from the change in our tax receivable agreement income and the change in valuation of our net deferred tax assets.
Net loss in the first quarter of 2023 was $12 million or $0.12 per share, per diluted share based on an adjusted weighted average diluted share count of 98.9 million compared to adjusted net loss of $16.5 million or $0.24 per diluted share based on an adjusted weighted average diluted share count of 67.5 million in the prior year period. Adjusted net income has been adjusted to reflect an estimated effective income tax rate of 25.9% for the current year period compared to 14.9% for 2022. EBITDA for the quarter was negative $16.3 million compared to negative $10.6 million in the first quarter of 2022.
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 today's earnings release, was -$4.4 million. This compares favorably to our guidance for adjusted EBITDA of -$9.5 million as higher than expected revenues, improvements in gross margin, and a shift in launch costs resulting in a better than expected bottom line performance. Moving to our balance sheet. As of March 31, 2023, the company had cash and cash equivalents of $54.5 million, compared with $41.8 million at December 31, 2022. The increase was driven primarily by cash provided from net proceeds of $57.2 million received from the secondary offering completed in February 2023.
This was partially offset by cash used in operations of $13.5 million, capital expenditures of $3.1 million, primarily related to additional investments made in our manufacturing facilities, and the repayment of the full $24.7 million outstanding on our credit facility. Inventories at March 31st, 2023 were $87.7 million compared with $73.2 million at December 31st, 2022. The increase in inventories since the end of 2022 is primarily due to an increase in finished goods. Turning now to our current outlook. Based on our first quarter results and continued confidence in our new product launch, we are reiterating our full year guidance.
For 2023, we still expect net revenue to be in the range of $590 million-$615 million, adjusted EBITDA between $13 million and $17 million, and gross margins in the low 40% range for the full year. We expect second quarter to reflect continued softness in the market ahead of our May 15th launch. Revenue is expected to be stronger than quarter one, but below Q2 a year ago. adjusted EBITDA will reflect launch costs, including the $3 million shifted from Q1 into Q2. With first half revenues and adjusted EBITDA still tracking to our initial projections, combined with the product, marketing, and channel initiatives planned for the remainder of the year, we feel good about our ability to achieve our 2023 financial targets. Back to you, Rob.
Rob DeMartini (CEO)
Thanks, Bennett. While the category continues to face challenges, I remain confident that the business is set up for success by continuing to drive efficiency and manage costs, and by leaning into the new brand and product rollout, supported by strong investment in advertising. I'm optimistic about the longer term opportunity to profitably drive growth, securing Purple's position as a true challenger brand. I'd like to thank our employees for their significant efforts to recharge this differentiated brand. I'd also like to thank our retail partners that recognize the unique benefits that Purple's GelFlex Grid and how it can deliver a superior night's sleep. That concludes our prepared remarks. Operator, we're now ready to take questions.
Operator (participant)
We will now begin the question and answer session. To ask a question, you may press star one on your touch tone phone. If you're using a speakerphone, please pick up your headset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star two. At this time, we will pause momentarily to assemble our rolls. Our first question comes from Brad Thomas with KeyBanc Capital Markets.
Brad Thomas (Managing Director)
Hi. Good afternoon. Thanks for taking my question. I wanted to ask 1 question just on sort of operations, going forward here and another on the competitive landscape. Maybe first, Rob, as we undertake this very exciting time here as you roll out the new lineup, I guess, can you talk a little about the steps you're taking operationally, you know, to ensure this works as smoothly as possible and, you know, just your degree of confidence in the ability to execute over the next 2 quarters here. Thanks.
Rob DeMartini (CEO)
Thanks Brad, thanks for the question. You know, we're about probably a little less than halfway into shipping the new product. We've got a hard conversion in our showrooms and e-commerce that's 5 days away. We definitely have some wrinkles we're dealing with inside of it, we feel pretty good. We've got new inventory in a very good place. We've been supplying those new orders well above 98%. You know, every now and then there's a size we don't have in the right place, but we're shipping new product. We don't have a very long tail on existing on the old product as we execute out of them. We've used our showroom channels to liquidate a lot of that stuff.
We've got, you know, 56 stores counting the one we converted from Intellibed ready to showcase the new product on Monday. The marketing team is hard at work making sure assets will be ready. We will be well above kind of minimum to proceed to launch on the website, and then over the next month we'll get up to full speed. We're in pretty good shape. We've had a few component constraints. We've had to incur a little bit of air freight, but all in all, for a relatively big transition for this category, we feel pretty good where we are right now.
Brad Thomas (Managing Director)
That's great to hear. Very exciting. Then as a follow-up on the competitive landscape, I'll ask a question that I know everybody, you know, curious of your answer. You know, obviously news yesterday of one of your manufacturing competitors buying Mattress Firm, you know, one of your larger customers. I think your disclosures have sized them about 15% of sales. Could you maybe talk a little bit about, you know, how you make sure that the financial outlook stays strong and how the relationship stays as positive as possible in this backdrop here where they are, you know, slated to be acquired in a year?
Rob DeMartini (CEO)
Yeah. I mean, Mattress Firm remains an important and a valued partner, and we're not gonna change our approach with them. Certainly without any significant changes on their part, we're not gonna change anything. We're working hard to grow their business and to grow our importance of our brand in their portfolio. I do think the GelFlex Grid positions us very well to remain relevant regardless of who owns any retailer, because we have a truly differentiated product. You know, the last thing I'd say is a late 2024 execution is a long way off. We've got hard work to do right now.
While it's big news in the industry and big news in the category, it doesn't really change our plan at all, and we think our path to premium is a great complementary offering to retailers who have big Tempur-Pedic businesses because it's a very different feeling product with the potential to have similar contribution levels and similar customer satisfaction. We're gonna hold the course and work hard in making sure our brand is valuable to all retailers, including Mattress Firm.
Brad Thomas (Managing Director)
Very helpful. Good luck in the days ahead here. Thank you.
Rob DeMartini (CEO)
All right. Thank you, Brad.
Operator (participant)
Our next question comes from Brian Nagel with Oppenheimer.
Brian Nagel (Managing Director and Senior Analyst)
Hi, good afternoon. Thanks for taking my questions. Rob, you know, just as you get now closer and closer to the launch date for the new products, I know we've talked about this, you know, the last couple of quarters, Have you seen anything else, you know, with data points, you know, conversations with your customers that give you even greater confidence in the, you know, the ultimate success of these products we'll be launching here shortly?
Rob DeMartini (CEO)
I think, Brian, thank you. I think I'd point to two areas, and the first one is the way these products have tested. We did very robust more than 200 consumers, from, I believe it was eight different competitive, excuse me, yeah, eight different competitive products, and we put these products into their home for 14 nights. The products performed incredibly well and across all eight attributes. You know, it's a significantly, statistically significant sample size tested against every one of our competitors and blindly against our best-selling product, and we outdid our own performance, and we outdid competition. That's the first.
The second one is going to sound a little blunt, but our brand has not been performing well in the wholesale channel recently, and we just added 1,900 new slots. I think that speaks loudly to what the retailer hopes and believes behind this brand. You know, I don't know that I've ever expanded distribution on a declining brand before, and I won't be able to do it a second time. I fully recognize that. I think the optimism they see in this launch, in the potential of GelFlex Grid and in our improving relationships really speaks to the customer, to the team that's calling on them, and to the potential of this brand. Those are the two things I would point to.
Brian Nagel (Managing Director and Senior Analyst)
Yeah. Very helpful. The second question I have, I guess maybe Ben, it's more for you, it's on the financial side. If you look at the nice gross margin performance here in Q1, you know, a piece of that was lower moderating input costs. You know, as we think about the gross margins, I guess, over the balance of, you know, the current year and maybe even to the next year, you know, should that dynamic input cost, shipping costs, should that get even better from here?
Rob DeMartini (CEO)
I think it could get marginally better. I think you're right as the year progresses. I think the improvement in the gross margin quarter-over-quarter was also heavily driven by the efficiencies that our new COO, Eric Haynor, has brought through to the plants. I've said in earlier calls that I think his improvements are sustainable and replicable, and I think we'll continue to see that. I think the only pressure we'll see against gross margin going forward will be if there's any heavy discounting in the market. I'm very confident that we have materials cost and operating parameters under control.
I'd also tell you that we're operating at a fairly low, production level with our low sales in the first quarter, and we have further opportunity to improve as we increase volume and spread our overhead absorption over more units.
Brian Nagel (Managing Director and Senior Analyst)
Right. Well, thank you very much. Looking forward to the launch. Thanks.
Rob DeMartini (CEO)
Thank you, Brian.
Operator (participant)
Our next question comes from Jeremy Hamblin with Craig-Hallum Capital Group.
Jeremy Hamblin (Senior Research Analyst)
Thanks, congrats on the results and the launch coming up. I wanted to start just by making sure to clarify the second quarter revenue guidance. I think in the release it talks about, you know, revenue guide similar to last year. Bennett, I think on the call, you suggested that it was going to be better than Q1, but below Q2. Just was hoping that we could sync that up and make sure that our expectations are set appropriately.
Rob DeMartini (CEO)
Yeah, that's exactly we said, Greg. We're definitely gonna beat the first quarter. With shipments just starting to roll now on the new mattresses, we're gonna have to see what the follow-through orders are. I think coming closer to last year in Q2 is probably where I'd be looking at to pinpoint things.
Jeremy Hamblin (Senior Research Analyst)
Okay. In terms of the implications between the two channels, you know, like you were down 22.5% DTC in Q1, down 25% wholesale. How should we be thinking about that interplay here in Q2? Are you expecting that because of, you know, channel fill, that your wholesale is, you know, closer to flat on a year-over-year basis and still assuming that DTC is gonna be a little soft? Or, you know, because you're getting that product in showrooms, you know, on Monday, and available online that, you know, it's gonna be more balanced with DTC. Anything you might be able to help us think about that?
Rob DeMartini (CEO)
Yeah, Jeremy, I think wholesale will be choppier in Q2 because you've got, you know, we've got some customers with 60% of this product floored and some customers who haven't ordered it yet. I think that will be a bit choppier. We do think that we'll get a little bit of help as we exit Q2, and I really am hoping, you know. Our e-commerce business has been down 10 quarters in a row sequentially. I would expect to see Q2 not be down again.
Jeremy Hamblin (Senior Research Analyst)
Got it. That is helpful. Just in terms of when you think you're gonna actually be able to walk into wholesale partners' retail doors and see, you know, the product in the showroom, en masse, when are you expecting that to happen?
Rob DeMartini (CEO)
Well, I had my answer till you added the en masse. I mean, we've got certain customers that are well late in the summer. You've got a modest group that are waiting till after Memorial Day. We are shipping about 50% to 60% of our customers now. I have not been through this before. It shouldn't take long to get through the system 'cause they're not that deep in backstock, but it's showing up on floors now. We're gonna turn the marketing on full speed next Monday.
Jeremy Hamblin (Senior Research Analyst)
Okay, great. A last one from me. Just in terms of the performance across some of these levels, whether it's luxury versus premium versus entry-level, can you add a little bit of color in terms of, you know, what you're seeing out there in the marketplace performance of those tiers of mattresses out there?
Rob DeMartini (CEO)
Yeah, I know some the questions. I'm not sure it was yours. Some of the questions I saw, talked about, are we seeing trade down? We are not seeing that right now. We're not seeing a whole lot of trade up on the high end because we, you know, we're just getting the Luxe to market today. Our hybrid line, you know, I'll put this in parentheses because our performance has not been great over the last few months. The hybrid line has been performing as it typically does, kind of a percent to total. We're not seeing consumers trade down. We actually have seen some trade up in the Essential segment towards Purple Plus away from the Purple Mattress. Then I mentioned it in my remarks. If you'll recall, we talked about this on previous calls.
We kind of forced Intellibed product into our four Utah showrooms just to learn about the selling. We've been trying to average about three-quarters to one unit per store per week of that high end, and that has performed on track, and that's before marketing. Again, I'm not making any predictions here yet. There's nothing we're seeing that suggests this brand can't perform at that level. We, I think, we've got to execute, you know, better and across all of our showroom formats, the early indications are encouraging.
Jeremy Hamblin (Senior Research Analyst)
As a follow-up on the advertising spend, that declined $11.7 million in Q1.
Rob DeMartini (CEO)
Yep
Jeremy Hamblin (Senior Research Analyst)
... you know, what are your expectations on advertising, as it relates to Q2 year-over-year?
Rob DeMartini (CEO)
Yeah. I think Q2 will be flat because we're not really burning anything until we get to next Monday. We've been spending at minimum levels, kind of minimum sustainable levels in April and the first part of May. Then, you know, you can do the math. We're up 80% in Q3 and Q4, so it's almost a direct doubling of those months based on what we spent so far this year. Then year-over-year, the total year advertising budget is up.
Jeremy Hamblin (Senior Research Analyst)
Got it. Thanks so much, and good luck with the launch.
Rob DeMartini (CEO)
All right. Thank you, Jeremy.
Operator (participant)
Our next question comes from Bob Griffin with Raymond James.
Bobby Griffin (Managing Director and Consumer Equity Research Analyst)
Good afternoon, everybody. Thanks for taking my questions. Rob, just one quick one to clarify the last comment on the ad budget. What does the plan imply for total ad spending for the year? Because I think we have just the 10-K numbers that give us the yearly data, but we can back into the quarters. What is the up 80 in the second half imply for the full year budget?
Rob DeMartini (CEO)
Yeah. We, Bobby, we don't release that number specifically, but I can tell you year-on-year it's up modestly, and that makes it up heavily in the back half.
Bobby Griffin (Managing Director and Consumer Equity Research Analyst)
Okay. That's what I was kind of backing into. All right, perfect.
Rob DeMartini (CEO)
Yes. Yep.
Bobby Griffin (Managing Director and Consumer Equity Research Analyst)
For the second quarter, I mean, are we looking, you know, given that we'll have probably some more launch costs in 2Q, we have a little bit turn on the spigot of advertising and kind of getting the product rolled out. Is the second quarter EBITDA looking like it's gonna be below 1Q despite the revenue being up? Anything there directionally to point us in?
Rob DeMartini (CEO)
Yeah. Again, we're not releasing it by the quarter, but I will say we have a fair amount of cost in Q2 that we think is, quite frankly, very good investment, so we're gonna make it.
Bobby Griffin (Managing Director and Consumer Equity Research Analyst)
Is the cost, I mean, is the cost on the growth side, like product launch costs and taking the hit on the floor samples that we're familiar with the different 3 year...
Rob DeMartini (CEO)
Yeah. It's kind of internal launch cost. You know this industry. You have to sell the floor samples at a pretty healthy discount, and we're selling a lot of them. The most important thing is May 15th forward, we start spending at what I would call more responsible rates long term, so we can grow the business.
Bobby Griffin (Managing Director and Consumer Equity Research Analyst)
Okay. Very good. I guess lastly for me, I just wanted to know, maybe expand a little bit on what you're seeing out of the showrooms. Any late data points there? I think it's been a little while since we've talked about them but you are starting to grow them. With the changing potential changing landscape inside the retail market here, maybe showrooms become a bigger piece at some point. Just anything there in terms of, you know, ASP versus your other things or attachment rate or just anything there to share?
Rob DeMartini (CEO)
No. Nothing. I mean, you know, it makes it hard for this call because what I'm talking to all of you about is stuff that hasn't happened yet. But you know, they are. Two things are happening. They're feeling the impact of the brand performing relatively poorly, and that's not gonna change till we get the new marketing and new product out there. They will do that hard conversion this Sunday night, and we're optimistic that we have plans that will make that mix start to grow the way we've mapped it out in our long-range plan. If it does, it makes the profitability of those showrooms get healthier in a hurry.
Bobby Griffin (Managing Director and Consumer Equity Research Analyst)
Okay. I mean, maybe lastly then I'll sneak in one more. Just what are you seeing ahead of Memorial Day from an industry standpoint, from promotions? Anything notable? Is the industry being more promotional, less, kind of in line with expectations?
Rob DeMartini (CEO)
I think, you know, most people have reported that the total category's continued to be pretty soft and, you know, maybe softer as Q1 went along for the total category. We were pretty steady in Q1. We're not hearing a whole lot of incremental promotional pressure. It still remains relatively high.
Bobby Griffin (Managing Director and Consumer Equity Research Analyst)
Okay. Thank you, Rob. I appreciate the details. Best of luck here with the conversion coming up.
Rob DeMartini (CEO)
Thank you, Bobby.
Operator (participant)
Our next question comes from Matt Koranda with ROTH Capital Partners.
Matt Koranda (Managing Director and Senior Research Analyst)
Hey, guys. Good afternoon.
Rob DeMartini (CEO)
Hey, Matt.
Matt Koranda (Managing Director and Senior Research Analyst)
Maybe just, several have been asked and answered, but just on production capacity at the facility with the new, product. Just curious if maybe you could talk about sort of the impact to gross margins on a longer time horizon or maybe even just into the second half as you kind of get deeper into the product launch and utilization improves. How do we sort of get comfort, or do you have good comfort that the gross margin profile can actually step up materially in the back half of the year and into 2024?
Rob DeMartini (CEO)
I think it is. Bennett laid out. I mean, we're optimistic about our command and control of gross margin with the biggest variable being kind of in the rearview mirror, the discounting we've had to compete with. We're confident in control of our gross margin. As Bennett said, absorption will help us nicely when we get it. I think, you know, like I said in my opening remarks, to have volume be as soft as it was in Q1 and produce a decent margin, you know, we've made long-term predictions that we'll get, you know, between 40% and 45%, and hopefully closer to 45%. I'm not backing off that at all. I don't think that'll happen this year.
We just, you know, too much of it will be kind of under the bridge by the time the volume corrects, but we should exit the year solidly in the low forties, and we've got room to go beyond that into 2024.
Bennett Nussbaum (Interim CFO)
To your earlier question, we have plenty of capacity, basically more than twice what we need.
Matt Koranda (Managing Director and Senior Research Analyst)
Okay. Yeah, super helpful, guys. It's been asked in different ways, I guess, but maybe just to put a finer point on it. Is all the legacy product cleared from the wholesale channel and your own channel? It sounds like maybe you had a little bit more cleanup to do, in the second quarter.
Rob DeMartini (CEO)
Yeah.
Matt Koranda (Managing Director and Senior Research Analyst)
Maybe just level.
Rob DeMartini (CEO)
Yeah
Matt Koranda (Managing Director and Senior Research Analyst)
... set us on that and just the implications for margin as we move in, move through Q2.
Rob DeMartini (CEO)
Okay. It definitely is not cleared. It's almost completely cleared from our showroom channel. They've done a hell of a job getting all the floor samples out and what little backstock is carried in that channel. There's no material impact from that. From a wholesale standpoint, and again, I'm feeling my way through this being the first time, we have addressed any and most issues that are out there. It's gonna be the full summer to get it all the way out 'cause you've got some customers going, you know, late in the summer and one big customer going after the summer. It's gonna be a while. We're having to juggle making both the old and new for a longer period of time than I had hoped, but I got confidence in that team.
They're doing a great job staying on top of it. Service levels are better than they have ever been in this company. We're running a significantly more complicated cook the book process in the plants because we're making both old and new. All that said, we don't see any significant negative impacts to the business.
Matt Koranda (Managing Director and Senior Research Analyst)
Okay. spectacular. I think you guys had kind of talked about the shape of inventory build through the year, but don't think I explicitly heard an update on how to think about that. Would love to get your latest thoughts on sort of the cadence of inventory build?
Bennett Nussbaum (Interim CFO)
We, we-
Matt Koranda (Managing Director and Senior Research Analyst)
... for the remainder of the year and then when do we expect watching the inventory.
Bennett Nussbaum (Interim CFO)
We expected the inventory to peak in late March and through April as we started to push it out. With some of the wholesale partners delaying their introductions, the peak was not as high as we expected, and we'll probably run with somewhat increased inventories through Labor Day, just as we expected. Just to further repeat what Rob said, with regard to our existing line of hybrids, we're actually gonna have to keep making them, and we can make them to virtually to order, so we don't expect to have hardly any left over when we finally make the conversion. We don't expect a lot of inventory, and we wouldn't expect a large amount of discounting on those mattresses until the very end.
We're very optimistic, and our warehousing in terms of managing the dual SKUs, has been very efficient. Again, to repeat what Rob said, our shipments are at an all-time high for reliability. It's all going extremely well, including the inventory build.
Matt Koranda (Managing Director and Senior Research Analyst)
Okay, great. Best of luck with the launch here ahead, guys. Thank you.
Rob DeMartini (CEO)
All right. Thank you. Thank you, Matt.
Operator (participant)
Our next question comes from Keith Hughes with Truist.
Keith Hughes (Managing Director and Equity Research)
This is... I guess that's me. Question is on advertising. You talked about a ramp up in the second half of the year.
Rob DeMartini (CEO)
Yeah.
Keith Hughes (Managing Director and Equity Research)
Historically, Purple had done advertising to the tune of almost 20% of sales. Are we talking that big of a ramp up? Give me some kind of magnitude of how much support you're gonna put behind it.
Rob DeMartini (CEO)
No. No. I mean, again, when the business mix was 70 or more e-commerce, you could run sales, you know, advertising at that level. This is a step up from where we were a year ago, but not anywhere near kind of 2020, 2021 levels. You know, we may get back there, the economics yet are not there. I think more importantly, you know, for the person running it, Keira Krausz, who's running our marketing, has a new level of command and control over what investments are returning. We're looking at it almost on a daily basis. We will get to fully daily, she's making that mix adjustment behind it. It's more money that's gonna feel like even more money 'cause it's being spent much better than it was before.
The other thing I'd add is that we were not confident in the creative. It just wasn't selling the benefits of the GelFlex Grid. Again, our advertising's in under embargo right now, but it'll be out on the fifteenth. When you see the selling spot, it pushes very hard on what's different about Purple and why it's better, and we have not done that in the past.
Keith Hughes (Managing Director and Equity Research)
Okay, one follow-up. The 50%, 60% of customers that are getting the beds in the short-term. Can you give us any idea of the mix of how much is premium, how much is luxe?
Rob DeMartini (CEO)
Yeah. The luxe expansion is, we're up about 300 slots. Is that the right number, Alicia?
Keith Hughes (Managing Director and Equity Research)
Yeah. Three.
Rob DeMartini (CEO)
300 slots. We still have a lot of work to do on that. There is a pretty good buy-in to the concept, but there's a fair amount of wait and see. In many of our customers, it's in 10%-20% of their doors. That may be their confidence in their stores. It certainly is their confidence in us. We're gonna continue to push that aggressively the rest of the year, and it's one of the reasons why I think the showroom mix is so important because as we prove we can sell $7,000 beds, that won't be lost on the partner. Most of those 1,900 slots are the premium line, the Restore line, what is replacing the hybrids.
About 15% of our doors will have Rejuvenate in it, which is the high-end stuff. Longer term, I wanna see us get that closer to 30.
Keith Hughes (Managing Director and Equity Research)
Okay, great. That's great detail. Thank you.
Rob DeMartini (CEO)
Thank you.
Operator (participant)
Our next question comes from Atul Maheswari with UBS.
Atul Maheshwari (Managing Director)
Good evening. Thanks a lot for taking my question. Rob, with respect to your first quarter, you did cite category softness and your beds are obviously not launched yet revenues were better than expected. What surprised on the upside relative to your expectation for the first quarter? Was it just better send through at your whole stores?
Rob DeMartini (CEO)
Atul Maheswari, it's hard for me to tell you how $109 million is better than really anything. It's a little bit better than the forecast we provided. You know, the category was under pressure and the brand is performing, you know, below the category. Until we get to the launch, you know, we were slightly better than we predicted, but nobody's handing out gold stars anywhere. We gotta get this brand much stronger. I really think we're talking about a difference of $4 million-$5 million.
Atul Maheshwari (Managing Director)
Right. Okay, that makes sense. With respect to your second quarter guidance, is there any material benefit that you expect to get from one-time channel fill activity, as you ship these new beds to these retailers?
Rob DeMartini (CEO)
No, I, not really, particularly on the revenue line because the industry carries relatively low back stock. Think of it as 2 weeks, is what I'm learning. Then you combine 2 weeks with selling the floor samples at 50% off, and you don't get any revenue bump at all. You might get a little bit of a unit bump because you're back filling all those floor samples, but it doesn't add up to much. We gotta get the new product. We look at that as an investment and then start selling it through.
Atul Maheshwari (Managing Director)
Got it. Thank you for that, and good luck with the upcoming launch.
Rob DeMartini (CEO)
All right, Atul. Thank you.
Operator (participant)
Our next question comes from Curtis Nagle with Bank of America.
Curtis Nagle (Director)
Great. Thanks for taking the question. Just a quick one, Rob, on the slot expansion. I think you said 1,900. Any change there? At least from what I remember, you know, we had looked at it, slots per door going from like 4 to 6, something like that. Yeah, any change in terms of, you know, last time we spoke in February? What was the ending wholesale door count for 1Q?
Rob DeMartini (CEO)
Door count hasn't changed, material at all in the first quarter. I think 3,450 is what we're reporting right now. You know, coming out of Vegas, there has been some slippage in the slots that we got. I wanna reinforce to this group, we're not done. You know, Monday is the start of this, not the end of it. There's a fair amount of customers that, you know, said, "Hey, we love what you're doing. Come back to us when you can show me that it's working." We have every expectation of, you know, ensuring that no is a desperate plea for more facts about how it's performing. We had said we were trying to get up a full slot.
We're at about 0.6 of a slot across the entire universe, that is with our largest customer not changing their slot count. It's a little bit better on 2,200 of my 3,400 doors. It's about a full slot, a little bit more. We've got the biggest customer holding. You know, rightfully so. They've got a lot of competition for those slots. They wanna see it perform before they're gonna give us carte blanche distribution. Coming out of Vegas, it has slipped a bit. It's still a meaningful 15% increase in real estate. Again, as I said earlier, on a brand that's been declining.
Curtis Nagle (Director)
Yeah.
Rob DeMartini (CEO)
I can't emphasize that enough. I've never, in 30 years of selling stuff, I've never been able to expand distribution on a brand that's declining. Because they believe in its potential, and they know if we get our service up, our marketing right, that they've got a product they can sell to their consumers and send them home happy.
Curtis Nagle (Director)
Okay. I mean, I guess kind of the next natural question, I guess it doesn't sound like a huge amount of slippage, like you said, is. That would, you know, then require higher productivity per door. Is that just a function of, you know, you like what you see in the testing or what would offset, you know, slightly lower doors?
Rob DeMartini (CEO)
It is... You hit exactly. It's what we've seen on the testing. You know, in preparation for this, I had our consumer insights take me through it yet again this morning. The testing results, they are outstanding. I mean, we got them about two and a half months ago. Robust, significant sample, winning across every attribute against all of our competition and our best-selling mattress. So that combined with new messaging, which you'll see shortly, which I think you're gonna see, it's gonna be very different than anything the category has seen.
Curtis Nagle (Director)
All right. Understood. That's really helpful. I appreciate it. Thank you.
Rob DeMartini (CEO)
Thank you, Curtis.
Operator (participant)
This concludes Purple Innovation Conference Call. Thank you for attending today's presentation. You may now disconnect.
Rob DeMartini (CEO)
Thank you all.