Purple Innovation - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 revenue was $0.104B, down 13.2% YoY, in line with internal guidance; adjusted EBITDA of $(4.7)M beat guidance as gross margin expanded to 39.4% GAAP and 40.3% adjusted on sourcing and manufacturing consolidation benefits.
• Showroom channel outperformed with +7.4% revenue and +11% comps despite a 5% smaller fleet; wholesale remained pressured (-24.2% YoY), but Purple announced a major Mattress Firm footprint expansion from ~5,000 to ≥12,000 slots, expected to drive ≥$70M incremental annual revenue starting 2026.
• FY25 guidance maintained: revenue $465–$485M; adjusted EBITDA $0–$10M, with management targeting a return to positive EBITDA in 2H 2025; near‑term headwinds include tariffs with ~$10M annual cost exposure and cautious consumer sentiment.
• Catalyst: strategic distribution expansion with Mattress Firm, continued gross margin tailwinds from consolidation and sourcing, and the Rejuvenate 2.0 launch; offset by tariff impacts beginning in Q2 and wholesale softness, keeping estimates risk balanced near-term.

What Went Well and What Went Wrong

What Went Well

• Adjusted EBITDA beat guidance on sustained gross margin improvement and disciplined OpEx; adjusted gross margin >40% for the fourth consecutive quarter (40.3%) driven by sourcing and production efficiencies and completed manufacturing consolidation.
• Showrooms delivered fifth consecutive period of revenue growth (+7.4%) and second consecutive quarter of positive comps (+11%) despite fewer locations, supported by higher order values and upselling/bundling strategies.
• Strategic distribution step‑change: Mattress Firm partnership expansion to ≥12,000 slots and Sherwood assembly support; CEO: “We’re projecting the same productivity on the incremental slots…establishing us as a core brand”.

What Went Wrong

• Top-line contraction: revenue declined 13.2% YoY to $104.2M, driven by wholesale (-24.2%) and e-commerce (-8.2%); macro softness and calendar shifts weighed on partners.
• Net loss remained significant at $(19.1)M despite YoY improvement; cash used in operations increased to $(23.1)M on seasonal inventory rebuild and contractual rebates amid lower sales.
• Tariffs now a tangible headwind: ~15% COGS exposure to imported textiles/bases implies ~$(10)M annual cost starting Q2; management sees potential demand pressure beyond cost passthrough.

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the Purple Innovation First Quarter 2025 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. I would now like to turn the conference over to Stacey Turner. You may begin.

Stacy Turnof (EVP of Strategic Situations and Investor Relations)

Thank you for joining Purple Innovation's First Quarter 2025 earnings call. A copy of our earnings press release is available on the investor relations section of Purple's website at www.purple.com. Before we begin, I'd like to remind you that certain statements made in this presentation are forward-looking statements. These statements reflect Purple Innovation's judgment and analysis as of today and are subject to a variety of risks and uncertainties that could cause actual results to differ materially from current expectations. You should not place undue reliance on these forward-looking statements. For more information, please refer to the risk factors outlined in our filings with the SEC. Additionally, today's presentation will reference non-GAAP financial measures such as adjusted gross margin, EBITDA, adjusted EBITDA, and adjusted earnings per share. A reconciliation of these measures to their most comparable GAAP measures can be found in the earnings release available 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, Stacey. Good afternoon, everyone, and thank you for joining us. With me on today's call is our CFO, Todd Vogensen. I'm pleased to share that we delivered first-quarter results in line with our revenue guidance and ahead of our adjusted EBITDA guidance. Our performance amid continued pressure on the industry includes growth in our showroom channel and ongoing gross margin improvements. Our focus on promoting our differentiation, along with the durability we've built into our cost structure, positions us to drive sustainable growth and profitability over time. First-quarter revenue of $104.2 million was down 13% compared to last year and was in line with our expectations. Softness in our wholesale and e-commerce channels was partially offset by continued strength in our showroom channel.

Showrooms grew 7%, the fifth consecutive period of revenue growth, while comparable sales were up 11%, the second straight quarter of year-over-year gains, despite operating fewer locations while optimizing our fleet. This sustained strength in the channel was primarily driven by higher order values, effective upselling strategies, and product bundling, reinforcing the strength of our retail store strategy. Adjusted EBITDA outperformance was the result of the strong foundation we built with our restructuring efforts and ongoing cost savings initiatives. For the fourth consecutive quarter, adjusted gross margins exceeded 40%, an improvement of 550 basis points compared to last year. Excluding the potential impact from tariffs, which I'll speak to later on, we anticipate gross margin expansion to continue throughout the year, supported by our sourcing initiatives, production efficiencies, and the full integration of our consolidated manufacturing operations.

Additionally, disciplined operating expense management contributed to a 160 basis point improvement in profitability in the quarter. Collectively, these actions have driven significant advancements in our adjusted EBITDA profitability, which increased $8 million and 650 basis points compared to last year. Now, I want to highlight a major strategic milestone that will significantly expand our distribution footprint and drive further efficiencies in our manufacturing operations, reinforcing our commitment to sustainable, profitable growth. Earlier today, we announced the significant expansion of our Mattress Firm partnership through a multifaceted agreement with Somnigroup International. We're excited to expand our commercial partnership, growing our presence from 5,000 Purple mattress slots in 1,400 Mattress Firm stores to 12,000 slots across their entire store network. This rollout, which we anticipate will begin ramping up in July and finish by year-end, is expected to drive more than $70 million in incremental net revenue beginning next year.

To support our partnership with Mattress Firm, we're also expanding our existing strategic supply agreement with Sherwood Bedding, another Somnigroup company, which will have the exclusive right to assemble certain product lines that Purple sells to Mattress Firm. Purple will maintain production of its proprietary grid technology and retain all related intellectual property. Mattress Firm has been an important and valued partner to Purple, and this partnership reinforces our stability, opens the door to significant new volume and brand exposure, and enables us to continue investing behind innovation and marketing. Additionally, as allowed in our term loan agreement, we entered into an amendment to borrow an incremental $20 million to support our expanded distribution agreement with Mattress Firm and continued investment in innovation and marketing. Later, Todd will provide further details on the financial impact. As we outlined last quarter, our strategy remains firmly grounded in three key pillars.

Number one, pioneering new technologies to maintain our product leadership. Number two, promoting our differentiation to effectively communicate our unique product benefits across our channels. Number three, prioritizing gross margin driven by ongoing operational improvements and strategic cost management. First, turning to pioneering new technologies, we remain committed to leveraging technology and innovation as the key driver of our competitive advantage. Last week, we launched the new Rejuvenate 2.0 mattress line in our showrooms and online and began the rollout in the wholesale channel with select partners. This marks one of the most significant product launches in our company's history, introducing a new type of grid technology, combining a plush pillow-top gel grid called DreamLayer on top of our existing GelFlex Grid. This unique combination preserves all the proven benefits of sleeping on gel layers while providing enhanced luxurious comfort.

While it's too early to assess sales trends, initial feedback from both our retail sales associates and our wholesale partners has been strongly positive. We've seen a meaningful increase in slot commitments across our wholesale channel, with total Rejuvenate slot count at non-Mattress Firm retailers now growing by more than 60% year-over-year. This momentum represents a significant milestone in our path to premium sleep strategy and reinforces that our innovation is resonating at retail. As Rejuvenate 2.0 reaches more customers, we're excited to see its performance in the market, and we're confident that customers will love the elevated experience it delivers. Second, we continue to sharpen our focus on driving sales by leading with our differentiation. Purple was built on innovation, and our gel grid technology sets us apart in a crowded and increasingly commoditized category.

Over the years, the industry has leaned on discounting to drive demand, but our path forward is to focus on the benefits of our products, especially the sleep and health advantages. We have begun to shift our messaging and focus our investment in marketing on what consumer benefits Purple mattresses deliver. Across our selling channels, our priority remains to improve conversion and drive higher quality traffic by highlighting what sets Purple apart. Our gel grid technology delivers the most impact when experienced firsthand, which is why we continue to see our highest conversion rates in our showrooms and our wholesale partner doors, where customers can feel the difference and associates are equipped to explain the benefits. E-commerce continues to lag in conversion, reflecting the challenge of conveying our benefits digitally. We're actively refining our marketing approach to clearly articulate our product's distinctive benefits.

I'll take a moment to provide color about how we're promoting our differentiation in each channel. Starting with our DTC channel, showrooms delivered strong performance, significantly outperforming overall industry trends by at least 10 percentage points, illustrating the effectiveness of our in-store experience, which allows customers to engage directly with our technology in a hands-on, personalized setting. Our focus at the store level is on customer education and upselling, particularly around higher-end products like Rejuvenate mattresses. In addition, consumer financing continues to be a valuable tool in supporting larger purchases, with finance orders meaningfully up year-over-year in delivering a higher average order value compared to non-finance transactions. Turning now to e-commerce, our consumer research tells us that we have a strong brand awareness now at 77%, a notable achievement for a brand of our size and maturity.

That said, there's still groundwork to be done online, as many consumers are not yet familiar with the unique benefits of our proprietary gel grid technology, and close to half of them do not know that they can experience our products firsthand in retail stores. This highlights a meaningful opportunity as online research is often the first step in the consumer's path to purchase. Our focus is on more clearly articulating the differentiation in the digital environment while also ensuring that customers know where they can experience our technology firsthand. In the first quarter, we continued to see softness, with sales down 8% versus the prior year, despite a lift in website traffic. Conversion declined, pointing to a disconnect between consumer curiosity and product understanding.

In response, we're actively reevaluating our digital strategy with a focus on three core areas: improving conversion and reinforcing the messaging around our grid technology and its unique benefits, optimizing potential customer target strategies for greater efficiency and impact, and elevating omnichannel efforts with an emphasis on increasing awareness of our showroom and wholesale partnership distribution points. The wholesale channel remains pressured, with sales down 24% compared to last year, largely due to fewer doors as we optimized our footprint, contributing to a substantial margin improvement. Additionally, calendar shifts and broad-based softness across most partners contributed to an overall channel weakness. We're encouraged by several key wins and early signs of momentum as we focus on product leadership. As I mentioned earlier, we expect our agreement with Mattress Firm will meaningfully broaden our retail footprint and elevate our exposure to premium customers nationwide.

We view this strategic action as a strong vote of confidence from our wholesale partner in the strength of the Purple brand, reflecting their belief in our product benefits, brand strength, and long-term growth potential. Our partnership with Costco continues to perform well, with year-to-date sales through up double digits. We're planning additional promotional events for later in the year and are maintaining year-round online availability of our products. We're also expanding our wholesale reach through 60% more Rejuvenate slots than our baseline. As we roll out the new Rejuvenate collection, we expect strong sell-through across the wholesale network. We're confident in the performance of this luxury offering. Finally, to grow our pillow business, we've broadened our assortment with our wholesale partners to now include DreamLayer and Freeform, strengthening our presence in the premium sleep accessory space and serving a wider range of sleep preferences.

We continue to expect to grow our placements in about 2,000 of the 3,000 doors that carry our Harmony Pillow. Finally, turning to our third strategic pillar, prioritizing gross margins. We exceeded our adjusted gross margin target of 40% this quarter, improving 550 basis points despite lower volumes. Margin gains were driven by improved sourcing, continued production efficiencies, and the successful consolidation of our manufacturing operations. In April, we also began operating at our new Salt Lake City distribution center, a dedicated facility that strengthens our wholesale servicing capability. Our in-house production of our Harmony Pillow line is also ramping up, enhancing both cost control and speed to market. Our gross margin strategy is continuing to evolve in response to the ongoing tariff developments, which brings me to an update on how we expect these changes to impact our business.

We continue to closely monitor the potential impact of recent U.S. tariff charges. Importantly, all of our mattresses are manufactured in the U.S., and about 15% of our cost of goods is tied to products sourced from overseas. This exposure is primarily concentrated in the textile side of our business, which includes sheets and mattress covers, but also includes the import of bases and foundations. Based on current tariffs, we estimate the potential annual cost impact to be approximately $10 million. While the tariff landscape remains fluid, we're actively evaluating sourcing alternatives and pricing strategies on a case-by-case basis, which we believe will mitigate at least a portion of the expected cost increases. Our vertically integrated model and strong vendor relationships give us the flexibility to adapt quickly, and we are confident in our ability to mitigate these impacts.

Looking forward, our guidance reflects a balanced view, considering some contribution from the expansion of our wholesale distribution later this year, while also incorporating potential headwinds from tariff policies. While we're working to offset the impact from tariffs, we believe that there could be pressure in overall consumer demand. Considering both the tailwinds and the headwinds outlined, we're reaffirming our full-year guidance of revenue in the range of $465 million-$485 million and adjusted EBITDA in the range of flat to up $10 million, which includes $25 million-$30 million in expected savings from our manufacturing consolidation initiatives. Todd will go into more detail later in the call. Finally, as announced previously, the board's review of the strategic alternatives remains ongoing. We don't have any updates to share at this time and will not be commenting further during today's Q&A.Now I'll turn the call over to Todd to discuss our financial performance in more detail.

Todd Vogensen (CFO)

Thank you, Rob. And good afternoon, everyone. As Rob touched on earlier, we're pleased that we met our revenue guidance and exceeded our adjusted EBITDA outlook, and that we delivered these accomplishments despite the challenging macroeconomic environment, including persistent inflationary pressures and uncertainty around tariffs. Today, I'll walk through the key financial metrics for the quarter and highlight the areas where we saw both progress and headwinds. Starting with the top line, net revenue for the three months ended March 31st, 2025, came in at $104.2 million, which was down 13.2% versus $120 million in the prior year, and was primarily the result of softness in our wholesale and e-commerce channels. By channel, direct-to-consumer net revenue for the quarter was $63.4 million. Within DTC, net revenue for showrooms increased 7.4% compared to last year.

As Rob mentioned, our showroom channel continues to be a solid performer within the business, and for the second consecutive quarter, showroom sales grew year-over-year despite a 5% reduction in store count. E-commerce continued to see softness and was down 8.2% during the first quarter compared to last year, driven by softness in the market in addition to the opportunities for conversion and messaging that Rob mentioned. We experienced a notable decline in our wholesale segment, where net revenue of $40.8 million was down 24.2% versus last year, as we were impacted by the wraparound on door count reductions from 2024 and broad-based volume declines across our wholesale partners. Our reported gross profit for first quarter was $41 million compared to $41.7 million during the same period last year. Reported gross margin rate for the quarter was 39.4%, an improvement of 460 basis points compared to last year.

Excluding restructuring and related charges during the quarter, our adjusted gross profit was $42 million compared to $41.7 million last year, and our adjusted gross margin rate improved 550 basis points to 40.3%. Our gross margin is supported by continued benefits from sourcing and production efficiencies, as well as successful consolidation of our manufacturing operations completed earlier this quarter, and a product mix shift towards our higher-margin DTC channels. Now, turning to operating expenses. Operating expenses were $55.5 million, down 14.4% versus $64.9 million last year. This was largely driven by headcount reductions from our restructuring efforts and the insourcing of certain functions in marketing and finance. Our adjusted net loss for the first quarter was -$11.9 million, an improvement from adjusted net loss of -$20.4 million in the prior year.

First quarter adjusted loss per share was -$0.11, compared to an adjusted loss per share of -$0.19 in the first quarter last year. Adjusted EBITDA for the first quarter was -$4.7 million, but was a significant improvement from the -$13.2 million last year, driven primarily by our ongoing improvements in gross margin and well-managed expenses. Now turning to the balance sheet. At the end of March, we had cash and cash equivalents of $21.6 million compared with $29 million on December 31st, 2024. Net inventories on March 31st, 2025, were $60.2 million, down 16.5% compared to March 31, 2024, and up 5.8% compared to December 31st, 2024. Typically, we experience net cash usage in the first quarter of each year as we invest in rebuilding inventory following the holiday season and make certain contractual rebate payments to customers, 2025 was no exception.

Due to these normal seasonal factors, along with a reduction in first-quarter sales, our cash used in operations was $23.1 million compared to $16.8 million last year. We were pleased to exit the quarter with cash of over $20 million yet again. As we move into a more seasonally balanced quarter for cash needs, we will remain focused on managing our cash position with discipline. In addition, as allowed in our term loan agreement, we entered into an amendment to borrow an incremental $20 million to facilitate the ramp-up in one-time rollout costs and inventory production for our new expanded distribution agreement with Mattress Firm, while also supporting continued investment in innovation and marketing and providing an incremental source of cushion for future operations in this uncertain environment.

Building on the momentum from last quarter, we remain focused on strengthening our foundation through continued cost discipline and innovation driven by our gel grid technology. The actions we've taken over the past year to streamline operations and reduce fixed costs have positioned us to realize greater operational leverage. As a result, we expect incremental upside volume to flow through at a much faster rate, supporting our path to profitability. While we remain cautious given ongoing industry headwinds, we've built our model for scalability, and we expect that any revenue upside will flow through at roughly 35%, providing meaningful earnings potential when the market stabilizes. As Rob mentioned earlier, we are reaffirming our full-year guidance. We continue to expect revenue in the range of $465 million-$485 million and adjusted EBITDA in the range of flat to positive $10 million.

This includes an anticipated $25 million-$30 million in cost savings that we had previously announced relating to our manufacturing consolidation and corporate restructuring, which remains on track. While the second quarter will be pressured by macro concerns and tariff headwinds, we're planning for sequential growth in the second half, driven by the launch of Rejuvenate 2.0 and increased distribution from the Mattress Firm partnership. We plan to return to a positive EBITDA in the second half, driven by ongoing benefits from our restructuring plan and sourcing initiatives. As Rob mentioned, we are maintaining our outlook. While we plan to see both incremental revenue and EBITDA contribution from our expanded Mattress Firm relationship in the back half, it's early to provide specific guidance on the impact of the relationship for 2025, and we are still working on our rollout plans.

Even as we expect to mitigate at least a portion of the $10 million tariff exposure as currently enacted, we see potential pressure on overall consumer spending. There is much uncertainty around the timing and scope of evolving macroeconomic factors, including the tariff environment, and we will continue to monitor the situation and update you over time. We remain focused on executing against our strategic priorities while driving profitable growth. With that, I'll turn the call over to the operator for questions.

Operator (participant)

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset to ensure that your phone is not on mute when asking your question. Again, press star one to join the queue. Our first question comes from the line of Brad Thomas with KeyBanc Capital Markets. Your line is open.

Brad Thomas (Senior Analyst)

Hi, good afternoon, and thanks for taking my question. Rob, I just wanted to kick off with a question about the new Mattress Firm partnership, expanded Mattress Firm partnership, I should say. First of all, congratulations. Sounds like an exciting opportunity for you. As we think about the $70 million number that you highlighted, can you just help us think a little bit more about maybe how you come to that math? Is that a net number that offsets potentially some sales that might have occurred in stores nearby before you're coming up with the $70 million number?

Rob DeMartini (CEO)

Brad, thank you for the question. We're using the current—I mean, we have about 5,000 slots in about 62% of their doors today. For the sake of, as we talk through with the Somni Group folks, we are projecting the same productivity on the incremental slots. We think that's going to end up being a fair number because while there would be some cannibalization just having more, we are not stocked and trained as a core brand in their system. We believe that with the investments that we can make and they can make in establishing us as a core brand, that there'll be slot benefits that come from that. It is based on the current business that we do with them and then projecting that on the full scope.

Brad Thomas (Senior Analyst)

That is very helpful, Rob. Thank you. Maybe if I can pivot to just talking about the industry and the consumer, wondering if you could just comment a bit more about recent trends and any more insights into how you are thinking about trends in 2Q here.

Rob DeMartini (CEO)

Yeah. I mean, I am concerned about the second quarter. As I laid out, the tariff burden for us is a manageable number, and we will figure out how to deal with it. What I am more concerned about is the psyche of the consumer. I think what I have read about the April consumer outlook is pretty concerning. Now, is it going to continue indefinitely? I do not think so, but I do think we're going to deal with it through the second quarter. I think people are a bit more optimistic about Memorial Day as we are, but I think we still got more uncertainty than certainty, Brad.

Brad Thomas (Senior Analyst)

That makes sense. We obviously heard a lot of negative things about February with the weather being an impact and that perhaps there was some improvement after the weather got better. Anything more that you can tell us about the cadence of spending and what you've been seeing of late?

Rob DeMartini (CEO)

No. I mean, obviously, with the 13% down, I think we're probably on the high side of the category range in the first quarter. We have seen a little bit better volume since April ended, but as you know, April is always a pretty weak mattress month, and it was for us. I think the consumer is very cautious right now and looking for some certainty as they plan for the rest of their spring and summer spending.

Brad Thomas (Senior Analyst)

Very helpful. Thanks, Rob.

Rob DeMartini (CEO)

All right. Thank you, Brad.

Operator (participant)

Our next question comes from the line of Bobby Griffin with Raymond James. Your line is open.

Bobby Griffin (Equity Research Analyst)

Good afternoon, everybody. Thanks for taking my questions. I guess, Rob, just to start, could you maybe talk a little bit about how the new agreement came to fruition with Somnigroup? Kind of thinking back during the process when they were looking at buying Mattress Firm, there were different supply agreements getting signed. I think Purple's was a little bit later. Maybe now, with it being complete, just talk a little bit about how the relationship developed to end up in this expansion.

Rob DeMartini (CEO)

Hey, Bobby, all I can do is share from my side because obviously, there's a number of folks from Somni involved. Mattress Firm has always been an important customer for us. I think at different times, we've put ourselves in a position to be at odds with each other over either contractual agreements or actions or inactions by either party. When I look at what grows their business, I know that there's a couple of things we do particularly well. We drive traffic. We trade up the transaction. Over the last couple of years, as we've done a lot of margin work, we've been a less dilutive, more accretive margin contribution to the retailer.

The combination of those three things, if I'm sitting in a retailer's chair, I'm looking for people and brands that are going to drive up my margin and drive up my transaction and get people in the doors. I think those are things Purple does well. I appreciate that Mattress Firm is putting some faith in us to be a good contributor to their business, and we have to live up to that.

Bobby Griffin (Equity Research Analyst)

Appreciate that. That's helpful. As you look at this now, you have this new kind of pretty big growth potential here in wholesale. Does that change kind of you and the team's view of what the alternate distribution model is for Purple when you think about your own stores? I know you're optimizing those company showrooms, but they're performing better, or even kind of the investment you would put behind the e-commerce business?

Rob DeMartini (CEO)

No, I think we've lived at 70/30 DTC. We've lived at 60/40, which is about where we are now. Behind the scenes, we've been ensuring that a 50/50 business is an opportunity for us. I think that is where we'll head, but we're very bullish on our showroom business. I mean, we comped up 11% in the first quarter. That's the second positive comp quarter in a row. They're becoming more profitable. Our average ticket, our average mattress ticket in our showrooms is still almost 2x what it is in wholesale. We're very appreciative of the wholesale support that we get, and we feel like the responsibility is we've got to lead the consumer to understand this brand can perform at higher prices than where it's been in the past in the category, and that's working right now.

Staying 50/50, I think we're legitimately the only truly omni brand. Most brands have a maternal channel, and then they do, they flirt with the other channels. We are legitimately across all direct and wholesale channels, and we've got to live up to that.

Bobby Griffin (Equity Research Analyst)

Lastly, on tariffs, understanding there's some pricing aspects. Is that yet hitting the P&L? Should we think of that as to come in 2Q, or is it more like it's on the vendor side of their balance sheet for now, and that's a 3Q, 4Q type issue if we don't adjust pricing or find alternate sourcing?

Rob DeMartini (CEO)

No, it'll start impacting 2Q, and we have that in our projections. What we do not, well, we have them at a macro level in our projections of offsetting some of that, but we are still working through the exact details of how to do that. It flows through pretty quickly. I mean, we turn our inventory pretty quickly.

Bobby Griffin (Equity Research Analyst)

Yeah. Appreciate the details. Best of luck here trying to navigate this environment, and congrats on the expanded relationship there.

Rob DeMartini (CEO)

Thank you, Bobby.

Operator (participant)

Next question comes from the line of Michael Lacer with UBS. Your line is open.

Dan Silverstein (Equity Research Analyst)

Hey, good afternoon. This is Dan Silverstein on for Michael. Just one more question on the expanded partnership with Mattress Firm, is there anything else you can share on the economics of the new partnership, especially in light of Sherwood doing some of the assembly? Just trying to think of how this would impact wholesale margins overall. On the additional $70 million of incremental revenues, is the 35% flow-through rate that we talked about last quarter still applicable?

Rob DeMartini (CEO)

I mean, it's applicable on a macro level. I don't want to go into individual customer margins, but it's good business for both of us, and I think that's why this deal got put together the way it did. I mean, the idea came from us trying to take cost out of the system, and the Sherwood manufacturing footprint serves Mattress Firm very well, and we wanted to take advantage of that. It's good business for us. It's good business for them the way we've modeled it, and now we got to go live up to it.

Dan Silverstein (Equity Research Analyst)

Great. Thanks. Is there anything else, like interesting opportunities from a cooperative advertising point of view that could improve the productivity in the Mattress Firm network now that you're a core brand in the system?

Rob DeMartini (CEO)

Dan, I mean, those are things that we will work out. We do believe that there's efficiency for both of us. My first focus is ensuring that we're bringing innovation to the market and that we've got advertising that is engaging the consumer and driving them into all retailers, not just Mattress Firm, but we certainly see opportunity from being recognized as a core brand. I think with that also comes responsibility.

Dan Silverstein (Equity Research Analyst)

Definitely. Thank you, and best of luck.

Rob DeMartini (CEO)

All right. Thank you, Dan.

Operator (participant)

Our next question comes from the line of Brian Nagel with Oppenheimer. Your line is open.

Hey, good afternoon.

Rob DeMartini (CEO)

Hey, Brian.

Brian Nagel (Equity Research Analyst)

I just wanted to ask questions on the new partnership, I guess, expanded partnership. First off, will Purple have to expand its own manufacturing capacity, so to say, to ramp volumes for this? Should we expect, as the relationship starts to build, will there be initial kind of startup costs that you're going to have to endure?

Rob DeMartini (CEO)

Yeah, there certainly is startup costs. Like any expansion for us, to get those beds and all the accompanying point of sale and materials to the stores, there are startup costs. We do have those fully reflected, or we believe we do. I want to make sure that we talk about this properly. We maintain 100% of the manufacturing responsibility for all grid material, regardless of who we are partnering with to finish the assembly. That's been true, and that will stay true.

We are not sharing the grid manufacturing formula or the methods. I mean, we've got 25 years of experience that is what differentiates us. We will make the grid and then distribute it to our partners who help us finishing with the assembly and distribution. We think that opportunity is going to work very well. As I said before, Sherwood is well positioned to serve Mattress Firm well, and we want to take advantage of that.

Brian Nagel (Equity Research Analyst)

Got it. Then my, I guess, a follow-up question. Within the new partnership, is there some type of exclusivity that Mattress Firm is asking from Purple?

Rob DeMartini (CEO)

Yeah. I mean, we already have some differentiated products across different customers, and that practice will do it when it makes good sense for both partners. I think the heart of this is what I'd ask you to take away is it's a vote of confidence in what this brand's capable of. It recognizes that we drive traffic, and it recognizes that we trade up the transaction. That is why we were able to secure this in this structure. We want to serve all of our wholesale partners with that benefit. That is what Purple has been good at and will continue to be good at.

Brian Nagel (Equity Research Analyst)

Okay. Just one final question. I do not know if this is a fair one or not, but you talked recently about, I guess, exploring strategic alternatives. Does this announcement today either fit into that or change that?

Rob DeMartini (CEO)

No, it's completely independent of that. The board special committee is leading the strategic alternatives process, and it will continue. When it's got meaningful updates, we'll share them. This is about running a profitable business, partnering with our biggest partners to be important to everybody in the system, and serving consumers with great product. This happened completely independent of that effort.

Brian Nagel (Equity Research Analyst)

Appreciate it. Thank you.

Rob DeMartini (CEO)

All right, Brian. Thank you.

Operator (participant)

Next question comes from the line of Matt Caranda with Roth Capital Partners. Your line is open.

Hi, guys. This is Joseph on for Matt today. I just wanted to see if you guys could talk about your guidance. It seems unchanged and now incorporates the contribution from Mattress Firm. Any way to think about how Mattress Firm contributes to the rest of year 2025? And assuming that this is ramping in 2Q 2025?

Rob DeMartini (CEO)

The ramp is probably a little bit later than that. We are still, the ink is still wet on the agreements. We're working through some of the details of exactly what's rolling out when and how the volume will play out. It's a little bit early to quantify specifics on 2025 for Mattress Firm. What we do know is we've got a fair amount of tailwind when we get into the back part of the year from the new agreement or the expanded agreement. At the same time, we have some headwinds that are probably more near-term in the form of tariffs and just an overall uncertainty in the economy. Those we view are roughly offsetting factors. Though the timing may be different, we feel that we're still comfortable with where we're at from a guidance perspective. We'll be able to provide a little bit more detail as we get into next quarter's call.

Got it. With the expanded partnership, is there any way you guys can just elaborate on the mix of new slots between your premium products and then the lower-range products? Any sense for how often the slots should turn in a given year?

Yeah, Joe, I think it's a pretty traditional distribution. There's representation. It is detailed in our agreement. What we really do is want to trust Mattress Firm to help make the best decisions for their business. There will be essentials, restore, and deluxe product available in just about every store. I'm going to leave it to their judgment to decide when to lean into essentials or luxe a little bit more based on the way that store trades. You should see broad expansion of our distribution.

All right. I appreciate it, guys. Thank you, and congratulations on a good quarter.

All right. Thank you, Joseph.

Operator (participant)

There are no further questions at this time. I would like to turn the call back over to Rob DeMartini for closing remarks.

Rob DeMartini (CEO)

Thank you, Operator. Thank you, everybody, for joining today's call. We are trying to execute with discipline, navigate the headwinds that we're facing, and build towards a long-term profitable growth company. We appreciate all your support. Thank you.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. Thank you all for joining, and you may now disconnect.