Purple Innovation - Earnings Call - Q3 2020
November 11, 2020
Transcript
Speaker 0
Good morning, ladies and gentlemen, and welcome to Purple Innovation Third Quarter twenty twenty 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. It is now my pleasure to introduce your host, Brendan Frey of ICR. Please go ahead.
Speaker 1
Thank you for joining Purple Innovation's third quarter twenty twenty earnings call. A copy of our earnings press release is available on the Investor Relations section of Purple's website at www.purple.com. I would like to remind you that certain statements we will make in this presentation are forward looking statements. These forward looking statements reflect Purple Innovation's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting the company's business. Accordingly, you should not place undue reliance on these forward looking statements.
For a more thorough discussion of the risks and uncertainties associated with the forward looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward looking statements included in our third quarter twenty twenty earnings release, which was furnished to the SEC yesterday on Form eight ks 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 references to non GAAP financial measures such as EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share. A reconciliation of these non GAAP financial measures to the most comparable GAAP financial measures is available within the earnings release, which can be found on our website. With that, I'll turn the call over to Joe Megabow.
Speaker 2
Thank you, and good morning, everyone. With me on the call today is John Legg, our Chief Operating Officer and Craig Phillips, our Chief Financial Officer. Following our prepared remarks, we'll be happy to take your questions. It was another very strong quarter with demand for the Purple brand at an all time high. Our teams did a great job capitalizing on our opportunities as we manufactured and sold more mattresses in Q3 than in any quarter in the company's history to deliver record revenue.
Our top line performance was driven by incredibly strong gains in our DTC channel coupled with a resurgence in our wholesale business as our retail partners experienced improved traffic following Q2 store shutdowns and limited operating hours. During the quarter, we also executed key operational, strategic and financial initiatives in support of our long term growth strategies. A few of the many key highlights for Q3 compared to Q3 twenty nineteen include net revenue increasing 59% to a record $187,000,000 gross margins expanding two twenty basis points net loss of $1,200,000 with adjusted net income of $17,200,000 adjusted EBITDA growing 97% to $30,100,000 and cash increasing 213% to $98,000,000 even as we made important investments in the business. We also began work on our new 05/20000 square foot manufacturing assembly and fulfillment center in Georgia, acquired the rights to an IP licensing agreement signed prior to the formation of Purple, strengthening our IP portfolio, and signed a new five year $100,000,000 senior secured credit facility, including an available $55,000,000 line of credit, creating a more optimal capital structure and significantly lowered our borrowing costs. I'm also thrilled to report that we just received the J.
D. Power Award for highest customer satisfaction with Mattress Online for our second year in a row. Looking at our performance in more detail, DTC revenue increased 98% to $134,000,000 with strong increases over the prior year period in each month of the quarter. We kicked things off with a very successful fourth of July holiday period, creating a lot of momentum that carried into August before accelerating during an even stronger Labor Day sale. In terms of product performance, across our DTC channel, we experienced fantastic growth.
For mattresses, demand was once again strongest for our hybrid premier product line, underscoring the progress we have made advancing the premium nature of the Purple products and brand. The combination of product mix and price increases implemented in early July drove a 14% increase in average mattress order value year over year. At the same time, our non mattress categories posted growth rates greater than 100%. Demand is reaching new heights as we've moved quickly to capitalize on the recent focus on home in both the bedroom and home office, which I suppose are sometimes the same, by upholding our marketing, merchandising, and selling programs for our premium seat cushions, pillows, and sheets. With consumer demand still leaning heavily online alongside reduced channel marketing costs, we shifted our marketing strategy to better reach those new to online customers.
We pulled back on more expensive lower funnel channels and are now able to efficiently cast a wider net in both traditional media and digital prospecting. With this larger addressable market, we were able to substantially increase traffic to our site while maintaining healthy conversion rates. This approach once again drove significant growth and meaningful expense leverage. Turning to wholesale, revenue was $53,000,000 marking a return to growth with an increase of 7% compared with a year ago and up 165 from Q2 this year. Our sales in this channel rebounded strongly from Q2 levels as retail traffic steadily improved and consumers shopping our brick and mortar accounts increasingly chose the Purple brand.
This was evident by the strong sell through trends we witnessed at both existing accounts and recently launched retailers in the third quarter, especially during the key July 4 and Labor Day sale periods. As we discussed on our last call, the strong demand for our brands and products is outstripping capacity and in Q3 likely reduced our wholesale performance. We were also challenged with both foam and coil supply shortages that reduced production levels below our intrinsic capacities. The addition of Max seven in June helped alleviate some constraints, but until production at our new facility is up and running and supply shortages are alleviated, our ability to significantly expand with existing customers and add new accounts is constrained. We recently made the decision to allocate a portion of production in order to bring on our first international wholesale relationship.
I'm excited to announce that as of yesterday, Purple products are available at Sleep Country, Canada's leading omnichannel mattress and bedding retailer with over 265 doors throughout the country. This includes the launch of an all new mattress, the Purple Plus, which adds a premium cover that is cool to the touch and even more breathable along with an advanced new premium comfort foam under the Purple grid that along with the high air dissipation supported by the grid further pulls heat away from the body. It's a great new mattress. And in support of our expected growth in Canada, we have expanded our partnership with Leggett and Platt, who will provide Canadian assembly capacity, augmenting our in house assembly capacity. We look forward to further expanding our wholesale door count in 2021 once MAX eight and nine come online at Purple South.
To provide an update of the status of our new facility in Georgia, I'm now going to turn it over to John.
Speaker 3
Thanks, Joe. Since I last spoke with you in August, we have been extremely busy preparing Purple South to commence operations. Right now, we are fully engaged in the build out of the facility and are close to completing the foundations that will eventually house the six Mattress Max machines at this location. We are pleased with the progress we have made on Max eight and nine and expect to have Max eight online with within about ninety days along with our first of four new assembly lines. MAX nine is being built in parallel, and we expect to bring it online shortly afterwards.
These two additional machines will increase our current production capacity by roughly 25% to 30%, allowing us to better meet near term d to c and wholesale channel demand with future growth further supported by two more MAX machines slated to be added later in 2021. On the logistics side, we are and continue to prepare our warehouse management system, physical location solution and hardware in preparation for first quarter distribution and fulfillment activity. Finally, we have ordered additional injection molding machines used for seat cushion and pillow production that will double our current capacity. This will allow us to better meet the growing demand for these two categories. We are very excited to be making progress on this critical infrastructure investment that when completed will significantly expand our US manufacturing and create many new jobs.
I'm pleased to say that the staffing of the local management team is on track and proceeding as planned, and we'll be further tapping into the area's large talent pool as we continue to build out the workforce. With that, I'll turn it back to Joe.
Speaker 2
Thanks, John. Along with the activity near Atlanta, the organization is gearing up for a strong finish to the year. The momentum the business has experienced since early April has not let up, and we are expecting another strong holiday season. Our focus is on meeting both DTC and wholesale demand, continuing our omnichannel strategy of supporting our customer wherever they choose to engage with our brand. We've already discussed the imbalance between demand and capacity that we are facing until we bring on the additional MAX machines.
For the fourth quarter, we are still dealing with constraints on our supply of foam, which we use in the core of the Purple mattress. This shortage is related to upstream chemical supply challenges facing all foam manufacturers. We are also now facing coil shortages where our specific fabrics used for the coil sleeves have only recently been reallocated for PPE product, which has limited our capacity of our hybrid mattresses. That said, we currently believe we have ample finished goods and inbound supply to meet our holiday needs and are aggressively pursuing alternative sourcing options should demand exceed our expectations. As we navigate this challenge, our teams are also executing key initiatives that will set the company up to start 2021 from a position of strength to continue our market share growth.
As John just outlined, we are rapidly building out our new facility and remain on track to begin manufacturing and fulfillment activities in the Southeast early in the new year. With MAX eight and nine online, we will be able to resume our wholesale expansion strategy in earnest, which includes selectively increasing our door count with existing partners and adding other leading furniture and bedding retailers in regions of the country where our brick and mortar presence is underpenetrated. Our fourth quarter plans also include accelerated investment in new creative and website design that will serve as the foundation of our 2021 brand positioning. Throughout this year, we evolved our messaging in order to better support the premium nature of our products as well as our unique innovations with the Purple Grid and our hyperelastic polymer and the very real benefits they provide. The work currently underway will continue to advance these themes as we capture more of the premium end of the market and look to attract new consumers to the brand.
As to the website, we continue to make improvements as well as the larger replatforming effort, which we chose to delay initial rollout until early twenty twenty one to avoid any unnecessary risks through the holiday months. We do continue to evolve the existing platform, and we believe these efforts have set us up for a strong holiday, starting with our new Kids Corner, featuring our new lighter and more affordable kid mattress paired with our kid pillows and kid sheets. We have historically seen strong kid demand for our brand, which is unique in the category. We have a beautiful holiday gift guide with elevated branding, which includes our just released purple pajamas literally made from our soft stretch sheets in partnership with Sleepy Jones. Our soft stretch sheets are so comfortable, you can now wear them.
And we continue to lean into bundles, which offers a great value for our customers and continues to drive up order value and units. The fourth quarter marks the resumption of our brand showroom expansion which we paused at the outset of the pandemic. We recently opened two showrooms that feature our latest evolution in store design. The new design looks amazing with elevated presentation and continued focus on meeting our customers' needs. The first new showroom is in Austin, Texas, and the second is in Tysons Corner, Virginia.
We have two additional showrooms under construction that will launch in q four, one in the Midwest and one in the Pacific Northwest. This will bring our showroom count to nine by the end of the year. All of our showrooms are performing very well and are now exceeding pre pandemic sales volume. We anticipate starting the new year with similar momentum of around five new showrooms opening in Q1. Finally, we are continuing to invest in new product development that we anticipate launching in 2021.
With our healthy balance sheet, we are also expanding our investment into research capabilities, and we have many exciting programs underway ranging from new and improved manufacturing processes to improved materials and novel new gel formulations as well as entirely new consumer technologies. I'll now turn it over to Craig who will review the financials in more detail.
Speaker 4
Thanks, Joe. As Joe outlined, we had another very strong quarter from both a revenue and adjusted profitability standpoint. As you will hear later, during the quarter, we had a significant noncash adjustment related to the fair value of outstanding warrants driven by the increase in our stock price as well as a loss in the extinguishment of debt associated with the replacement of our previous debt agreement. For the three months ended 09/30/2020, net revenue was $187,100,000 up 59.4% compared to $117,400,000 in the prior year period. Revenue increase was driven primarily by strong growth in mattresses at our DTC channel along with higher demand for pillows, sheets, and seat cushions.
Our wholesale business also returned to growth following a difficult Q2 when COVID-nineteen severely disrupted our partner store operations. For the quarter, DTC channel net revenue increased 97.5% year over year, while wholesale channel net revenue grew 6.9%. Gross profit dollars were $88,300,000 during the 2020 compared to $52,900,000 during the same period in 2019 with gross margin at 47.2% versus 45% in the 2019. This gross margin increase of two twenty basis points year over year can be attributed primarily to the higher proportion of DTC channel revenue, which carries higher gross margins in our wholesale channel. DTC revenues comprised approximately 72% of net revenue for the quarter compared with approximately 58% in the same quarter last year.
Additional positive contributions to the gross margin improvement came from a modest product mix shift as we continue to increase our non mattress revenue, the July price increase on several of our models and improvement in our overall return rates in our DTC channel. This was partially offset by headwinds from higher freight expense incremental overhead associated with our new Atlanta facility. Operating expenses were 34.2% of net revenue in the 2020 versus 35.7% in the prior year period. This improvement of 150 basis points is achieved through ad spend efficiencies, open headcount and leveraging our expense base on higher net revenue, partially offset by an increase in marketing costs aimed at driving demand and increased brand awareness as well as the addition of company owned retail showrooms in the 2019. Marketing and sales expense as a percentage of net revenue decreased to 27.4% compared with 29% last year primarily due to efficiencies in our advertising spend created from enhanced marketing strategies and lower rates in certain marketing channels in which we advertise.
For the third quarter, we reported operating income of $24,300,000 compared to $11,000,000 in the 2019, an increase of 120.9%. Net loss for the quarter was $1,200,000 compared to net income of $8,400,000 in the year ago period. The third quarter twenty twenty included an $18,000,000 noncash expense associated with the change in fair value of warrant liabilities, a $5,800,000 loss on the extinguishment of debt related to the retirement of the company's previous debt agreement and the $600,000 noncash expense associated with the tax receivable agreement. The third quarter twenty nineteen included a $1,400,000 noncash expense associated with the change in fair value of warrant liability. Excluding these items, adjusted net income was $17,200,000 or $0.27 per diluted share based on a fully diluted share count of 64,400,000.0 compared to adjusted net income of 7,300,000.0 or $0.14 per diluted share based on a fully diluted share count of 53,700,000.0.
Adjusted net income has been adjusted to reflect an estimated effective income tax rate of 25.2% in the current year period and 25.6% for the comparable prior year period. EBITDA for the quarter was $2,500,000 compared to $10,500,000 in the 2019. Adjusted EBITDA, which excludes noncash expenses associated with the change in fair value of warrant liabilities, tax receivable agreement expense and stock based compensation as well as expenses primarily related to loss and extinguishment of debt, a technology vendor impairment, legal fees, interim CFO and consulting costs, severance, previous period sales tax liability and COVID-nineteen related expense was $30,100,000 versus adjusted EBITDA of $15,300,000 in the same quarter last year. Moving to our balance sheet, net inventories totaled $50,800,000 at 09/30/2020 compared to $47,600,000 at December 3139. As of 09/30/2020, the company had cash and cash equivalents of 98,000,000 compared with 33,500,000.0 at December 3139, an increase of 192.6%.
As we announced on September 3, we entered into a five year $100,000,000 senior secured credit facility. The new facility consists of a $45,000,000 term loan and a $55,000,000 revolving line of credit. We down the full amount of the term loan at closing and utilized the proceeds to retire our previous credit agreement. We have not drawn on our line of credit. Our borrowing rates are based on the company's leverage ratio, and our initial rate of LIBOR with a floor of 0.5% plus 3% is eight fifty basis points lower than our previous rate.
Based on our strong cash position at the September, continued demand for our products and our new $55,000,000 line of credit, we feel we are well positioned to continue investing in our business which includes our new Atlanta manufacturing facility, company operated showrooms, Purple branding and innovation initiatives. Due to the continued uncertainty in the overall economy, we are continuing to refrain from providing guidance at this time. However, I do want to highlight a few important points about our fourth quarter. As Joe commented, the mattress industry is currently experiencing a shortage of foam and coil supply which has impacted Purple as well. To reiterate, we are working diligently to secure enough supply in order to meet consumer demand.
But based on current market conditions, is possible the shortage may impact our ability to do so and therefore may impact our ability to meet realized demand. For the fourth quarter, as we have seen in comparable periods in prior years, we expect to see contribution margin headwinds from advertising rates that are traditionally higher during the holiday season. As our wholesale partners continue to see expansion in their business, we also expect a continued increase in wholesale demand where we experience lower margin rates. Additionally, we are continuing to invest in our new Atlanta manufacturing facility that will dramatically increase our capacity next year. However, till that facility is fully operational and producing a rate similar to our Grantsville facility, we will continue to see margin headwinds from this investment.
Also, incremental website and creative spend Joe touched on as well as higher co op marketing expenses, our retail partners utilize dollars not spent earlier in the year will likely push our marketing and selling expense for the fourth quarter above our target of 30%. For the year though, we expect to be at or below that target level. These factors will cause our adjusted EBITDA margin to trend closer to the fourth quarter a year ago versus the margins we've experienced in the previous March 2020. However, with our strong momentum coming out of Q3, we expect year over year quarterly growth rate similar to Q3 in revenue and adjusted EBITDA, balanced with the planned investments in people, capacity, showrooms and infrastructure just discussed. I also wanna spend a moment discussing our share count.
From October 1 through October 26, approximately 8,000,000 public warrants were exercised resulting in the issuance of 4,000,000 class a shares and generating proceeds to the company of approximately $45,600,000. On October 27, we announced that we were redeeming the approximately 11,000,000 outstanding public warrants, which are exercisable on a two for one basis and the 2,600,000.0 incremental loan warrants, which are exercisable on a one for one basis. For the warrant agreement, any exercise of warrants between the notice date, October 27, and the redemption date, November 30, must be executed on a cashless basis. As of 11/09/2020, approximately 1,700,000.0 public warrants and all 2,600,000.0 incremental loan warrants had been exercised since October 27, resulting in an additional 3,100,000.0 class a shares being issued. Considering the impact of these exercises, we had approximately 60,900,000.0 class a shares outstanding as of 11/09/2020.
If all of the remaining aforementioned public warrants are exercised on a cashless basis prior to the redemption date, we estimate we will issue an additional 2,900,000.0 Class A shares. This would increase the total outstanding Class A shares to 63,800,000.0 as of November 30. It's important to note that there are still approximately 8,500,000.0 sponsor warrants outstanding which are exercisable on a two for one basis but are not redeemable. I'll now turn it back to Joe for his closing comments.
Speaker 2
Thanks, Craig. We are on track for finishing off an outstanding year of growth and enhanced profitability despite the initial challenges presented by COVID and operating under capacity constraints for much of 2020. Our performance in these conditions highlights the growing awareness and desirability of our differentiated products and the strengths of our omnichannel distribution strategy, particularly our advanced digital capabilities. Importantly, the work our teams have done over the past twelve months has significantly strengthened this foundation and put the company on a clear path to maintain our pattern of profitable growth. While there is still health and economic uncertainty in front of us, we believe that the positive momentum already demonstrated early in the year remains in place.
So regardless of recent positive consumer shifts resulting from the pandemic, we believe our intrinsic business is well set up for continuing to take share into 2021. I want to thank all of our nearly 1,500 employees for their relentless hard work and dedication and the commitment they've shown to maintaining our operational operational and to commitment
Speaker 0
Our first question is from Bobby Griffith with Raymond James. Please proceed.
Speaker 5
Good morning, everybody. Thank you for taking my questions and congrats on another great quarter.
Speaker 6
Bobby. The
Speaker 5
first thing I wanted to ask about was just the sequential change in gross margin and understanding the mix up in wholesale from in 3Q versus 2Q of this year. When we think about modeling out 4Q, gross margin, and you've talked about another mix up in wholesale, so could we use that change in 3Q as a as a good kind of starting point? It looks like, I don't know, for every five base five percentage change in wholesale mix, it's roughly 60 or 70 bps worth of gross margin pressure, or is there other items in there that I should keep in mind when we're trying to kind of pinpoint where gross margin should be in the fourth quarter based on our wholesale estimates?
Speaker 6
Yes. Did you
Speaker 1
ask Craig that?
Speaker 5
Yeah. Or whoever yeah. It was for Craig or you, Joe, whoever you think whoever gets whoever wants
Speaker 2
to take take a stab at Sure. I'll I'll kick off since I jumped in, but Craig can fill in.
Speaker 7
Hey. And so as you're trying
Speaker 2
to model out q four, I think you need to write it's not just a gross margin story. As you stated, we are anticipating continued shift back toward, call it, normal channel mix, where our wholesale, which in Q3 was more like sub-thirty percent, around 28% wholesale, where in Q4, getting back to more of that third of business being in wholesale is current trends, which is where we've always said we like to be. So I think that does create some gross margin pressure, of course. But I think the other things to keep in mind as you think about Q4, Q4 has seasonality that just and it's consistent if you look back at our prior two Q4s in 'eighteen and 'nineteen. Q4 just looks different than other quarters.
We, it's a more promotional quarter. Marketing expense is typically higher and as compared to Q2 and Q3 where we saw very attractive marketing costs. Things are also shifting back to much more normal marketing expense in Q4 on top of the increased, dollars that are in the, in the marketplace. So, you know, where we've been sub 30% of net revenue in in advertising and selling in the last couple quarters, we expect to be, you know, back into that that more 30% mark. Then the other thing is we're back into investment mode.
You know, we've got a healthy cash, yeah, healthy balance sheet. We're we're investing in in building out, as we've said, our new manufacturing facility. We've ramped back up investment into getting the new site platform built out and some of the creative and design around that as well as reinvesting in R and D and our research capabilities, some of which is leaning into growth and some of which is catch up on things that we had deferred early in the year, which just makes prior quarters look a little more attractive. So the key is everything's healthy and normal. There's nothing about q four that, is is really surprising, at least, to us.
It's just a very different kind of quarter than we've seen in prior quarters. Craig, I don't know if you wanna add any color to that.
Speaker 4
Yeah. I I'd say the I I think your question was more around gross margin. And if it was, I'd say the only real difference I don't think you're thinking about it incorrectly, but one of the probably biggest differences on the gross margin level will be the operating costs in Atlanta as we really start to ramp that up heavy to get it operational. That'll put pressure on the margin.
Speaker 2
Okay. Yeah.
Speaker 5
The
Speaker 4
shift from from wholes from DTC more into wholesale, that that shift economics won't change from from the shift in prior quarters.
Speaker 5
Okay. That's helpful. And then maybe just to follow-up, and I just wanna make sure we are we're all on the same page from a capacity standpoint. But the the plan is to have the the eighth and ninth machine up and running here. I think you guys mentioned ninety days or or then the ninth a little after the ninety days.
And then what's the what's the number of machines that will be added after that in the Georgia facility? So I'm just trying to get a sense of where the goal is of how many machines will be up and running by the 2021 because that will help us then gauge where we should try to put our our revenue estimates at based on what we estimate for each machine's productivity.
Speaker 2
Yeah. So we the the facility itself can hold six machines, and, you know, there's a number of things that we're doing upfront and in parallel. So, you know, for instance, part of retrofitting the facility is is digging and reinforcing some fairly large pits to contain them, and we've we've already built and and and poured you know, built up and and poured in for all six pits. So we're setting ourselves up to be able to build out in parallel. Yeah.
As of the as if we look at this year, we're we're modeling a a little more conservative pace. So we're expecting to get, you know, committing to, say, one a quarter or or, might accelerate a little faster than that. So four more Max machines, from a, you know, operational to the point that they're contributing to the year next year. We may have onefive online right toward the end of the year, but not in a way that it would be part of the modeling for the year.
Speaker 5
Okay. That's helpful. Congrats on the quarter, I appreciate all the details, and great to see some of the investments coming back given the growth outlook. Best of luck in fourth quarter.
Speaker 7
Thank you. Thank you so much.
Speaker 0
Our next question is from Brad Thomas with KeyBanc Capital Markets. Please proceed.
Speaker 8
Hi. Good morning, Joe, Craig, and John, and let me add my congratulations on a great quarter here and what's shaping up to be a really great year. I was hoping to dig into just the sales trends a little bit more. I was wondering if you could give some color on how the different channels had performed through 3Q and and what you were seeing out of each each channel, you know, thus far in 4Q.
Speaker 2
Sure. Well, first of all, hey. Thanks for joining. So say channels, meaning sales channels, you said? Wholesale versus Yeah.
Speaker 8
Sales channel. How how did exactly. How did you see it performed by month and and and and how it was going so far, through October and the November and and and the same for wholesale just just as we try and get our arms around the trajectory of these businesses
Speaker 2
Got it. Got it. Play out in the fourth quarter. Yes. So I mean, as we said in the prepared remarks, I mean, DTC continued to remain very, very healthy in Q3, such that it can it also, as we mentioned, put pressure on our wholesale ability.
We still, through much of Q3, had our wholesale partners on some level of allocations as we just continued through the quarter to be supply constrained. We, going into Q4, are on the capacity side feeling much more confident that we've got what we need for a healthy Q4, both in terms of getting the new MAX machines and the labor back up and working through some of the upstream supply challenges that we have had. So we it's one of many reasons we expect wholesale to continue to grow into Q4 as we're better able to service our partners. In terms of sort of tailwinds going into this quarter, yes, I mean, it's these things don't change overnight. So the strong performance we've had and strong traffic levels we've had have continued into the quarter.
And I think everyone's waiting to see exactly what holiday is going to look like. Something that we did see in Q3 is just, I'd say, demand seemed to be spread out a little more. The the peaks of holiday tended to be a little less, and, you know, and and the customer demand seemed to be more balanced, which we view as a very good thing. But exactly what that looks like heading into Black Friday, Cyber Monday, you know, we are prepared for it however it goes. Everyone seems to have gone a little promotional earlier this year, we've joined in with that, partly driven by just challenges in fulfillment networks.
But so far, what we saw through Q2 is driving on.
Speaker 9
Very helpful, Joe. And if I
Speaker 8
could follow-up on the new Purple Plus model and the brand architecture in general, you know, it's been my belief that you all still have tremendous opportunity ahead of you to refine the assortment that you have and and add more premium models. I guess, could you talk a little bit more about, what sort of testing and r and d you did on Purple Pro Plus? I know it's new to the market. But when you think it will be available in The United States and, how you're thinking about continuing to expand and and, add more premium products over time?
Speaker 2
Yeah. The Purple Plus, it's it's a great new mattress. One one thing to consider with it is, you know, we we really try to do to put the customer at at the center of everything we do, and that was a mattress specifically built in partnership with Sleep Country for the Canadian market. And one of the things that has performed very well for Sleep Country is premium foam core mattresses. So it was designed to be a premium mattress that wasn't a hybrid, which again is a different kind of design consideration than, than what we've done in The States.
In that regard, it's a phenomenal mattress. You know, it's it's a much more premium cover. It's, just elevated design. The cover, as as I mentioned in the in the prepared remarks, has cooling, a cooling capability, that that just feels wonderful to touch. And, we found a novel new, foam that, we put underneath the, the purple grid, that is is really sort of a a balance between it's a novel new technology we found that's a balance between some of the best of both latex and memory foam.
It has the bounce that you would want from latex, and it draws heat away but has some of the shaping capabilities, that memory foam and, you know, pairing that up with our grid was just a magical combination. So it's it's got elevated features, elevated design. It's a much more premium mattress overall, but the key is it was designed as a premium foam core mattress, which is exactly the right product for Sleep Country in Canada. That said, will we bring it down to The States? I I think let's see how it goes in Canada, but there's no reason we couldn't in The States.
We are much more focused right now on, you know, more US focused premium expansions. And as I mentioned, we are leaning very heavily into our product design and research programs right now.
Speaker 8
Very helpful. Thank you so much, Joe.
Speaker 2
Thanks. Take care.
Speaker 0
Our next question is from Curtis Nagle with Bank of America. Please proceed.
Speaker 10
Very good. Thanks so much for taking my question, guys. Yeah, just maybe a quick one first in terms of just how many doors you have at the moment. It didn't sound like there were any changes. So, you know, somewhere, I guess, above 1,800 or around 1,800.
You know, should that be roughly the same in 4Q? And kinda how do we think about, you know, expansion, you know, into next year?
Speaker 2
Yeah. Sure. We so so we I think we ended last quarter just shy of 1,700, although on the earnings call, I think we were already over 1,800, which is what we announced. We with the addition of Sleep Country, which we just, launched this week, actually, it gets us closer to 2,100 doors. Yeah.
At that point at this point, we, we expect that'll carry us through the end of the year, Really, as as it's always been until we get additional capacity built out, we we sort of hold the line on that kind of expansion. Once Max eight and nine come online, you know, we continue to have interest with both our larger existing partners as well as some regional plays in areas we're less penetrated. That said, we continue to say what we've said all along, which is we are a retailer first and foremost, leading with digital channels and, you know, aiming for somewhere between that that two thirds, owned to, may maybe as much as 60% owned, versus retail, and we're we're gonna do everything we can to keep that balance. But we also, you know, have done extremely well with our wholesale partnership. And as as capacity grows, we will continue to lean into wholesale as appropriate.
Speaker 5
Got it.
Speaker 10
Very interesting. Yeah. And then, Joe, your your comments on the owned stores, thought, were really interesting. I think you said that they were exceeding, you know, pre, pre COVID levels, which is which is encouraging. I guess, would you be able to kind of frame what kind of where where that productivity is per box?
And and how should we think about, owned store growth in in 02/2021?
Speaker 2
Yeah. It's it's still something that's in early days. We I mean, our original plans were a little, more aggressive this year. As we had said, we were aiming to open about five a quarter. And given the pandemic, we we put that entire plan on pause for, you know, for obvious reasons.
This quarter, we're back into business, and we're we're thrilled that we're opening four more. Again, as I mentioned, we just opened Tyson's Corner in Austin, and it's it's a completely revamped, showroom design, and we're we're very, very pleased with how it's come out. Right now, our expectation is to get back to the pace we originally said, which is about five a quarter. So, again, these are brand showrooms, really trying to to bring the brand story to life in, in key metros. The economics remains, as we've said, very good.
We've we've just lapped our first year on some of them. You know, the specific economics we haven't talked about in partly as we've been, you know, testing a lot and revising as we go, which has been sort of our test and learn conservative approach here. But I'll reiterate, we're seeing industry standard economics here, you know, right in line with, other specialty mattress retailers. And, you know, we're very, very pleased with the results. And and, you know, just to be clear, they are they are producing profitable results.
Speaker 10
Got it. Thanks very much. I appreciate it.
Speaker 7
Thank you.
Speaker 0
Our next question is from Brian Nagel with Oppenheimer. Please proceed.
Speaker 6
Hi. Good morning. I actually want to add my congratulations on another very nice quarter.
Speaker 7
Thank you so much.
Speaker 6
So the question I have, and look, I understand you're not giving guidance here given the fluidity of the environment. I just want to ask on sales. And clearly, another very strong sales period here in q three and and good commentary in q four. You know, as we're all looking at you know, this COVID crisis very much continues, you know, hope hopefully, we're looking towards some end of the side now with some of this vaccine news. Either in your data or as you talk to your your wholesale partners, are you seeing any indications that, you know, the consumer story know, there there's the consumers may be starting to back away from this category and and refocus elsewhere, or does underlying demand for the mattress category remain as as good as it's been?
Speaker 2
Yeah. It's well, of anything, I I'd say demand appears to be very strong right now, which I think just focused on home and health and and sleep in general. So I I think there's some good strong tailwinds there. I think who has won in that consumer demand has, has shifted a bit as, over the last two quarters, those who have the ability to reach and service the customer through digital channels have done have been able to arbitrage that demand better. And, you know, certainly we believe we've done very well in leaning into that.
But we remain optimistic that this is a category that's healthy with sufficient demand and sufficient opportunity for growth.
Speaker 6
Okay.
Speaker 2
Greg, if you wanna add anything there.
Speaker 4
No. I I agree. I mean, there's still opportunity there. You've covered it well.
Speaker 6
Well, then the second question I have with you know, there's lot you've been talking here about the supply constraints and certain, sort of, say, components of the mattresses.
Speaker 7
So I guess I'm looking at this and given
Speaker 6
what a purple mattress is and that so much of it's manufactured in house, Does that put you at somewhat of an advantage against the backdrop of supply constraints versus others who are outsourcing much more the components of their products?
Speaker 2
I'm I'm I'm sorry. That cut out a little on my end. Can you say that one more time?
Speaker 6
Yeah. Let me I'll rephrase it too. So you're you're we're talking about the supply constraints and, you know, and the impact that's had upon your your business. But so much of your product is manufactured in house vertically. Does that dynamic against the backdrop of supply constraint, does that dynamic put Purple at an advantage versus other mattress companies who are outsourcing a much larger portion
Speaker 2
Yes. Well, we certainly believe so. I mean, we think part of op you know, part of how we have been able to manage through the ever shifting and uncertain environment we've been in is the fact that we are deeply vertically integrated and can manage our cost structure and our output, you know, on nearly a day by day basis. The majority of the raw materials in our IP is stuff that isn't where we've been supply constrained, we're able to source those materials domestically and have ample supply, which, again, is part of being vertically integrated that where we need to stockpile raw materials to protect and ensure that we can manage through any shortages in the industry, we have those opportunities. So overall, absolutely, we believe this is a competitive advantage of ours.
And that said, there are some components that are important ingredients in our mattress that we don't manufacture, such as coil and, you know, in our Purple mattress, our entry level mattress. It is a foam core mattress. And then even our coil mattresses are encased with, foam rails to provide a terrific edge support. So I mean, there is some foam in our mattresses. It's not the primary feature, but there is some foam.
And the foam challenges that have been out there, we've we've felt, mostly where we've had opportunities to lean in and expand. Similarly, coil, which is mostly around the fabrics that surround the coils, have been, in short supply primarily, in support of PPE. The fabrics that we were using, we had chosen a quieter fabric by design. We felt it continue to make our mattress more premium, and we were somewhat insulated on those fabrics as we weren't using the same old fabrics that everyone else was using. But even just the demand for PPE has gone even deeper, and even the fabrics we're using now, we're finding are suddenly, being sucked into other PPE needs.
So even that's been something that has recently been a challenge, but nothing that we haven't been able to work through. So yes, I'd say very much. We believe it's part of our moat and part of our part of what makes our business attractive.
Speaker 6
Well, you. Congrats again.
Speaker 2
Thank you.
Speaker 0
Our next question is from Seth Basham with Wedbush Securities. My
Speaker 11
question is around the near term outlook that you have. First, on the top line, just making sure I understand your perspective here. To reach similar growth rates in the fourth quarter versus the third, so 59 ish percent year over year, do you have high visibility to that with the supply constraints that you're considering? And if you're able to secure additional components, could there be upside to that perspective?
Speaker 7
Yes. John, do you want to jump in on that?
Speaker 3
Sure. Thanks for the question. Yes, we are able to react accordingly based on additional supply capabilities. So we build according to our build plan on a daily, weekly, monthly, and quarterly basis. And if we see our position on materials improve, we'll increase our build plan and react accordingly.
Speaker 4
Got it. Okay. And And now with Capital, we have we we have the ability to to forward buy if we need to to stockpile those those resources that are that are scarce where, you know, a year ago, we didn't have that ability.
Speaker 11
Certainly. So there's some component constraints. If you secure additional components potentially, you could see higher revenue. You have the capacity to drive a little bit more production than the 59% revenue growth implies.
Speaker 2
Craig, you got
Speaker 5
Yeah.
Speaker 4
I think it's possible. But, again, that's that that's a short term scenario. We're talking about less than two months left in the year. So, yeah, being able to to buy way in advance and and stockpile inventory, you know, the raw material inventory, that's a little bit tougher in the short term.
Speaker 11
Understood. Okay. And secondly, it relates to EBITDA expectations for the fourth quarter. At one point, Greg, you said that you expect the margin to be similar to the fourth quarter of 'nineteen. And in your press release, you commented that you expect that growth rate to be, similar to the third quarter, so 100% You get to $10,000,000 in one case and $12,000,000 in the other, a little bit different.
Can you just tell us which one is we should be, thinking about here?
Speaker 4
Sorry. So I I understood the last part of that. So the can you just repeat it one more time? I'm just trying to follow along with some a schedule I have in
Speaker 5
front of me here.
Speaker 11
Your fourth quarter EBITDA expectations, should we be thinking about double year over year on dollar basis or similar margin rate to the 2019, which
Speaker 12
you referenced at one point?
Speaker 4
Similar growth rate is what we said on an EBITDA basis. So, the growth rate from March to March, similar growth rate in the fourth quarter that we saw or or comparable that we saw in the fourth quarter sorry, in the third quarter. So, mean, you're you're in the ballpark, but you also need to consider that we we said that it would be the similar growth rates, but there were some additional considerations that, need to be, looked at. We outlined those. You know, we're adding capacity, so there's a little bit of inefficiency there.
Ad spend is different from third quarter. But, yeah, the growth rate in fourth quarter, you know, as we said, should be similar to the to what we saw for third quarter.
Speaker 11
Fair enough. And last related question, thinking about the EBITDA trajectory going forward. When you think about these additional costs that you're incurring in the fourth quarter to invest in growth, how should we think about your growth related investments in the 2021? Will we continue to see pressure on EBITDA during that period? Or could we see much improved results?
Speaker 4
Well, much of much improved. It's how you define much. We should begin to see more efficiency out of Atlanta as as we open and start producing and and having output from that facility. And as we said, we are we're always trying to improve our efficiency in the existing locations in Grantsville and Alpine. So we don't we don't expect there to be as much pressure going forward, But, you know, there's no way Atlanta will be as efficient, as as the existing facility that has six machines and three or four assembly lines running with full fulfillment capabilities.
Speaker 11
Understood. Thank you very much.
Speaker 0
Our next question is from Susan Anderson with B. Riley FBR. Please proceed.
Speaker 13
Hi, nice job on the quarter. I was wondering if you could talk a little bit more about the expansion in international markets. So it sounds like now you're in Canada. I guess how many more wholesale doors can you be in there? And then also is there opportunity to expand into other countries?
Speaker 2
Yeah, sure. Happy to take that. Thanks for joining. So in Canada, we are in a two year exclusive arrangement with Sleep Country, both online and in showrooms. So we've, we've really locked arms with Sleep Country for Canada for the moment, given their incredible presence there.
On the premium side, they've got about half the market share. So, you know, we we feel very confident that we've picked the right partner, and this really sets us up for, for long term, opportunity in Canada. But but that's, you know, that's, our current arrangement there. We did launch fleet lot fleet wide with them. So we are in all of their I I believe it's, as of now about two eighty doors.
So, so that that gets us going to Canada. Yeah. As to Beyond, as as we talk about other countries, absolutely, this has always been part of our stated strategy. We you know, given our manufacturing constraints, our job one has been to service our demand we have locally here, which we believe there's still a lot of upside. So, you know, we've taken a very cautious approach in terms of expansion.
We expect in 2021, in addition to continuing to build out our presence in Canada, that, you know, we'll begin the process of starting to build the, you know, the infrastructure we need for more international expansion, but we really don't see any meaningful expansion happening until 2022 and beyond.
Speaker 13
Great. That's helpful. And then just to follow-up on the OpEx. So with the higher marketing and investments in fourth quarter, I guess we should expect some additional deleverage of expenses from third quarter to fourth quarter. Is that how we should think about it?
Speaker 2
Yes. Certainly, you're comparing a quarter where wholesale still wasn't fully back to normal, there was still very attractive marketing rates and you didn't have the seasonality that just is part of q four. Q four has more days of promotion. Q four has a much more competitive marketing, environment. So yeah.
And and by the way, this will be true likely in every year comparing q three to q four. So that seasonality is just part of the business. And again, we've seen that, each of the last two years. On a year over year basis, we are fully expecting to get leverage. So we continue to see our business, improve, top to bottom, and we think Q4 will not be an exception on that.
Speaker 13
Great. That's helpful. Thanks so much. Good luck next quarter.
Speaker 7
Thank you so much.
Speaker 0
Our next question is from Atul Maheshwari with UBS. Please proceed.
Speaker 14
Good morning. Thanks a lot for taking my questions. Joe, can you provide some thoughts on how revenues could play out in a post vaccine world? What do you think, is really the normalized growth rate for the company going forward. So if I ask this question other way, Purple grew revenues by 50% prior to the pandemic that was in 2019.
Is that something that's achievable as the environment hopefully normalizes at some point next year?
Speaker 2
Yeah. We you know, what our exact growth rate is, we're not giving specific guidance on, but are on a trajectory basis. The I mean, what we believe happened over q two and q three was just channel shift. The demand remained, and the limiting factor in our growth has been and continues to be just fundamentally how many mattresses we can make. So, you know, we have not seen any waning in demand either on an end consumer basis or in opportunities for wholesale partners to engage.
We have a long list of of regional terrific, players out there, furniture stores and others who, who would love to be able to, put our product on their floor, and we'd love to be able to support them. That's why we're investing in this additional half a million square feet in Georgia. And as we build out that capacity, we will continue to lean in. Similarly, we've got great national players who, you know, we are not penetrated all the way, and there's a lot of opportunity for expansion with our existing players. So, yeah, our our number one job right now is continue to build out this capacity, continue to, to get our PurpleSouth facility outside Atlanta up and running and do everything we can for our partners and our customers to service that demand.
But we see good tailwinds still.
Speaker 14
Great. Thank you. And as my follow-up, Joe, as you look forward to the next few years, can you rank which of your long term initiatives really have the most potential? So what is it that you're most excited about? And then how do you manage the execution risk associated with simultaneously working on all of these initiatives?
Speaker 2
It's a terrific question. Thank you. Yeah. Long term, it's it gets us much more excited. Yeah.
We're there there's a lot of just operational efforts right now to build out capacity and service our customer. We are the name of our company is Purple Innovation, and we were founded on innovative product with our patent portfolio of nearly 300 patents now. And there's a lot of untapped potential we have in our labs right now, in both the sleep category, which we see tremendous opportunity for innovation and advancement, and beyond. And the example we talked about how, we're up over 100% in our non mattress categories, which includes some sleep like our Remarkable Pillows, which we put a lot of design into, as well as like our seat cushions, which is an example of how our capabilities extend well beyond the bedroom. So on product expansion and category expansion, we continue to believe we have tremendous opportunity given our core capabilities.
And as we just spoke in prior question, we've been basically just a domestic company, and the international opportunities we have, we believe, are significant. There's very little about our product given that we are a product first company that isn't something that can be quite easily extended into markets outside The U. S. This isn't a marketing play or a brand play. It's a product play with differentiated premium better product, and we believe there's tremendous opportunity for growth beyond The U.
S. As well.
Speaker 14
Excellent. Good luck for the rest of the year.
Speaker 7
Thank you so much.
Speaker 0
Our next question is from Jeremy Hamblin with Craig Hallum Capital Group. Please proceed.
Speaker 9
Congrats on the strong results here. I wanted to ask some questions about the wholesale business. It looks like you've seen a pretty steady recovery there, but I think productivity per door still looks like it was negative in Q3. But I think based on the commentary that you had here for Q4, it looks like that might shift to getting back to positive on a kind of sales per wholesale door. Can you just comment on that, part one?
And part two is when you think about the Sleep Country relationship, they generate kind of higher sales per door than your current largest partner. So how do we think about the expectations around productivity for those doors?
Speaker 2
Yes, there's yeah. This is hard to back into. There's a lot of nuance here, in part because not all doors are equal, as you're suggesting with Sleep Country. Also, you know, how we post our P and L is is not exactly the same as flow through. So, you know, for example, one of the things we saw going into Q2 is, you know, a lot of, you know, orders that had come in, some of which got deferred into q two, some of which, was, you know, burned down of inventory on hand.
So there's some timing that goes into the quarters on this. You know, all in, we added, q two to q three, I think, about 200 doors. So you know? But but all in, we also saw that we saw the return to growth, in wholesale, revenue. So, you know, call it a mix of seeing a rebound in existing doors plus some new doors coming on, and again, accounting for some of the timing that goes into how those load ins occur.
But all in, we're back to growth, and we're back to expansion with Sleep Country coming on. So we feel like we've hit that pivotal point where this is getting back on track, and we see the right momentum. We do and then in Sleep Country, the other challenges as of right now, as part of our launch, we've we've got two beds on the floor versus, say, like, most of our mattress firms where we have, typically four beds on the floor that does impact, the sales per door as well. Sleep Country does produce more per box, on average, just looking at their overall numbers. And, you know, we've got good price points with Sleep Country and are selling our full assortment, through their digital channels and and are available for sale at any of their stores as well.
We just don't have all four on the floor, or or five, really, on the floor up there, excuse me, with our new Purple Plus mattress. So we just launched literally yesterday, So it's a little early to say what we're going to see there, but we think there's tremendous potential.
Speaker 9
Got it. And then as a follow-up, with quite a bit of capacity coming online in 2021. In terms of you've been somewhat restrained by capacity limitations in adding wholesale doors this year. But as we look forward into 2020 it sounds like you could be in a position to potentially add like 1,000 wholesale doors. Can you kind of reflect on that and give us a sense for I mean demand continues to be very strong and you're making these adjustments on capacity where I think you're catching up to demand.
But can you give us a sense for what kind of the wholesale door add potential is for 'twenty one?
Speaker 2
Yes. Certainly, the idea that we could add, as you said, 1,000 more doors is absolutely in the realm of possibility. There's, as I mentioned earlier, sufficient existing demand out there from our existing partners. I mean, just from our existing partners, we've got more than a thousand dollars right there. So for sure, we see lots of opportunity there.
The key is just balancing it against our sort of baseline demand growth we're seeing in DTC and our existing doors as well as building out just a healthy capacity. I mean, part of our capacity expansion plans is, you know, and part of being a good supplier to our partners is making sure that we've got predictable capacity. And, you know, when you're running all machines, all ships, you know, at at maximum capacity all the time, it doesn't allow for high tolerance if unexpected things happen, or there's sudden shifts in demand, which which happens all the time in the real world. So part of our capacity plans is to actually build a little more surplus into our overall capacity where we can both flex in to additional equipment and additional lines as well as allow for tolerances as we need to do maintenance beyond what's normally planned. So just as modeling out the expansion, we're expecting on average slightly less productivity per machine, not because we're not getting the output we can, but because we've been operating in a in a way that just isn't healthy for the long term.
We we've got to have a certain amount of surplus that we can lean into appropriately and protect our ability to support demand at any given moment in time.
Speaker 9
Thanks for taking the questions guys. Best wishes. Sure.
Speaker 7
Thank you.
Speaker 0
And our final question is from Matt Koranda with ROTH Capital Partners. Please proceed.
Speaker 12
Yes. Hey, guys. Thanks for squeezing me in. A lot of questions have been asked and answered. But I did want to dig into the guidance for fourth quarter just one more time and maybe attack it from just a different angle here.
So it sounds like the right number on EBITDA is around $11,000,000 and I'm just trying to get there with the revenue guidance that you guys provided of just below $200,000,000 Even if I boost marketing, sales and marketing to, you know, north of 30% of sales and keep other expense items sort of flat versus 3Q, that seems to imply that gross margins would be in the low 40s or or somewhere around like 600 basis points of deleverage sequentially. I'm just wondering if you guys could comment on sort of the right way to think about, the margin profile, both gross margin and OpEx to get to that $11,000,000 level in EBITDA.
Speaker 2
Yes. It's well, and let me start by saying we are not giving formal guidance for Q4. We've given a directional nudge, which is basically more of the same on a growth rate basis. We continue to see a healthy business here, and we continue on a year over year basis to see both leverage and consistent growth rates. So I just I want make sure we're clear on that.
The do you want to perhaps jump in on
Speaker 0
the Yes.
Speaker 4
So there's a couple of ways to look at this. So there's a way to look at it as growth in volume and growth in channel, and there are a lot of components. And, again, we're not giving guidance, but what we're trying to do is is look at it as or the growth rate that we saw in third quarter is gonna be very similar to what we expect to see in the fourth quarter, but also considering those factors in the fourth quarter that we spoke to also, such as it's a more promotional quarter. It's a more, expensive ad quarter. So it's not gonna cost us any more or less to make the product, and we're going to distribute and fulfill the same way.
So the gross margin pressure that we're gonna see is gonna come from the fact that we're putting a lot of investment into the Atlanta facility, which is gonna be some gross margin pressure, but not they're not extraordinary. And then on the marketing and advertising side, there's gonna be pressure from higher ad spend and as we talked about some of the investment in brands. So there are puts and takes, and we're trying to to to help you understand for your modeling purposes that, yeah, the the growth is going to be there. There will be a shift in the channel mix, and there are going to be some headwinds in gross margin from Atlanta and from from ad spend and marketing and advertising. So, those are the components that we want you to understand as you're building those, but that was the best way that we could feel to to help give, give at least some indication.
Speaker 2
Yeah. And and the channel shift is is meaningful here. I mean, we Yes. We this quarter was was, 28%. Getting back to close to a third, you're talking, you know, close to 500 bps or so of shift right there.
And we saw it going into COVID on the enhanced margin and profitability as this dramatic shift happened away from wholesale into DTC. We're now, as we've been saying along, expecting that, things will get more back to normal, and we're seeing things go back to normal, which remains a very healthy business.
Speaker 12
Okay. That's helpful, guys. And and then just maybe if we could break apart the the gross margin, pressure that we're seeing from the wholesale mix shift, which I think is is maybe understood versus the deleverage for Atlanta and the ramp up and and the cost incurred there, maybe that would be one way to to help us understand that that gross margin directionally.
Speaker 4
We we haven't publicly, announced, you know, where we are on a channel mix shift. Somebody referred to it earlier in the call, and I don't think they're they're, you know, completely off the reservation on on what that amount is. They're certainly within the range. And then the pressure from from Atlanta, it'll be a little more significant than it was in the third quarter. But, again, we haven't we haven't broken down gross margin on on, how much of the pressure is coming from Atlanta.
Speaker 2
Yeah. I a expense out there. We you know, with the the press release, the Georgia release said it was, around $21,000,000 of investment. Obviously, a lot of that's CapEx. But we've got we've got full time labor out there now that is, that is building out, and, you know, there's some of that just rolls into OpEx, and it's just part of the start up cost of getting this going.
Speaker 12
Okay. And then just last one real quickly on the marketing and sales front. I just wanted to be clear. It sounded like you said it was headed back into sort of the 30% of revenue range. Any reason that we would go to the levels that we saw last year in Q4?
I think they were relatively elevated in 2019. Just help us understand that dynamic. And then maybe why would we be stepping on the gas on marketing if we're potentially supply constrained?
Speaker 9
Well, I
Speaker 2
I wish, I wish the implication there were true that we could just turn off advertising and sales just comes in. I I I think, most CFOs ask that question to, any marketer every quarter. Yeah. We we, we continue to need to, you know, fight for mindshare. We're a young brand.
I I mean, we by no means are we suggesting that we are a commonly known brand, as people come into the consideration set. And this is a category. I mean, given that the majority of our revenue is mattress, this is a category that, you know, on average, people are buying every seven to ten years. So, you know, there's new people entering the market every year. And and as a young brand, many of them have never heard of us.
So, you know, we fight the good fight every day to get more and more consumers educated as to who we are in our premium product offerings, and and that's never gonna end. The reality is what it takes to do that last quarter is less expensive than what it takes to do in q four. There's just more noise, more advertising out there, which is seasonal. And then on top of that, we've had very attractive marketing rates as dollars were pulled out of the market over the last two quarters. It's been phenomenal.
But we're getting back to, to more normal, you know, marketing environment. And, that's just, again, that quarter over quarter increases marketing costs. But year over year, we still expect to see marketing leverage. So, yeah, as you look at q four last year, we we fully anticipate leverage over last year.
Speaker 12
Great. Very helpful, Joe. Thanks, guys.
Speaker 6
Sure.
Speaker 0
We have reached the end of the question and answer session. I would like to turn it back over to Joe for closing remarks.
Speaker 2
Thank you so much. We have built a very effective foundation and our ability to keep successfully executing and maintaining growth is something our whole team is very proud of. We have not only had to figure out how to shift from being a start manufacturer, but I've also had to figure out how to operate in a very challenging environment. The outpouring of satisfied customer feedback keeps us going every day. I'm also thrilled that we've been able to continue to invest domestically in our people, having hired over 500 employees since the pandemic began.
Looking forward, we remain very optimistic. We believe our core business is very healthy. And regardless of how this uncertain future plays out, we believe we are well equipped to continue to innovate and take share. To all of our customers and partners as well as our employees, stay healthy, be safe and sleep well.
Speaker 0
Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.