Purple Innovation Inc (PRPL) 2018 Q3 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Purple Innovation Third Quarter 2018 Conference Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions) I would now like to turn the conference over to Brendon Frey of ICR. Please go ahead.

Thank you for joining Purple Innovation's Third Quarter 2018 Earnings Call. A copy of today's 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 that is included in our third quarter 2018 earnings release, which was furnished to the SEC today on Form 8-K, as well as our filings with the SEC referenced in that disclaimer. We do not undertake any obligation to update or alter any forward looking statements, whether as a result of new information, future events or otherwise.

Today's presentation will include references to non-GAAP financial measures, such as adjusted operating income, EBITDA and adjusted EBITDA. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measure can be found within the earnings release, in our quarterly report on Form 10-Q, each of which can be found on our website.

With that, I'll turn the call over to Jo Megibow.

Thank you, and good afternoon, everyone. I'm thrilled to be here today speaking with you. I look forward to meeting many of you in the months ahead. With me on the call today is Mark Watkins, our Chief Financial Officer.

I'll start today with my thoughts on the company and our future based on my observations during my first 45 days here as CEO, then Mark will review the financials and discuss our updated outlook, after which we'll be happy to take questions.

When I was initially approached about the CEO position here, I obviously did a fair amount of research to understand what the prospects look like for Purple, both within the mattress space as well as in several adjacent categories. What I discovered was that Purple has all the criteria, I believe, best positions the company to win with consumers in today's omnichannel world. First, Purple is a direct-to-consumer company which, for me, personally is the most exciting kind of company with B2C, we know in a very real financial way if we are getting it right for our customers. More importantly, Purple has built the beginnings of a great brand platform. Mattresses are expensive considered purchases in an increasingly crowded space. Our marketing has managed to cut through the clutter and achieve incredible viral media reach. We have earned the right to create a true lifestyle brand.

Second, Purple is a product company at its core. Its founders have decades of history introducing innovative, patent-protected products that offer innovations in making our lives more comfortable and healthier. Importantly, Purple is vertically integrated with internal domestic manufacturing capabilities that provide an additional moat around the business. And given the fact that humans spend roughly 1/3 of their lives in bed and that there is plenty of research that shows that getting a good night's sleep is a cornerstone of a healthy lifestyle, it turns out having a great bed really does matter. And this so-called bed-in-a-box space has been celebrated for disrupting and improving how to buy a bed, which we are also a part of. And we think it's great that if you want easy and low cost, there are many mattress choices out there to toss a foam bed into your guestroom. But for your own bedroom, Purple really does have a differentiated better product.

Third, Purple is a mission-driven company. We exist to help improve lives. That was the goal when Tony and Terry Pierce started in business 30 years ago, and it remains the company's overarching strategy today. It's not hyperbole. The stories I hear from our customers are truly inspirational, life-changing stories. It motivates every single employee I've met.

And finally, Purple is a digitally native company, which is interesting because of our unique products, we could have had a meaningful business prior to the proliferation of e-commerce. But with the launch of our Original Purple Mattress into the bed-in-a-box category less than 3 years ago, our digital routes have allowed for explosive growth fueled by highly effective digital marketing tactics. We believe that a great product, along with a digital-first approach, is a powerful combination.

So you can see that I believe Purple is poised for continued success. Upon determining this, I also asked myself, as CEO, what could I do to ensure positive outcome for Purple. I spent the majority of my career helping companies evolve all aspects of their digital capabilities to drive sustained growth, which I've done on the vendor side, helping hundreds of consumer-facing companies; and in direct leadership roles, including at Expedia and more recently, American Eagle Outfitters. My experience has provided me a deep understanding of how brand, merchandising, product and retailing all enable and support consumers. Therefore, I feel I have some of the battle scars to draw on that will help make Purple a larger player in both the mattress space and the much broader comfort market.

So what have I learned in my first 45 days on the job? Not surprisingly, like many high-growth companies still in their infancy, there are a lot of things that need to be fixed, things that never had a chance to mature. Fortunately, we believe they are mostly execution related and not core to brand or product. Nearly every operational part of the business has opportunities for maturing, which we believe means there's a ton of low-hanging fruit.

From a high level, Purple's issues have to do with operational inefficiencies that have put unnecessary pressure on gross margins. This includes poor inventory management, shipping and delivery missteps, excess waste throughout the supply chain and immature corporate controls. And I don't say any of this lightly, nearly all of my time so far has been digging into the weeds in these areas. And in addition to these core concerns, Purple's performance has also been negatively impacted by a lack of systems and processes a company of our size now need to operate successfully. From manufacturing and finance to sales and marketing, the teams don't have all the tools required to properly plan and execute critical tasks.

The challenges of operating on a very rudimentary platform have been magnified by the company's hyper-growth. Fortunately, while there are things we clearly need to do better, I've also discovered that we have an organization full of talented people that are passionate about this business and are as excited as I am about the future possibilities for Purple. I'm still evaluating areas of the business and will be making additional decisions about the company's long-term strategic course over the coming months. But let me outline some of our near-term priorities.

First, we are rightsizing this business. I have launched several cross-functional initiatives to get costs in line with revenue. This includes better sourcing, contract management, better labor management and production, reduce waste and better corporate controls. I've also taken a close look at overhead in general. And on Monday, we reduced our headcount, which along with smaller changes we've been making over the last month, have reduced our total heads by over 10%.

Secondly, we are attacking our fulfillment capability. The truth is, we have not met consumer expectations on delivery times, which is just not acceptable to me. And looking at social media, it's clearly not acceptable to our customers. It has been a confluence of issues from inventory planning, fulfillment velocity, communications and processes and standards with our delivery partners. We believe we are solving the root issues end to end, and I expect improvements by the end of the year that we believe will set us up for a successful 2019. Fulfillment times have also contributed to our elevated return rate, and we expect returns to improve with better fulfillment as well.

Thirdly, we are expanding our brick-and-mortar presence. We have learned that even with our 100-day guarantee, many of our customers still want to experience our mattress first hand before buying. We believe in giving our customers what they want, so we are dramatically increasing our local reach. We are pleased to announce that we recently reached an agreement with Mattress Firm that moves our relationship beyond the test phase into broader, more permanent distribution. After ending the third quarter, where we already had expanded into approximately 188 Mattress Firm locations, we have already added another 126 locations in Q4 through today and are continuing to expand.

In addition to expanding with Mattress Firm, we secured distribution for our mattresses with other high-profile retailers, including 129 Macy's, 49 Furniture Rows and testing in 8 Bed, Bath & Beyond stores, all of which are live now.

What does that really mean? As of my start date, on October 1, about 12.5% of our target demographic was within 30 miles of a showroom with our bed on display. Now just over 5 weeks later, we are currently at more than 50% of our target. And with Purple on the floor of nearly 600 locations by the end of this year, we will be closer to 60% of our target demographic will be within 30 miles of one of our beds on display. We think that is terrific.

We just launched a Try in Store link at the top of our website. The national coverage it shows is amazing, and we believe it will keep growing.

Fourth, we are preparing our DTC business to capitalize on the upcoming holiday season. We've been tuning up the marketing messaging to better focus on our differentiation. The marketing team is excited that I speak their language, and we will be getting even more sophisticated with how and where we spend. For Black Friday through Cyber Monday, we will be highlighting our Original Mattress. It remains our best-selling, easiest to deliver and lowest return rate mattress.

We have also just launched our new campaign alongside Disney's Ralph Breaks the Internet movie with co-branded digital videos, national broadcast advertising, a YouTube homepage takeover that's live today and additional property takeovers coming. Disney has been a great partner, and we are excited for the tie-ins.

And fifth, we are seeking additional bank financing that will help fund working capital and strategic investments. While we are on track to running a sustained cash flow positive business, the additional financing will give us flexibility and the ability to accelerate our growth plans.

With that, let me turn it over to Mark.

Thank you, Joe. First off, I'd like to say how great it's been to have Joe here at Purple. He is a strong leader with a clear vision to take Purple to the next level.

As for our third quarter results, for the 3 months ended September 30, 2018, net revenue was $70.8 million, up 26.4% compared to $56.0 million in the prior year period. The revenue increase was primarily due to gains in our direct-to-consumer business, combined contributions from our expanding wholesale channel, which initially launched in the fourth quarter of 2017.

Gross profit dollars were $28.1 million during the third quarter of 2018, compared to $24.1 million during the same period in 2017, with gross margin at 39.7%, compared to 43.0% in the third quarter of 2017. The decrease in gross margin was primarily due to increased product and freight costs, inefficiencies in our manufacturing process as we migrated to a new warehouse management system, and improved quality assurance processes that have identified additional scrap.

In addition, a shift in sales mix to more sales with wholesale pricing also reduced gross margin. Wholesale revenue comprised approximately 16% of net revenue for the quarter. These headwinds were partially offset by the higher product margins from the new mattress models.

Operating expenses were $31.6 million in the third quarter of 2018 versus $29.5 million in the prior year period. This increase is primarily due to higher general and administrative expenses associated with supporting top line growth as well, as expenses associated with being a public company.

Marketing and selling expenses were flat compared to the prior year period in dollars, with efficiency improving to 35.6% of net revenue in the third quarter of 2018 from 45.8% in 2017.

During the third quarter, we reported an operating loss of $3.4 million, compared to an operating loss of $5.4 million in the third quarter of 2017. After adjusting third quarter 2018 results for litigation-related legal fees and severance costs, adjusted operating loss was $3.3 million, compared to an adjusted operating loss of $5.0 million in the third quarter of 2017. Net loss for the quarter was $4.4 million, compared to a net loss of $5.4 million in the third quarter of 2017.

EBITDA for the quarter was negative $2.9 million, compared to negative EBITDA of $5.2 million in the third quarter of 2017. Adjusted EBITDA, which excludes the same nonrecurring costs I just mentioned, was negative $2.7 million, versus negative adjusted EBITDA of $4.8 million in the second quarter of 2017.

Turning to our year-to-date results. Net revenues for the 9 months ended September 30, 2018, were $207.3 million, up 54.9%, compared to $133.8 million in the comparable year ago period. Gross profit dollars were up 45.1% to $85.8 million during the first 9 months of 2018, compared to $59.1 million during the same period in 2017, with gross margin of 41.4%, compared to 44.2% in the 9 months ended September 30, 2017. The decrease in gross margin was driven primarily by higher dollar returns, which widened the spread between gross and net revenue, as well as higher freight costs, which pressured gross margin during the first 9 months of 2018 after we began selling new mattress models, which was in February of 2018.

Adding to the headwinds were inventory adjustments and manufacturing inefficiencies, which we experienced as we improved quality control and manufacturing processes and preparing for the direct-to-consumer launch for new mattress models in Q1, as well as implementing a new warehouse management system in Q3. These headwinds were partially offset by higher product margins of our new mattress models.

Operating expenses were $97.5 million in the first 9 months of 2018, versus $63.3 million in the prior year period. This increase is primarily due to higher marketing investments to expand brand awareness and drive consumer demand for the company's product portfolio, and to a lesser extent, higher general and administrative expenses associated with supporting growth and being a public company.

In addition, operating expenses included $3.1 million of onetime nonrecurring costs related to the business combination transaction with GPAC, which is Global Partner Acquisition Corp., also litigation costs and CEO search and severance costs.

During the 9-month period ended September 30, 2018, we reported an operating loss of $11.7 million, compared to an operating loss of $4.3 million in the same period in 2017. Adjusted operating loss was $8.6 million, compared to an adjusted operating loss of $3.4 million in the prior year period.

Net loss for the 9-month period was $14.2 million, compared to a net loss of $4.3 million in the comparable period of 2017. For the first 9 months of 2018, EBITDA was a negative $10.2 million, compared to negative $3.8 million in the comparable period of 2017. Adjusted EBITDA was negative $7 million, versus adjusted EBITDA of $3 million in the comparable year period.

Moving to our balance sheet. As of September 30, 2018, the company had cash and cash equivalents of $7.7 million, as compared to $3.6 million at the end of 2017. The increase since the end of 2017 reflects the funding from the business combination with GPAC and our term debt financing that was finalized on February 2, 2017. These were partially offset by working capital investments, primarily inventories, as well as capital expenditures. We are actively pursuing financing to ensure we have sufficient cash to support our growth initiatives.

Net inventories totaled $28.7 million at September 30, 2018, compared with $13.3 million at the end of 2017. The increased inventory at the end of the third quarter was due to an expanded product line, the growing demand for our products and the stocking of new models at third-party regional distribution centers. Compared to the end of the second quarter, inventories were down $4.6 million or 13.7%.

Now turning to our guidance. For the fourth quarter of 2018, we anticipate net revenue to be in the range of $76 million to $80 million and adjusted EBITDA to be between 0 and a positive $2 million. Based on third quarter results and current visibility into the fourth quarter, we now expect revenue to be between $283 million and $287 million for the year, an increase of between 44% and 46% over 2017. We are now forecasting adjusted EBITDA to be between negative $7 million and negative $5 million for the year.

Before turning the call back to Joe, I want to point out that as part of our third quarter accounting close, we identified errors that caused an overstatement of previously reported prepaid inventory, net inventory and minor changes to certain other liability accounts. These errors relate to tracking and reconciling deposits made to overseas suppliers, valuation of certain subassembly inventory items, reconciling accounts and proper cutoff -- proper period cutoffs. Part of the correction of these errors reduces prepaid inventory and increases cost of revenue in the amount of $1.7 million for the periods from January 1, 2017 through June 30, 2018. We also identified errors of $1.3 million, resulting in adjustments to inventory and cost of revenues for the 3 months ended June 30, 2018. Other adjustments of $0.2 million were made to the 6 months ended June 30, 2018, related to customer prepayments, accrued sales taxes and revenues.

The year-to-date EBITDA results that I just mentioned include these revisions, as does the guidance for the full year 2018. A full detail of the adjustments is included in our 10-Q filing that just took place today.

I'll now turn it back to Joe for his closing comments. Joe?

Thanks, Mark. While Q3 was clearly difficult, I remain optimistic. The team is working incredibly hard to dig into the many issues, and I believe we are doing the best we can to remediate and move forward. Because of our deep diagnostic efforts, I feel confident that we now have better data and a better understanding of our production systems and processes, which is actually a silver lining of sorts.

Let me close by saying, I remain very excited about all of the possibilities for Purple, with a truly differentiated product that helps people live better lives, patent protected, local manufacturing capabilities, the roots of a real lifestyle brand and growing brand awareness, the company's uniquely positioned within the mattress industry to increase market share. I also believe there's tremendous potential for Purple beyond our current categories, but we need to walk before we can run. I'm confident that the work we are embarking on will allow the company to successfully capitalize on the many long-term opportunities that lie ahead and deliver improved value for our shareholders.

Thank you for your interest in Purple. Operator, we are now ready to take questions.

(Operator Instructions) Our first question is from Seth Basham with Wedbush Securities.

I look forward to meeting you in person, Joe, thank you for your remarks and it sounds like you have a great vision for the business. I'd love to talk about, first, some of the dynamics around the quarter, however. The first thing is just on gross margins. Obviously, you guys encountered some challenges this quarter. We're hoping to understand in more detail what the impact in gross margins were from each of those challenges and how should we think about run rate gross margins going forward.

Yes. So this is Mark, Seth. We did have some challenges during the quarter. As mentioned in the prepared remarks, they do revolve around a few different areas. And comparing a year-over-year basis, freight costs have been up ever since we launched the new models. And so as we're talking about a year-over-year comparison, that is still impacting us. We do have some improvements that we're making there, and we're switching out our fulfillment partner for any of those new mattress models under 150 pounds. And so that's yielding some benefit that we're scaling that up. We'll continue to see benefits throughout Q4, as well on a year-over-year basis, we did have some cost of input increases. Now we haven't seen a lot of increases over the course of 2018, but in Q4 into Q1 of -- Q4 of '17 into Q1 of '18, we did see some input costs, primarily foam. The areas that are impacting Q3 specifically really revolve around 2 things. One is improvements to our quality assurance processes and just additional scrap that's been identified as we continue to improve those processes. We view this as a positive, frankly. For the long term, this is something that's going to benefit us. As we improve our quality, our consumers will be impacted. Our return rates will come down over time if we have better quality. So that's one of the areas. The other is we have implemented a new warehouse management system, and there's some inefficiencies as we've migrated through that warehouse management system over the course of the quarter. That is largely in place here as of the end of October. And again, this is something that, while there's some growing pains as we implemented that, it's everything from racking to an overall system that tracks all the movement of our inventory and allows our processes to be improved upon. If you were to ask me to quantify that, it's probably somewhere in the neighborhood of 200 basis points off the margin between the scrap and the manufacturing inefficiencies.

Got you. Okay. That's helpful perspective. Secondly, on inventories, it seems still roughly heavy to us. Can you help us understand what the right inventory level is for this business? And did I hear you correctly saying that you essentially own most of the inventory that is in Mattress Firm distribution centers at this point in time?

So yes. So as of right now, the inventory at the end of the third quarter, frankly, it was a little bit high still. It's come down several million dollars since Q2, I think a little over $4 million. And so that's heading in the right direction because it's still a little bit heavy. Now as we are heading into the holiday period, where we're at right now is actually appropriate. So we're getting to the right place. I don't have a specific number for you, but roughly $28 million that's sitting on our books as of the end of Q3 is a good number heading into holiday. Now, next Q1 that may not be the right number, but we expect our inventories to come down in November and December as we sell through and achieve our forecast. In terms of Mattress Firm, we don't have any inventory that's sitting with any third parties other than our distribution partners. All of the inventory at Mattress Firm is owned by Mattress Firm.

Got it, helpful. And then as it relates to Mattress Firm, more broadly, it sounds like good news that you're expanding the relationship there. How many stores do you anticipate being in of theirs when you fully roll out?

We -- Joe here. We have not set a number to cap us out. There's -- as is known well in the press, they have a pretty enormous fleet of stores, which we still think is very opportunistic for us. So we're in a few hundred stores now as we're rolling out. And there's a plan to get into many, many more of those. When we sort of hit the saturation point is unclear, but we're going to continue to move forward at the pace we've been rolling out.

The next question is from Peter Keith with Piper Jaffray.

You had mentioned in the prepared remarks around some fulfillment capability issues, delivery issues, and those are being addressed immediately. Could you just help us understand exactly what's going on and maybe what some of the fixes are?

Yes. Joe here. It's been -- as I said in the remarks, it's been a confluence of things. Mark spoke about some of the inventory, and we'll kind of get that aggregated up. It's much more complex when you look down to the SKU level. And part of our inventory levels and cleaning things up on the inventory side is making sure we've got the right inventory at the right SKU level and aligning our production much more tightly with demand, which we've made some really incredible improvements on. So it's all the way up from that sourcing side on production and raw material to how we're actually getting mattresses out the door, where part of the warehouse management system and a lot of the operational improvements inside have cut literally days out of the delivery time in just getting it out of the building and in dealing with the heavier mattresses that we have, where we've had to rely more on white-glove service. It's been a learning process for us. And we outsourced really the entire end customer experience, and we -- it didn't go as well as we would like is the simplest way to say it, which meant that it was taking longer than consumers were expecting, well more than 2 weeks in many cases. And the communications we had on top of that, which is another challenge, were lacking. So in terms of things we are looking to change, obviously, tightening up the delivery times dramatically, some of which is working with our delivery partners to own the experience and then -- and some of it is shifting how and with whom we deliver. But it's also, even at the fundamental communication level, in what we are telling the customers, when in the process, managing expectations, keeping them informed on the process and making sure that there are open lines of communication to assist them throughout. So it's really been an end-to-end capability. We have a bit more work to do, but we are very, very focused on getting this right.

Okay, that's helpful. And maybe just following up on that point, is the delivery issues primarily with a lot of the newer, more expensive products that launched this year? Or is it across the board with even your traditional Purple Mattress?

Some of the issues were systematic. But in terms of the real challenges we have had have absolutely leaned much more towards the newer mattresses and related to their weight and the delivery mechanisms we use.

Yes, very helpful. Okay. And then I wanted to change topics just on the sales and marketing. So intriguing that the dollars there were flat year-on-year. I guess, kind of a 2-part question. Number one, how are you finding some of the search costs with regard to the competitive environment? And secondly, is this a bit of an air pocket with marketing? Do you anticipate this will start to now grow year-on-year? Or are you happy holding it flat?

No, I'm not happy holding it flat. But I think it's less about the amount. Though that will grow, it's more about how and where are we spending. So I think there is an enormous amount of opportunity here, and we have been holding it back. We've been managing more to cash and more to where we were as a company in terms of our EBITDA targets. And as we clean that up and reducing overhead and pulling -- and improving COGS and finding ways to grow the business, we are producing cash that allows us to now invest into growth. So even into Q4 now, we will be getting a bit more aggressive. But I also think we've been sort of just playing in the auction marketplace, alongside everyone else with very similar messaging, against competitors who are fighting primarily on price. And that's not our game. We're not on the low end, and we have no interest in the race to the bottom. We are a more premium offering. And there is a lot of opportunity in looking at the channels we can play in, our messaging and how and where we spend, the audiences we go after to get the right messaging in front of the right customers. And we are already seeing some great results testing into that.

The next question is from Brad Thomas with KeyBanc Capital Markets.

Joe, congratulations on the new role here. I wanted to ask first about some of the operational efficiencies that you talked about here. I guess, my question would be around sort of the time line, and obviously, recognizing that you're still getting up to speed here. But what would you think a reasonable time frame might look like to start to really improve some of the inefficiencies that you're seeing in the business here today?

Yes. I'll unpack that a little and some of that is when do we see the benefits and when do those flow through the financials. For example, I've been taking a very, very close look at overhead, and we'd overbuilt a little. I think we're a very young company, maturing quickly. And I think some of the early expectations had our growth levels higher than they realized and built in to some areas, especially in production, which was creating a bit of an anchor on the business. So we've made some pretty significant changes in overhead and including headcount, which will have some significant savings. But obviously, while we've executed on that already with severance and the departures, it's going to be -- toward the end of this quarter, we'll see a little benefit. And going into 2019, we'll see much of that benefit. And I think that's true of many of the changes we're making, some of the process improvements. We're finding opportunities to reduce our cost on sourcing raw materials, both in the mix of the vendors we're playing. We've had multiple suppliers where we haven't necessarily taken advantage of strategically going with the best prices as well as just getting into -- as we become a more volume player, leveraging that volume for better pricing in general. So we've already renegotiated some of those contracts. But because of inventory on hand, raw materials on hand and when the orders hit, again, it's going to be a few months before we see that start to flow through. But it's -- we're -- this is early days on these improvements. There's a lot of low-hanging fruit, if you can take that cliche. And we're going to continue to attack this over the coming year.

That's helpful. And as you look at and think about the product architecture and the number of models that you're selling and the price points of them, what's your sense of what maybe the optimum assortment looks like here today? And should you be taking some price increases as many others in the industry are right now?

Yes. We -- so I'm not prepared to talk about new product launches at this point, but I think we've learned a lot from the assortment changes we've made. In terms of strategically, as I mentioned earlier, I'm much more interested in the premium side of the market. I mean, just loosely speaking, about 75% of the units are sub-$1,000, but only generating about 25% of the industry revenue. And the other side of that equation, the $1,000-plus, is much more interesting to us, and we've got a differentiated premium offering. So if we're going to lean anywhere, it will be leaning more in that direction. In terms of how many choices we have at a given price point and how many price points we have, I think there's some learnings we have to get that a little easier and more clearer for our customer. And we're absolutely testing into that and will continue to do so.

The next question is from Budd Bugatch with Raymond James.

I'm on today for Bobby Griffin who will be covering the stock. Just I'm looking at the MD&A and looking at the results, and I was curious a little bit about the sales breakdown. I think you told us that the wholesale sales were about 14% of revenues, if I heard you right, is that correct? Is that the right number?

It's 16%. 16% for Q3.

So a little bit more than $11 million or so. And you told us that I think that the direct was up about 10%. Is that correct in the quarter?

Sorry, what was the question, Budd? I didn't quite catch it.

That revenues in the direct channel were up about 10% in the quarter, is that -- year-over-year?

Yes, that is approximately correct.

Okay. Because that was what I think you said in the MD&A. I'm curious what caused the slowdown in revenue growth in the direct channel. That sounds pretty modest for a fast-growing e-commerce-type company?

Yes. We -- Joe here, and thank you for your comments initially. We -- I think the short answer is we deliberately pulled back investment on the top line pretty significantly as we were trying to get control of costs in the business and for a brief period of time, really just managing the cash. It flows right through. I mean, our audiences that we are reaching are significantly lower this year than we have in the prior year and just in terms of the top of the pile metrics, it means we're going to be bringing fewer people in. So that's really through Q3. As I mentioned, we're turning that back around in Q4. Now that we have done some rightsizing of the business and are getting the fundamentals back in line, my expectation is, especially Q4 being so important around holiday, that we're going to be investing in heavily. And it includes even some pre-commits that we're now leaning into, such as the partnership with Disney that I mentioned, which is some pretty significant broad marketing that's going on right now. So certainly, our expectation is that was a period in time that we've now come out of and we expect that we'll be fueling back in.

Make sure I understand what you mean by the audience is less this year than last, are you talking about the number of visits to the site? Or is that what you're talking about?

No. It's a little more complex than that. But yes, it ultimately results in number of visits to the site. But as we're trying to build brand awareness and be in the consideration set and be top of mind, this is a considered purchase. The typical consumer may take 30 days during the decision process. And a lot of that is getting in on the early side of that, which is how do we even make sure the customer knows we exist and understands how we fit into the ecosystem. And that's at the top of the funnel and we invested much less into that this year, and our metrics reflect that.

I see. Okay. And can you talk a little bit about the customer returns? How does that metric look? Are we seeing any issue on that? You were talking about inefficiencies. If you have inefficiencies in production, that oftentimes works its way into product issues. So how does that look?

Yes. So we -- returns -- and this has come up in the prior quarter earnings calls as well, returns have put pressure on our margins and more so with the newer mattresses at a higher price point, a heavier mattress, a more of a considered purchase. We've seen return rates higher than we have historically seen, and more importantly, higher than we believe they should be. Another pretty significant initiative I launched about 4 weeks ago is really attacking returns and getting that back down to the levels that they should be in the industry. I've got over a dozen different dimensions we are looking at. Product quality is one of them. Fortunately, that has not been a signal we've seen as a primary reason. The delays in delivery and the delivery times have certainly factored in. There's some messaging and communication. We're looking at some pricing and promotional factors. We're looking at the break-in period and our customers understanding how to get the benefit of our mattress. There's a number of different dimensions. And the good news is on the initiatives we've launched, we're already seeing measurable improvements, and I expect we'll continue to see that until we get returns back to appropriate levels. So that will absolutely help with margins.

So can you provide any help to us on gross to net? How does that look in terms of -- what was the gross to get down to the $70.8 million of net revenues?

Yes. So we don't share all of the details, Budd. But what I have shared and I'm happy to share now is our return rates have been historically in the high single digits. And after we launched the new mattress models, we've settled in the low teens. And so that's the delta that we've seen take place roughly over the last 8 or 9 months as that shifts.

And has there been any measurable change in that, Mark, or not?

We initially expected that the return rate was going to pop and then come back down, instead we saw it increase and then stay relatively flat. Over the last 6 months, we have not seen a dramatic shift. It's been fairly flat. We did have some seasonal -- some signs of optimism just in the last 2 months, where it's ticked down a little bit, but too early to tell. But as Joe mentioned, we are focused on this. And the amounts are big enough, so this will have a dramatic impact as we can improve that over the course of 2019.

No question.

And as Mark said, the 4 weeks we've been working on this is not enough to get a true signal. But again, some of the initiatives we launched have some very positive early results, and we remain optimistic that this is an execution challenge and one that is solvable.

Okay. Just a couple more questions from me. The Mattress Firm, can you talk about what their sell-through has been? I know you've been populating the stores with -- I think there are 4 models on the floors, at least in the stores that we've seen. Can you talk a little bit about the repeat or customer take-up of that business?

We -- some of them have 2 on the floor, some of the smaller footprint stores, and some have 4. We -- I don't believe we've disclosed specific sales velocity through. What I will say is Mattress Firm has been and continues to remain very excited about the partnership, as are we. We -- it's a mutually beneficial relationship. Our brand strength is bringing interested customers into the store specifically looking for Purple, and we're getting plenty of data evidence on that. And just with the reach and local presence that Mattress Firm has, it's been a phenomenal way to allow potential customers of ours to see and feel the product, as well as many get introduced to Purple just by being on the floor in their stores. So, so far, it's been a win-win on both sides. And it's been -- in an industry that has not had a whole lot of innovation for the last 2 years, it's been a nice shining star on their floor.

I've been in a number of the stores where it is and the displays look very nice. So I agree with you. I just wanted to know how the take-up has been on that. You said you were on 8 Bed, Bath & Beyond stores. Are they the next-gen stores? Or there's -- I've been in several of those and I haven't seen Purple in there, which stores are they in?

No. Yes, so it's -- consider it more of a test rollout right now, and we've chosen the stores a little more strategically on testing a variety of markets and store formats. So it's at 8 stores. It's obviously a very small penetration. We are using some new interactive displays. While there's a bed on display, we've got some interactive videos that consumers can engage with and which is just a different approach in educating the consumer. So again, we're learning. It's very recently rolled out, but we're excited about the test.

This concludes the time allocated for questions on today's call. I'd now like to turn the conference back over to management for closing remarks.

Thank you, and thank you to everyone for their questions. Just quickly closing, I just want to restate that I remain incredibly optimistic about this company and this brand. I am thrilled every day that I've joined here. And if I think about just having a great company in this space, it comes down to having meaningfully differentiated products, having a true lifestyle brand and having a legitimate retail capability. And I think we are executing well in the direction of each 3 of those. We grew very fast. We need to mature this business, and we're working very hard at that. I've been very impressed with the team and how they've been able to get heads down and focus on execution. And I remain confident on our ability to deliver there. And finally, it's -- this is a company with some solid legs. We're in very early chapters in the story. Right now we're focusing very heavily on our great mattress products, but I remain very enthusiastic about our ability to innovate and the portfolio we have of technologies and capabilities that could extend far beyond what we're doing now. So very, very interested in where we take this next. And with that, thank you very much.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.