Purple Innovation, Inc. quarterly report, Q2 FY2022

Purple Innovation, Inc. — Q2 2022 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. Purple designs, manufactures, and sells mattresses and other comfort products through direct-to-consumer (DTC), wholesale, and retail showroom channels. Financial amounts below are in millions unless stated otherwise.

Financial performance

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Net revenue	$144.1	$182.6	$287.3	$369.0
Gross profit / margin	$48.8 / 33.9%	$81.7 / 44.7%	$100.4 / 35.0%	$169.2 / 45.9%
Operating income (loss)	$(12.1)	$(2.5)	$(30.5)	$14.4
Net income (loss) attributable to Purple	$(8.3)	$2.6	$(21.8)	$23.4
Basic EPS	$(0.10)	$0.04	$(0.29)	$0.36

Q2 revenue fell 21.1%; six-month revenue fell 22.1%. DTC revenue declined 29.8% in Q2 and 30.7% for the half; wholesale revenue declined 5.9% and 6.1%, respectively.
For the six months, cash used in operating activities was $52.8, versus $11.5 provided in 2021. Investing activities used $26.1; financing activities provided $28.4. Cash declined by $50.4 to $41.2.
At June 30, cash was $41.2 and working capital was $80.1, compared with $91.6 and $87.5 at December 31, 2021. Inventory was $84.9, down from $98.7.
Debt carrying value was $38.5, including a $39.7 term loan principal balance; the $55.0 revolving-line draw was repaid in March, leaving no revolver borrowings. The term-loan rate was 6.07% at June 30. Operating lease obligations totaled $113.3.
Q2 and six-month results included noncash gains from warrant remeasurement of $0.3 and $4.3, respectively; the comparable 2021 gains were $4.9 and $14.0.

Material changes and management commentary

Management attributed weaker sales to softer demand for home products, inflation’s effect on discretionary spending, reduced advertising, and 2021 demand brought forward by COVID-era conditions and stimulus. Consumers’ shift back to brick-and-mortar shopping also weighed on DTC sales.
Gross margin contracted amid lower volume, a greater wholesale sales mix, unfavorable production-cost absorption, and elevated materials, labor, freight, and overhead costs. Workforce restructuring partly offset these pressures.
Operating expenses decreased 27.7% in Q2 and 15.5% for the first half, primarily reflecting lower advertising, workforce reductions, and other cost measures. Q2 G&A included a one-time $3.1 separation fee for ending a professional-services engagement; the company also recorded $2.0 of severance costs in the first half.
In March, Purple issued 16.1 million Class A shares, raising $92.9 net. The offering helped fund repayment of the revolver and increased shares outstanding from 66.5 million at year-end 2021 to 82.8 million at June 30, 2022.
Management’s stated priorities include expanding wholesale, improving showroom and wholesale productivity, refining marketing, and managing costs and production capacity. The company had 40 showrooms and approximately 3,200 wholesale doors at quarter-end; it planned to add 14 showrooms during the rest of 2022.
Management targeted exiting 2022 with gross margins “close to 40%.” This is a stated objective, not a guarantee; the filing does not provide a numerical revenue or earnings forecast.

Liquidity, debt, risks, and contingencies

The February 2022 credit amendment waived net-leverage and fixed-charge-coverage testing for the quarters ended December 31, 2021, March 31, and June 30, 2022, and added liquidity, reporting, capital-spending, showroom-lease, and other restrictions. The amended agreement includes a covenant period extending into 2023, subject to conditions.
If cash exceeds $25.0, the company must use the excess to prepay revolving loans, up to the amount outstanding; it also cannot draw on the revolver if a borrowing would leave cash above that threshold. Management said it expects available cash, revolver capacity, and operating cash generation to cover working capital, covenant compliance, and planned capital expenditures for the next 12 months and beyond, while warning it may cut spending or growth plans if funding is insufficient.
The company reported $52.8 of operating cash outflow for the first half, driven in part by a $37.0 decline in accounts payable and a $6.1 increase in receivables. Six-month capital expenditures were $24.2; total cash investing outflow was $26.1.
Key risks include weaker consumer demand and inflation, elevated input and labor costs, lower wholesale margins, execution of showroom and wholesale expansion, and potential covenant or liquidity pressure. A 100-basis-point increase in rates on debt outstanding at June 30 would add approximately $0.4 of interest expense over 12 months.
The tax receivable agreement liability was $162.2; the company paid $5.8 under the agreement in January 2022. Deferred tax assets were $224.0, net of a $93.7 valuation allowance.
Legal matters include a ReST arbitration in which Purple seeks more than $4 of damages and ReST claims damages in the tens of millions; a Photon contract suit seeking reimbursement of amounts paid; and litigation seeking recovery of approximately $7 of Section 301 duties. Recovery is uncertain. Other disclosed intellectual-property matters also remain pending.
Disclosure controls and internal control over financial reporting were reported ineffective at June 30 because of a previously identified material weakness in IT general controls, involving user access and segregation of duties. Management reported no resulting identified financial-statement misstatement and was working on remediation.

Important facts for investors to verify

Whether sales trends, particularly DTC demand, and gross margins improved after Q2; compare actual results with management’s close-to-40% year-end margin objective.
Cash burn, working-capital movements, revolver availability, and compliance with amended credit-facility liquidity and covenant requirements.
Whether cost reductions and production-capacity adjustments offset elevated materials, labor, freight, and overhead costs without impairing product quality or fulfillment.
The impact of the March share issuance and subsequent share count on per-share results, and any further financing needs.
Progress remediating the IT-control material weakness, and developments in the disclosed legal cases and tax receivable agreement obligations.