Purple Innovation Inc (PRPL) Q1 2020 Earnings Call Transcript

Purple Innovation Inc (PRPL -4.38%)
Q1 2020 Earnings Call
May 11, 2020, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, ladies and gentlemen. Welcome to Purple Innovation's first-quarter 2020 earnings conference call. [Operator instructions] It is now my pleasure to introduce your host, Brendan Frey of ICR. Please go ahead.

Brendon Frey -- Investor Relations

Thank you for joining Purple Innovation's first-quarter 2020 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 included in our first-quarter 2020 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 EBITDA and adjusted EBITDA.

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 Megibow.

Joe Megibow -- Chief Executive Officer

Thank you, and good afternoon, everyone. With me on the call today is John Legg, our chief operating officer; and chief financial officer, Craig Phillips. Following our prepared remarks, we'll be happy to take your questions. On behalf of the entire Purple organization, I want to extend our sympathies to everyone affected by the COVID-19 pandemic and express our thanks to the healthcare providers, first responders, and essential workers on the front line supporting our communities.

Throughout this evolving situation, we have diligently worked to ensure that we can continue operations while ensuring the safety of all of our employees which has required significant changes in how we operate, including work from home, reconfiguring our facilities, protective equipment, temperature checks, and large-scale frequent sanitation. We have also sought to find ways to give back. We have created new discounts for first responders, healthcare professionals, and even our truckers who keep our products moving and keep food and supplies in our homes. We partnered with the brands for better coalition, committing 10% of net proceeds in April, raising more than $250,000 toward the production of approximately 1,000 relief beds made in our facilities.

And finally, we designed and just launched a bespoke Purple face mask, leveraging many of the innovations from our successful premium pillows, bringing comfort and functionality that exceeds CDC guidelines to our customers and our employees alike. Now on to recent performance. We are very pleased with our first-quarter results, which showed significant improvement year-over-year despite the challenges created by COVID-19. We entered 2020 with a lot of momentum in our business and with sound strategies in place to drive another year of strong revenue and adjusted EBITDA growth.

Our initial plans involve robust expansion in the number of wholesale partner doors, primarily during the first half of the year, combined with an acceleration in DTC channels, including the opening of additional company showrooms. The first quarter started well, including a successful President's Day weekend selling period at retail and online. February was also highlighted by the launch of our partnership with Raymour & Flanigan, the Northeast's largest furniture retailer with 138 stores across several states. And we were on schedule in bringing our 6th Max manufacturing machine online in March.

When we reported fourth-quarter results and outlined guidance for 2020 on March 9, the general concern about the impact from COVID-19 was largely related to potential supply chain disruptions and that demand at the outbreak of the virus in the U.S. was in its early stages. The situation changed rapidly as the number of reported cases quickly increased, resulting in the President declaring a national emergency on March 13th and many states requiring nonessential businesses to close and individuals to shelter at home soon thereafter. The measures to help slow the spread of the virus significantly altered everyday life for most Americans and disrupted commerce across the country for many companies.

Purple was not immune as more than 80% of our wholesale partner doors closed along with our 3 company showrooms in California over the last two weeks of the quarter. We also experienced a brief slowdown in our digital sales in mid-March as consumers stocked up on food and other necessities needed to weather a prolonged home confinement. We reacted quickly to the changing environment and immediately took action to further safeguard the health and well-being of our team members, enabling employees to work from home where possible and practicing social distancing, and increasing sanitizing standards in our manufacturing facilities and distribution centers. At the same time, we took advantage of our vertically integrated business model to adjust production schedules to match current demand, allowing us to convert finished goods back to cash, as well as, temporarily furloughing more than a third of our labor force.

We also took additional steps to preserve liquidity, including deferring executive and board compensation, putting all investments in capacity and showroom expansion on hold, and amending our credit agreement to allow payment in kind of our entire interest payment for the first and second quarters of 2020. Beside a very difficult backdrop over the last few weeks of March, our business performed very well in Q1, with revenues increasing 46% to $122.4 million, gross margins improving 280 basis points, and adjusted EBITDA up 71% to $10.6 million over Q1 2019. As the second quarter got under way and much of the country adapted to the new normal, we pivoted the majority of our resources to our digital business and have capitalized on the accelerated shift toward online purchasing. During April, we experienced a dramatic spike in online demand for a lineup of mattresses, as well as, our ancillary products, led by seat cushions, pillows, and sheets.

For the month of April, DTC orders were up more than 170% to approximately $54 million compared with April 2019, more than offsetting the significant year-over-year decline in wholesale sales as the majority of our partner stores either remained closed or still experienced steep declines in traffic. That said, we have started to see an increase in weekly wholesale orders on a sequential basis, which is an encouraging sign that demand for our brand in the wholesale channel remains strong despite the challenges facing physical retail. The increase in DTC orders allowed us to work through a substantial portion of the inventory we had on hand at the end of March and generate a meaningful amount of cash in April, along with the collection of the majority of our wholesale partner receivables under existing contract terms. And our cash preservation actions, cash and cash equivalents increased $36.1 million, or 137%, to $62.5 million at April 30, compared with $26.4 million at March 31.

To meet the higher-than-expected DTC demand we are experiencing, we recently ended the temporary furlough for our manufacturing personnel, along with the majority of our corporate employees and have accelerated completing our work on our Max 7 machine, which is on track for launch later in May. The addition of Max 6 and Max 7 will increase our overall mattress capacity year-over-year by approximately 40%. As of this week, we are operating our facilities at full current capacity as we rebuild stock levels and prepare for the upcoming Memorial Day promotional period. We are very pleased with the strength being exhibited by our DTC business, which we believe underscores the growing awareness and affinity for our branded products and reflects the work we've done enhancing the shopping experience on purple.com.

While we are cognizant of the uncertainty surrounding retail, as well as, the overall economy, we are cautiously optimistic about certain near-term growth prospects and are planning accordingly. For example, while we postponed capacity expansion, as previously mentioned, given the recent strength, we are moving forward with negotiations on a new manufacturing facility on the East Coast and we'll be ready to move quickly as we continue to see our business trends stabilize. While we are not providing an updated outlook at this time, I do want to share some thoughts on the status of our key initiatives, product innovation, omnichannel retailing, organizational effectiveness, and brand development. Starting with product innovation.

We have seen significant growth in our newly launched products from the end of last year, including our premium Harmony Pillow, our innovative new foundation, our upgraded platform base, and our upgraded protector. We also just updated our original Purple pillow with boosters that finally make this unique pillow height-adjustable for any sleeping position. With people spending more time at home, we have also seen significant increase in demand for our innovative seat cushions, as well as, our bedding. In total, we have seen the share of our business from non-mattress products nearly doubled since the beginning of the year, which brings us to omnichannel retailing.

We made significant progress in improving our site commerce and site merchandising capabilities last year, which has continued into the beginning of this year. For example, with the new demand signals we identified for non-mattress products, especially seat cushions, the team was able to pivot our site content, structure, and merchandising incredibly quickly, including building new bundles and offers, which really demonstrates how much more agile and mature we are becoming. And the large initiative of redesigning and replatforming the site continues to be in progress and is still planned for launch later this year. For our owned-retail showrooms, we continue to see strong performance prior to COVID-19.

Somewhat promising is that in our factory outlet in Utah and our showroom in Utah headquarters, we have seen a consistent upswing through the back half of April following a drop in sales of more than 50% as shelter at homes swept across the nation starting in mid-March. We believe that our focus on cleanliness, for example, using sheets, which we regularly launder on our displayed mattresses and placing sanitizing dispenser stations throughout each showroom, have helped maintain customer confidence. We were fortunately ahead of the curve with these measures, having launched them late last year. While we have paused any showroom expansion during the crisis, we expect that there will be attractive opportunities for additional showrooms later this year.

As to organizational effectiveness, this continues to be an important focus, given our incredible growth. We have expanded to nearly 1,000 employees while maintaining G&A as a percentage of revenue in the mid single-digit range, and we continue to improve processes and efficiencies as we mature. Most importantly, we have been able to maintain productivity alongside doing everything we can to provide safe, clean working environments for those employees who continue to work in our manufacturing and warehousing facilities. And as an example of the resourcefulness of the team, as we assess this new environment, we were able to retrain the majority of our furloughed showroom employees and move them into sales roles in our now 100% work-from-home contact center, expanding them into commerce-over-chat, where they have been able to drive sales that more than offset the lost business from the showrooms.

Finally, with brand development, we have continued to flesh out the team, adding some incredible talent on the creative side, as well as, recently hiring our new VP of acquisition and retention. We continue to evolve the focus of our brand under the premium nature of our products, as well as, the unique technology and benefits that the Purple Grid and our hyper-elastic polymer provide. I'll now turn it over to Craig, who will review the financials in more detail.

Craig Phillips -- Chief Financial Officer

Thanks, Joe. As Joe outlined, we had a very good first quarter, even with the challenges created by COVID-19, and the second quarter has started strong, driven by accelerated DTC growth. For the three months ended March 31, 2020, net revenue was $122.4 million, up 46.3% compared to $83.6 million in the prior year period. The revenue increase was driven primarily by strong growth in mattresses in the DTC channel, along with higher demand for pillows, sheets, and seat cushions, combined with higher wholesale revenue due to more partner doors compared to the same period last year.

Gross profit dollars were $53.2 million during the first quarter of 2020 compared to $34.1 million during the same period in 2019, with gross margin at 43.5% versus 40.7% in the first quarter of 2019. The 280 basis-point increase in gross margin year over year is attributable to efficiencies in operations and logistics, along with benefits from product and channel mix. DTC channel revenue, which carries higher gross margins in our wholesale channel, comprised approximately 66% of net revenue for the quarter compared with approximately 64% in the same quarter last year, and 64% in the fourth quarter of 2019. Operating expenses were $45.7 million in the first quarter of 2020 versus $29.3 million in the prior year period.

The increase in operating expenses was primarily attributable to higher marketing spend aimed at driving demand in the current quarter, as well as, the addition of company-owned retail showrooms in the fourth quarter of 2019. Marketing and sales expense as a percentage of net revenue increased to 30% compared with 28.7% last year due to a deliberate reduction in marketing expenses incurred in the year ago period as we shifted our focus into wholesale expansion during the first half of last year. For the first quarter, we reported operating income of $7.5 million, compared to operating income of $4.8 million in the first quarter of 2019. During the first quarter of 2020, we recorded a gain of approximately $13.6 million from a change in the fair value of warrant liabilities, while in the first quarter of 2019, we recorded a $6.3 million non-cash expense associated with the loss on extinguishment of debt, partially offset by a $1.7 million gain from a change in the fair value of warrant liabilities.

Inclusive of these noncash gains and expenses, net income for the quarter was $20 million compared to a net loss of $0.7 million in the year-ago period. EBITDA for the quarter was $22.8 million, compared to $0.9 million in the first quarter of 2019. Adjusted EBITDA, which excludes noncash gains associated with the change in fair value of warrant liabilities, noncash expense associated with the loss on extinguishment of debt, product reserve, tax receivable agreement expense, non-cash stock-based compensation, legal fees, interim CFO, and consulting costs, and severance was $10.6 million versus adjusted EBITDA of $6.2 million in the same quarter last year. Moving to our balance sheet.

Net inventories totaled $42.1 million at March 31, 2020, compared with $47.6 million at December 31, 2019. As of March 31, 2020, the company had cash and cash equivalents of $26.4 million compared with $33.5 million at December 31, 2019. As Joe touched on, our cash position increased significantly since the end of March, driven by the acceleration of DTC sales, intentional sell-through to reduce our inventory levels, combined with the collection of most wholesale partner receivables in April, and the benefits from our cash preservation measures. With over $62 million in cash at the end of April, we feel we are positioned to weather this crisis while continuing to invest in our business.

As we announced on March 26, we withdrew our full year guidance as a result of uncertainty due to the COVID-19 pandemic. Due to the continued uncertainty in the overall economy, we are not providing an update at this time. I'll now turn it back to Joe for his closing comments.

Joe Megibow -- Chief Executive Officer

Thanks, Craig. While these are certainly unfortunate times for many, we feel very fortunate as a company. We are proving that a fantastic team with a solid strategy, great execution, and a bit of market timing can be a winning formula. To that end, the incredible amount of work that the team has accomplished over the last year to mature and fortify our business, along with our deep vertical integration, U.S.-based manufacturing, and flexible omnichannel capabilities has placed us in a stronger position financially and operationally.

This has enabled us to lean into the sudden recent shift in demand to the home category online. Most importantly, with our profitable business model and solid liquidity, we believe we can weather through this crisis no matter how long the recovery. These are challenging times, and I want to send out a heartfelt thanks to all of our employees and partners for their relentless hard work and perseverance as we navigate through this together. At this time, we will open for questions.

Questions & Answers:

Operator

[Operator instructions] The first question is from Seth Basham with Wedbush Securities.

Seth Basham -- Wedbush Securities -- Analyst

Thanks a lot, and good afternoon.

Joe Megibow -- Chief Executive Officer

Hi, Seth. Thanks for joining us today.

Seth Basham -- Wedbush Securities -- Analyst

Thanks for all the great explanation, and congrats on good results. And great to see the continued progress in April. My question first is on April itself. The strength that you talked about, both in DTC and the improvement you saw in wholesale, if you could contextualize that, how things trended through the month, that would be helpful.

Joe Megibow -- Chief Executive Officer

Yes, sure. It's been remarkably consistent. We -- when things started to go south as wholesale shutdown and shelter-at-home were in place, we briefly, toward the end of March, saw DTC retract, as we mentioned, and then start to stabilize. Really what happened is we saw pretty consistent performance in DTC while really very little happening on the wholesale side as the stores remain shut down.

About the time that stimulus checks hit, we saw a pretty significant increase in our DTC business. We've done some surveying, and we don't believe that's entirely related to the stimulus checks themselves, but I think really just some sentiment as people began to settle into the new normal. And since that time, we've seen a consistent but elevated performance on DTC. It's really been pretty remarkable how consistent it's been.

I think our operating thesis is the demand really never went away. We've just seen consistent demand and growing demand for our product. Really what we're facing is channel shift, where what's been unable to exist offline and brick-and-mortar has shifted online, which fortunately we've been set up to take.

Seth Basham -- Wedbush Securities -- Analyst

That's helpful, and that's also remarkable that the demand may never have gone away. You guys are bringing back all your for furloughed manufacturing employees going forward with your Max 7 machine here this month after just finishing Max 6 to get you back to essentially the capacity levels that you were planning at the outset of this year. Is that the way you're thinking about the sales for this year as well without providing specific quantitative guidance, of course?

Joe Megibow -- Chief Executive Officer

Yes. So I mean we've been in a capacity-constrained business, meaning our demand has just -- our demand growth has outpaced our supply for much of our first five years here. Obviously, as things slowed down, that changed briefly, and we deliberately stalled manufacturing as we were trying to preserve cash. But on the strength of the demand that really has not, it turns out, waned at all and the growth we're seeing against that.

Yes, we've got our manufacturing capacity ramped entirely back up to full capacity, or say, near full capacity as we get the labor force built back up. We -- furlough is all but over for manufacturing, and we're actually in hiring mode right now and trying to bring more people in pretty aggressively. As you mentioned, Max 7 will be coming online shortly. The only changes we did choose to defer our build out of our new manufacturing facility on the East Coast, which we had anticipated having Max 8 and 9 live this calendar year.

We're not sure at this point exactly when we'll bring those online. They may differ in early next year. But as we mentioned, given the strength, we are going to continue forward this year, we have to build out of the East Coast facility and get going on continuing on our journey for expanded capacity.

Seth Basham -- Wedbush Securities -- Analyst

Got it. And the last question before I turn it over, just thinking about the margin implications of the channel shift back to DTC from wholesale, how do we think about what the contribution margin is on each unit that you're selling at DTC relative to wholesale? So not only gross margins, but also the cost to acquire that customer online relative to the wholesale channel? Thank you.

Joe Megibow -- Chief Executive Officer

Yes, sure. Thanks. So yes, we -- a bunch of questions in there. We -- well, I'll go back.

On the cost require, it's a simpler model when it's mostly DTC. We -- and just frankly, marketing costs have come down quite a bit as there's just been fewer dollars in the marketplace. So we've been able to reach a wider net to drive more addressable market, bring them to the site and then at higher conversion rates and a straight DTC model, we can get much more optimized in that spend. So I mean, we actually have seen some great leverage on the marketing side, but again, with more of the shift online to DTC, etc.

Craig, what was the first part of the question?

Craig Phillips -- Chief Financial Officer

First part was on the margin pressure. And I would say that on a full capacity basis, I would say, yeah, there's some margin pickup that we could expect because it is a shift in channel to DTC. But also keep in mind that for a portion of April, we were not running at full capacity. In fact, we were running at a very lean and not producing that many beds, which the absorption on our overhead cost on fewer beds is a bit of a headwind for the EBITDA -- or sorry, for the margin, yeah.

Yeah.

Joe Megibow -- Chief Executive Officer

But the real story is, as that demand has shifted from off-line to online, I'd say it's distorting revenue up because we're getting more revenue dollars per unit sold. And in general, we should be seeing reasonably better margins across the board as there is just a margin delta that's positive toward DTC. Thanks for jumping in there, Craig.

Craig Phillips -- Chief Financial Officer

Yup. Thank you very much, and good luck, guys.

Joe Megibow -- Chief Executive Officer

Thanks.

Operator

The next question comes from Bobby Griffin with Raymond James.

Bobby Griffin -- Raymond James -- Analyst

Good afternoon, everybody. Congrats on the quarter and the strong performance here in April.

Joe Megibow -- Chief Executive Officer

Thank you.

Bobby Griffin -- Raymond James -- Analyst

The first thing I wanted to ask was -- you saw this come out a few weeks ago, the amendment to the interest expense and to give you a little bit more flexibility. Given that April has gone so well and your cash balance has worked really impressively in your favor, I mean, would you go back to just paying April interest as normal? I mean our 2Q interest, excuse me, as normal?

Joe Megibow -- Chief Executive Officer

Craig, you want to take that?

Craig Phillips -- Chief Financial Officer

Yeah, if we could, but there's really -- yes, there's really not a whole lot of reason to. We didn't do it permanently. We already have the option to pick 7% of the 12%, which we've always done. This was just to give us short-term additional liquidity by allowing us to pick the first quarter and second quarter, and that's all that amendment does.

Since we're already past the first quarter, it's not really worth going back at this point. So we likely would not.

Bobby Griffin -- Raymond James -- Analyst

OK. That's helpful. And then, Joe, I mean, I saw the commentary on April wholesale being down 43%, big number. But to be honest, a lot better than I would have probably expected going in, given that the vast majority of stores were closed.

I mean how should we think about that versus the benefit of having more doors in the quarter? And then I guess, the reason I'm asking that is, does that benefit of year-over-year doors continue in May and June as we think about modeling out wholesale growth, maybe modestly getting a little bit better?

Joe Megibow -- Chief Executive Officer

Yes. So this is going to be very tricky to track and model for a while. And of course, what we're reporting is sell-in, not sell-through. So what's happened with a lot of our wholesale doors is, as they were managing cash, they effectively burnt through all their safety stock as we understand it and our own analysis would lean into that.

So as the wholesale doors that are opening are getting prepped for Memorial Day, we saw going from really very, very light orders, some sudden demand as wholesale partners were looking to rebuild some of that safety inventory into their warehouses, which could be sort of a onetime true-up as they get to some reasonable inventory levels. It remains to be seen exactly what happens in brick-and-mortar retail over Memorial Day and beyond. So again, it's -- and this is also just a subset of their doors, and we're seeing very wide performance metrics as doors reopen. Some doors we're seeing as little as 20% of initial sales.

I think the highest we've seen are getting into the 80% or 85% range. We haven't seen any get back to full performance. But again, there's a wide variety of even what reopening means. Are they allowing full traffic? Is it full hours? Are they doing by appointment only? So it's pretty noisy right now.

We're thrilled to see it coming back. And we're thrilled to have these orders coming in. But I think building any trend on that would be a little tough right now.

Bobby Griffin -- Raymond James -- Analyst

OK. And at the peak, you mentioned, I think 80% of doors were closed. Any update of what could be open in some capacity or another understanding that everybody's definition of open might be a little different by region. But by Memorial Day, could you see 50% or -- only 40% of the doors closed and 60% back open again of your partners? Or anything like that to help us maybe frame the opportunity?

Joe Megibow -- Chief Executive Officer

Yes. It's -- and again, it's exactly, as you said, what's the definition of open. Of our roughly 1,800 stores, about a third of them are, let's just call, open, meaning the front door is unlocked and you can just walk in unannounced. There's another, call it, third, that are are either by appointment-only or actually only doing phone sales.

Only doing phone sales, which isn't that different than e-commerce, but you can actually call it in and come by the store to finish the transaction or if it is a smaller item, pick up at the store or local delivery or whatever it is they may offer from a local service point of view. And then roughly a third just aren't open at all yet. So it really -- it's just -- we're in early days of the reopening. And how that performs, we'll see.

But that -- I'd say, right now, that's what we see. How that -- I expect it's going to be -- I'm not sure, in May, we're going to see much more than that. I think in June, we'll see some more experimentation in opening. But really, our ability to predict beyond that is probably about as good as anyone else's.

Bobby Griffin -- Raymond James -- Analyst

OK. And I guess lastly for me, it was just more on the modeling side, but the G&A, you've done a great job in maintaining that, the scale of it. How should we look at that from a dollar perspective going forward? Should we take kind of what was reported here and 1Q back out some of the onetime items and think of that as a baseline for adjusted G&A, and that's kind of what you'd like to hold it at? I think that would be around $6.2 million, $6.3 million. Or anything else around that to maybe help us think about that line item.

Joe Megibow -- Chief Executive Officer

Yes. So our G&A...

Craig Phillips -- Chief Financial Officer

Yeah, go ahead, Joe.

Joe Megibow -- Chief Executive Officer

Philosophically, as Craig said, we're trying to hold G&A firm, at least as a percentage of revenue. We're growing a lot. And our operation gets more complex. So I wouldn't say we're quite getting leverage on the G&A, specifically yet.

There's still a lot of core capabilities we're building out. What we want to make sure is though as a percentage of revenue, we are holding very firm. And over time, we expect we would get some leverage there. But Craig, please continue.

Craig Phillips -- Chief Financial Officer

Yes. No, that's -- I was going to say virtually the same thing. In the second quarter, we may see a little bit of improvement just because we did furlough a portion of the corporate staff. Most of those are back now.

But as Joe mentioned, there -- it may ebb and flow because we will need to build up staff as we continue to expand, and then that leverage will come on the back end of that. So again, our target is roughly 6% of net revenue.

Bobby Griffin -- Raymond James -- Analyst

OK. Thank you. I appreciate all of you taking my questions. Best of luck in the first half and second quarter.

Joe Megibow -- Chief Executive Officer

Thank you.

Operator

The next question comes from Brian Nagel with Oppenheimer.

Brian Nagel -- Oppenheimer and Company -- Analyst

Hi, good afternoon. Thanks for taking my question.

Joe Megibow -- Chief Executive Officer

Thanks, Brian.

Brian Nagel -- Oppenheimer and Company -- Analyst

Hey, congratulations on managing a tough environment very well. So for my first question, and maybe a bit of a follow-up, just to understand better that the significant flex up of Q1 in the month of April in your DTC sales, are you able to look at that and say, how much -- what portion of these sales are new to Purple versus others that may have been a channel shift, meaning that customer would have otherwise gone to a wholesale door but instead it came directly to DTC.

Joe Megibow -- Chief Executive Officer

Yes. It's -- well, clearly, with this kind of growth rate, we're seeing a lot of net new. So just looking on sort of a straight e-commerce standard metric basis, the percentage of traffic that is truly global unique, traffic we've never seen before and the percentage of sales that's globally unique, new customers we've never seen on our sites before, as a percentage has gone up measurably. We're reaching a higher addressable market.

Now one way we thought about looking at it is on a unit basis. Again, our revenue is distorted up as we're getting more revenue from e-commerce and again some margin improvement from that as well. What's interesting is if we look at it more on a unit basis, we're basically more in line with where we expect it to be, maybe slightly behind as we just don't have exactly the same reach. It just, again, how that financially flows through is beneficial.

So that's part of our hypothesis. It's just that demand is still there, the desire to acquire is still there, and out of just current macro necessity, there's been more drive of that demand online. What that means for the future as things start to get back to more traditional distribution channels, remains to be seen. But we do believe it has driven a lot of previously off-line customers online.

And some of that is likely some share we're getting as well. The more traditionally off-line mattress players, I would imagine, would have a tougher time converting that customer, and we believe we likely are taking share from those players.

Brian Nagel -- Oppenheimer and Company -- Analyst

That's helpful. And the follow-up question I have, and again, I get it. It's extraordinarily fluid right now and a very dynamic would be another word. But just what you're seeing with this DTC channel and the consumer response of DTC caused you at all to rethink would the business should be split DTC to wholesale over time, and how you could think about just the return -- basically what the business looks like the potential returns over time?

Joe Megibow -- Chief Executive Officer

Yes, certainly. I mean, we -- I mean, prior to the sort of reallocation of consumer behavior, so to speak, at an industry level, domestically, roughly 70% of mattress sales were through brick-and-mortar and the remaining 30% online. And as you got into more premium, the data was less clean, but it was weighted a little more toward brick-and-mortar, with, call it, maybe 80%, 85% of premium mattresses being sold through traditional brick-and-mortar channels versus online. So I think the ratio, as we were thinking about it in that somewhere between the 60-40, 70-30 split of DTC to wholesale as our ideal made sense, and we were actually leaning where we were saying if we get closer to even 50-50 this year as we aggressively expanded into wholesale demand, I think it is likely that after this all settles down, those prior ratios will shift, and that there will be more willingness for the consumer to buy online than perhaps there was beforehand.

How far the pendulum swings remains to be seen. But we -- I mean, the key is we are uniquely set up in our vertical integration, our ability to flex in and out, and our omnichannel structure that wherever that ratio lands, we feel fully set up to be able to capitalize on that.

Brian Nagel -- Oppenheimer and Company -- Analyst

Very good. Thanks for all the detail. Congrats, again. Stay safe.

Joe Megibow -- Chief Executive Officer

Thank you.

Craig Phillips -- Chief Financial Officer

Thank you.

Operator

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

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Hey, guys. Thanks for taking my question. And let me add my congratulations as well on the execution and the momentum in the business here. I want to ask a couple of questions on the wholesale side.

I guess, first of all, can you talk about the line of sight you have to door growth going forward with about 1,800 today, again, understanding that it's difficult to forecast, but do you have a rough idea of perhaps how many additional doors you might be able to add in the quarters ahead here?

Joe Megibow -- Chief Executive Officer

Yes. I'm just going to lean back on the prior comment, which is, I think, it's -- at the heart of this is flexibility. So there is a scenario that wholesale takes a while to fully rebound and our productivity per store is less than we had been trending earlier. In which case, just that on its own means.

We'll likely, as we ramp up our raw capacity, that we could expand into more stores if we're not seeing the pull-through the same way. I think there are scenarios alongside that where DTC as a percentage remains elevated at levels higher than we had anticipated. In which case, that will eat up much of our capacity even as we expand. And we would elect to, as we've done in the past, throughout our wholesale growth up until we continue to expand our capacity.

And there's many combinations throughout. So I think we're ready and willing to see how this plays out. And I do think there's a wide variety of scenarios. The key is we can easily flex in as appropriately.

And as we have done for the last year, we're not going to get ahead of our skis, and we're going to ensure that we are set up to meet our customers' demands, our customers, whether they be our wholesale partners under SLAs or our direct-to-consumer customers and make sure we're appropriately scaling a business against our capacity.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Great. That's helpful color, Joe. And recognizing that you all don't have a tremendously long list of retail partners that you're working with today, I was hoping you could give a little bit of commentary around the financial terms that you're working with these partners, your perception of their financial health, and how those conversations are going?

Joe Megibow -- Chief Executive Officer

Yes. It's -- I mean we're outsiders as is anyone else. So what I will say is we've been fortunate in having great partnership with our wholesale partners on the strength of the demand of our business and the desire of our partners to continue to buy from us, and play along and match promotions and other merchandising that we have going on. We're largely current in our receivables, which we're really proud of.

And we are continuing to get paid against terms from our retail partners. Really almost entirely across the board. So that's a positive sign. I mean, that said, we all read in the news the casualties that are happening in brick-and-mortar retail right now.

And I think all brick-and-mortar retail is at some level of risk until it's not. And we're watching that cautiously and trying to manage as responsibly as we can. But so far, it's been relatively positive signs for us. And from our point of view, so long as we can continue to operate the business and our partners are being good partners and keeping current, we, again, feel set up for success.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

I could squeeze one more on that topic of the brick-and-mortar side. How have your stores been performing? I understand it's a small portion of the business, but how have they been performing? Are any of them reopening at this point? And how, if it all, has the appetite to open Purple-branded stores chains looking forward?

Joe Megibow -- Chief Executive Officer

Yes. It's -- I mean, it's always been more around getting the brand story out in major metros and a place to really bring the full assortment to life. We've been pretty conservative in the pace of growing. We had opened five in Q4 last year and had indicated sort of on a quarterly basis about that pace.

In Q1, we did not open any. And with COVID hitting, we paused all openings. So -- and then three of those five are in California, so they've been shut down as per state guidelines. The two that are in Utah are, again, it's a very small sample size, but it's an interesting benchmark.

They -- even without shelter-at-home in Utah, we saw store traffic and sales dropped by, say, 50% as things began to really change. But what's been interesting is on a week-by-week basis sequentially, we've continued to see sales grow and as people are starting to venture out of their homes, just even this last weekend, was getting within stones throw of a normal weekend in one of our two stores. So it's been good to see that while other decline, we're seeing progressive trends upward, but it's a very, very small sample size. As to appetite moving forward, the other part of your question, again, we continue to look at this conservatively.

I think opportunistically, there's likely going to be some terrific deals to be had out there. And I suspect there will be more availability. So we're going to look carefully and take advantage of opportunities should they show up, which may accelerate a little bit. We certainly haven't lost taste for it.

We've -- we don't believe brick-and-mortar retail is going away and our showrooms to date have been very successful for us.

Operator

The next question comes from Curtis Nagle with Bank of America.

Curtis Nagle -- Bank of America Merrill Lynch -- Analyst

Good afternoon. Thanks very much for taking my questions. So I guess just a quick one on working capital use or contribution for the rest of the year, and how to think about that. Obviously, you generated a ton of cash in April, right? That's obviously not going to be sustained given some of the comments you made.

So just generally, how do we think about that, at least at the high level for the rest of the year?

Joe Megibow -- Chief Executive Officer

So even at a high level for the rest of the year is a tricky one. And as we said, we're not giving guidance for the rest of the year. We, as you said and as you picked up, what happened in April, some of that was some timing events, some of that was just the strength of our business. We think it's a good sign of our ability to flex in.

And certainly, we have demonstrated over the last 12 months that we are capable of producing cash and have consistently done that. So we expect to continue forward. That said, some of it is timing on -- we've held back from a cash basis on the capex investment. We -- again, as I said, we're looking to invest into the manufacturing facility, which we expect we'll be leaning back into now and, again, these showroom or other opportunities may present themselves.

So we're not making any commits right now exactly as to the timing of those cash expenditures. It's slightly less than what we had originally forecasted. Some of it just rolls into next year. But we'll be responsibly looking at that as the year plays out.

Craig, anything you want to add to that?

Craig Phillips -- Chief Financial Officer

Yes. I was just going to add that we are, as Joe said, going to continue to maintain or continue to monitor where we are from a liquidity standpoint. We are beginning to invest in those things that we postponed, but we are not -- certainly not going to take our eye off of sort of the fact that this -- if the market were to either stay where it is or to retract again on a short-term basis, we've got to make sure we manage the liquidity and are able to flex up and down, thankfully, very quickly. So we're not giving guidance, but we are going to make sure that we do not have any liquidity issues.

Curtis Nagle -- Bank of America Merrill Lynch -- Analyst

OK. Understood. And then just maybe a quick one on gross margin for 1Q. Maybe I didn't, I guess, set my expectations right, but just looked like it came in a bit lower than I expected.

So just wondering if there's anything that drag down the margin just a little bit on the grosses?

Craig Phillips -- Chief Financial Officer

Yes. There's a couple of things that are more onetime items. It's several small things. One was we changed the way we were accounting for some marketing and sales expense that at the end of the year last year, we did a small catch up in the quarter, moving it out of a contra revenue and moving it down below the gross margin line.

That was one small one. And then in the fourth quarter, we did our annual warranty liability reserve and actually had a benefit from that. We have been experiencing warranty costs less than what we had previously estimated. So we had a pickup in the fourth quarter.

So those were 2 benefits in the fourth quarter to the gross margin. And then in the first quarter, we had a voluntary product adjustment that we booked the reserve for. And then there was also pressure at the end of the quarter, in the second half of March, where we were producing hardly any beds, and we are much less efficient on our overhead costs, and we're not producing debt. So there's pressure there as well.

So most of those are all onetime and should expect it to get back to a normal gross margin rate going forward. But excluding those, it was fairly comparable from quarter-to-quarter.

Curtis Nagle -- Bank of America Merrill Lynch -- Analyst

Understood. Makes little sense. Thanks very much. Appreciate it.

Joe Megibow -- Chief Executive Officer

Thank you.

Operator

This concludes the question-and-answer session. I would like to turn the conference back over to Joe Megibow, CEO, for any closing remarks.

Joe Megibow -- Chief Executive Officer

Thank you so much. I could not be more proud of how the Purple team has come together. The work we've accomplished together over the last one and a half years since I've joined has really built an amazing foundation for success and giving us amazing flexibility. I think recently, the team has proven us as they have found new ways to work and adapt, and just perform incredibly well.

So I'll leave you with saying to all our customers and partners, as well as, our employees stay healthy, be safe, and sleep well.

Operator

[Operator signoff]

Duration: 49 minutes

Call participants:

Brendon Frey -- Investor Relations

Joe Megibow -- Chief Executive Officer

Craig Phillips -- Chief Financial Officer

Seth Basham -- Wedbush Securities -- Analyst

Bobby Griffin -- Raymond James -- Analyst

Brian Nagel -- Oppenheimer and Company -- Analyst

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Curtis Nagle -- Bank of America Merrill Lynch -- Analyst

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