Purple Innovation, Inc. (PRPL) Q2 2019 Earnings Call Transcript

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Purple Innovation, Inc. (NASDAQ: PRPL)
Q2 2019 Earnings Call
Aug 13, 2019, 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 second-quarter 2019 earnings conference call. [Operator instructions] It is now my pleasure to introduce your host, Brendon Frey of ICR. Please go ahead.

Brendon Frey -- Investor Relations, ICR

Thank you for joining Purple Innovation's second-quarter 2019 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 second quarter of 2019 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 measures can be found within the earnings release and 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 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 Craig Phillips, our interim chief financial officer. Following our prepared remarks, we'll be happy to take your questions. As you saw from our earnings release, the positive top-line momentum we experienced early in the year continued during the second quarter.

Our growth was fueled by the combined work we've done to heighten awareness of the Purple brand and create even greater demand for our differentiated product offerings and to strengthen our manufacturing and fulfillment capabilities. Financial highlights from the second quarter include: net revenue increasing 36% year over year to $103 million; gross margins expanding 80 basis points compared with the first quarter; operating expenses as a percent of net revenue declining to 44% from 48% last year. This was achieved even as we incurred a significant increase in noncash stock expense and the shift of approximately $3 million in marketing spend out of the first quarter this year into the second quarter; finally, on a non-GAAP basis, adjusted EBITDA, which excludes stock-based comp and certain nonrecurring items, improved $9.7 million to $6.2 million, which was ahead of our expectations. Looking at our recent success in more detail, starting with our top line.

Revenue is once again driven by growth in our wholesale channel as this business continues to benefit from the addition of new doors and strong sell-through at existing locations. Since the beginning of 2019, we have added more than 650 new doors to our wholesale footprint, including just over 180 in the second quarter. As we have stated in prior quarters, we believe that an omni-channel approach to retailing is essential to our brand, and that includes providing a convenient way for our customers to feel for themselves how different the Purple grid and our innovative comfort technology is from the rest of the market. With approximately 1,400 wholesale doors today, we have established a physical presence across the U.S.

through our relationships with leading retailers such as Mattress Firm, Macy's, Furniture Row, Home and Bed Bath & Beyond that allow us to reach a significant percentage of our target market with around 4,500 of our beds actually on display for customers to experience. On top of this recent expansion, we continue to experience very good sell-through for our products in our existing doors, which led to strong replenishment orders during the first half of 2019. In terms of our DTC business, second-quarter sales were down 5% year over year as we had strategically planned, but up 18% compared with the first quarter as we continue to deploy specific initiatives aimed at reaccelerating growth of this channel. For example, during the second quarter, we continued to test more heavily into targeted promotions to both traffic and conversion, which has proven to be both revenue and margin-accretive.

We also moved up the start of our July 4 sale compared with a year ago to be more in line with the rest of the industry. This decision contributed to our June performance and provided the business with momentum at the start of the third quarter. Another recent highlight was the recent opening of the Purple factory store, our first stand-alone company-owned showroom location. The factory store, which is near our manufacturing facility, has allowed us to find new revenue streams on scratch and dent merchandise that has also allowed us to merchandise our new product as well.

In its first month of operation, the store generated above-industry avenue revenue, with zero advertising and no grand opening events. We recently put up a billboard on the main interstate through Salt Lake City and immediately saw a sharp acceleration in both traffic and sales. We are very excited by the early performance of the store and what this means for our future showroom plans, which I'll discuss in more detail later in the call. For now, I'll turn the call over to John, who will provide an update on our manufacturing and fulfillment capabilities.

John Legg -- Chief Operating Officer

Thanks, Joe. It's a pleasure to be addressing everyone again. As I outlined on the Q1 call, our team made great strides early in the year enhancing product quality, operational efficiency and timely fulfillment. During the second quarter, our work continued to yield improved results.

First, we posted another quarter of record production, which enabled the company to capitalize fully on the increased demand for our products, and we achieved this output without increasing our labor costs, thanks to efficiencies in our production line from improved processes and increased automation. This has allowed us to better control costs and further improve yields on both a year over year and sequential basis. Second, we've continued to realize greater savings through better sourcing of our direct materials, for example, in our domestic raw materials and sourcing agreements. Third, following the significant improvement in Q1 when we achieved our fulfillment service-level agreements over 90% of the time, we've continued to get better, hitting approximately 96% in the second quarter.

The successful execution of our internal initiatives, combined with the work being done by our new 3PL partner, has helped with accuracy, timeliness and cost. I'm confident that we can maintain and I anticipate continued improvement upon this current high level of performance. Finally, in response to our heightened outlook for 2019 and increased optimism around our long-term growth prospects, we are pleased to report that we completed the buildout of our fifth proprietary Mattress Max machine, and it successfully went online a few weeks ago. In addition, we have already started the process to further increase production capacity by kicking off the projects for building our sixth and seventh Mattress Max machines and expect to bring them online in early stages next year.

I am pleased with the advancements we have made toward becoming a world-class manufacturing organization in this short period of time. While there's more work to be done, I'm very optimistic about where Purple is headed, and I am confident that our team can continue achieving our strategic objectives. Thanks, and I'll turn it back over to Joe.

Joe Megibow -- Chief Executive Officer

Thanks, John. Looking ahead, we are committed to further strengthening our growth platforms and capabilities with a focus on four key areas: product innovation, omni-channel retailing, organizational effectiveness and brand development. Let me provide an update on each of these. Starting with product innovation, we have many technologies and products in the pipeline that we are excited about, starting with the new Purple pillow expected to launch in the fourth quarter, which we believe will be our best pillow yet, both in comfort, innovation and mass appeal.

With mattresses, our pipeline includes a reassortment strategy which we'll roll out in Q3 that will simplify and better articulate the benefits of our current models, as well as all-new mattress models coming over the next year ranging from improvements driven from our years of listening to customer feedback to new inventions that we are very excited about. Beyond mattresses, we are also leaning hard over the next year into our existing nonmattress categories such as cushions, as well as new categories that we expect to launch in 2020. For omni-channel retailing, we will continue our efforts to service the customer wherever and however they want, including continuing to aggressively expand our retail partner doors, significant improvements to our website and opening company-owned showrooms. With respect to wholesale, on top of growing same-door sales, our current focus is both deepening our relationship with our national players while building relationships with strong regional players that will allow us to expand our physical reach in areas of the country not serviced by our existing partners.

We have found a great symbiotic relationship between DTC and wholesale, with each channel supporting the other. As such, we will continue to invest in the development of our online and showroom capabilities. Last month, we hired Jimmy Drake as vice president of e-commerce, a talented digital leader who is spearheading our digital initiatives, including rebuilding and relaunching purple.com. And then under the guidance of our recently appointed chief retail officer, Tres White, we are continuing to expand beyond our already successful factory store.

Over the remainder of this year, our plan is to open additional company-owned showrooms in major metropolitan areas. These showroom locations are designed to help bring our brand and product to life in support of all of our channels and will begin primarily in locations in the west as we test and learn. With respect to organizational effectiveness, we have continued to fill key roles, as well as mature and build our core functions. In addition to Jimmy, we also recently hired Burke Morley as VP of brand and executive creative director.

Burke has an impressive background of brand leadership at iconic companies including most recently Sonic Drive-in and Nike, American Eagle and Hollister earlier in his career. We have also placed important roles in project management, quality, safety, operations and technology. Furthermore, following the assessment of our controls and processes by an outside consulting firm earlier this year, we have been implementing process improvements throughout the organization. This includes controls to our accounting close process and policies and procedures to improve workflows and accuracy.

And finally, for brand, starting with Burke's hiring, we are working on building the in-house talent in order to better align our brand positioning and creative with the unique, differentiated and premium benefits of our products, especially the Purple grid. In addition, we have signed with a digital agency and are actively exploring relationships with a variety of creative agencies. In summary, we believe our strategy is working. It has been a solid first half of 2019 as our team has been successfully executing against what we presented late last year.

We have taken important steps toward improving operations and capabilities across the board, which is reflected in our revenue growth and improved cash position, and we expect to continue to see improvements as we mature and grow. With the organization on much stronger footing, combined with a stronger balance sheet, I am confident that Purple is well-positioned to capitalize on the numerous near- and long-term growth opportunities in and out of the bedroom that we believe lie ahead. Craig will now review the financials and our guidance in more detail.

Craig Phillips -- Interim Chief Financial Officer

Thanks, Joe. As you mentioned earlier, for the three months ended June 30, 2019, net revenue was $103 million, up 36%, compared to $75.8 million in the prior-year period. The revenue increase is primarily due to continued wholesale door expansion, combined with higher replenishment orders following strong sell-through during the quarter. The second quarter of this year also benefited from the earlier start to our July 4th sale compared with the same quarter last year.

Gross-profit dollars were $42.8 million during the second quarter of 2019, compared to $31.8 million during the same period in 2018, with gross margin of 41.5% versus 42% in the second quarter of 2018. The slight year-over-year decrease in gross margin was mainly attributable to a shift in sales mix to more sales with wholesale pricing, partially offset by efficiencies in operations and logistics. Wholesale channel revenue comprised approximately 38% of net revenue for the quarter, compared with approximately 11% last year and 36% in the first quarter of 2019. Operating expenses were $45.1 million in the second quarter of 2019 versus $36.5 million in the prior-year period.

The increase in operating expenses was mainly driven by a $6 million increase in noncash stock-based compensation expense, as well as the incremental $3 million in marketing investment we discussed on our last call, which shifted out of the first quarter and into the second quarter. The increase in noncash stock-based compensation expense relates to Class B common stock distributed by InnoHold, the current and former employees of Purple during the second quarter of 2019 in exchange for the cancellation of their units in InnoHold. This transaction is explained in more detail in the 10-Q under InnoHold incentive units. Marketing and selling expenses as a percent of net revenue improved 570 basis points to 34.9% from 40.6% in the second quarter of 2018, driven by improved efficiencies of our marketing initiatives and higher net revenues from the wholesale channel, partially offset by the aforementioned marketing spend shift.

During the second quarter, we reported an operating loss of $2.4 million, compared to an operating loss of $4.7 million in the second quarter of 2018. After adjusting for legal fees, equity incentive compensation, interim CFO costs and severance and executive search costs, adjusted operating income was $5.3 million, compared to an adjusted operating loss of $4.1 million in the second quarter of 2018. During the second quarter, we recorded expense of approximately $3.7 million from a change in the fair value of the incremental loan warrants issued in conjunction with the amended and restated credit agreement we announced in February 2019. Inclusive of this noncash expense, net loss for the quarter was $7.3 million, compared to a net loss of $5.6 million in the year-ago period.

EBITDA for the quarter was negative $5.2 million, compared with negative EBITDA of $4.1 million in the second quarter of 2018. Adjusted EBITDA, which excludes the same nonrecurring cost I just mentioned, plus warrant liability, was a positive $6.2 million versus negative adjusted EBITDA of $3.5 million in the same quarter last year. Moving to our balance sheet. As of June 30, the company had cash and cash equivalents of $20.3 million, up from $12.2 million at March 31, 2019.

Our cash position at the end of the second quarter compared with the end of Q1 was primarily driven by the positive EBITDA results in this quarter and an increase in receivables net of an increase in payables and accrueds. Net inventories totaled $25.1 million at June 30, 2019, compared with $22.9 million at March 31, 2019. The increase in inventory reflects the strong top-line growth we experienced in the second quarter, particularly in our wholesale channel and our expectation for continued growth over the remainder of the year. Turning to our guidance.

Based on first-half results, combined with the expectation for continued growth during the second half, including the positive impact from further wholesale door expansion and the opening of several company showrooms throughout the third and fourth quarters, we now expect revenue to be in the range of $400 million to $425 million. Based on the increased revenue outlook, combined with continued operational improvements, we now expect adjusted EBITDA between $24 million and $27 million. Operator, I believe we're now ready to open the call for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Seth Basham with Wedbush Securities. Please proceed with your question.

Seth Basham -- Wedbush Securities -- Analyst

Thanks a lot, and good afternoon. Congrats on a good quarter. A couple of questions. The first one is thinking about the trajectory here for the DTC business.

Obviously, you've shown some great strength in the wholesale DTC, and it's down less than it was in the first quarter on a year-over-year basis. Should we be thinking about that this is reflecting positive growth year over year in the back half?

Joe Megibow -- Chief Executive Officer

Yeah, we -- so yes, we are expecting the second half to -- for positive growth overall as we continue to reinvest in it, again, with the new team we put in place and some new partners we're bringing onboard. We're ready to really take this seriously again. So that is our expectation.

Seth Basham -- Wedbush Securities -- Analyst

Got it. And from a marketing standpoint on the DTC side, can you touch on what you plan on doing differently to get better returns on that advertising as you start to propel that business higher again?

Joe Megibow -- Chief Executive Officer

Yeah. So certainly, part of the decision, as we've leaned very successfully into our wholesale/retail strategy, has been a choice to pull back on some of the marketing in DTC, and we allocate that investment elsewhere. Part of it is going to be putting some of that money back in to DTC, as well as the showrooms that we have to continue to build that brand demand, which is driving traffic both to our sites and to our partners in the retail stores. So some of it is just a matter of spend.

Some of it is we've been getting much more focused on the efficiency of what we do. And we get more sophisticated, and I spoke through, as I mentioned in the prepared remarks, digital agency that we're working with now just to up our game in terms of our sophistication levels, as well as new technologies and tools we've continued to invest in, in terms of better attribution and efficiency measurement. And finally, it comes down to the site itself as well, as we improve our landing pages, the site journey, better service our customers as they engage with the brand and learn about our products. There's a tremendous opportunity for us to just get more laser-focused on getting it right for our customer as they engage with us online.

Seth Basham -- Wedbush Securities -- Analyst

Got it. That's helpful perspective. Thinking about gross margins here, we're continuing to see a little bit of pressure but not nearly as much as in the first quarter. Going forward, would you expect gross margins to start to inflect positively with all the operational improvements you made?

Joe Megibow -- Chief Executive Officer

Yeah. And Craig can chime in as well. But I mean we -- first of all, let me say, we're very pleased with the work we've done on getting more efficiencies out of the business, both in terms of scale, as well as just the overall economics. And John and his team have done a terrific job in really maturing this company.

I do want to be clear, we're not a mature company trying to squeak out efficiencies. We're still very much in aggressive growth mode. So as we continue to invest in growth, that creates some opportunity for choice on are we optimizing for margin or growth, and growth is our priority. We do still believe that we will continue to get scale efficiencies regardless.

Craig, do you want to add anything?

Craig Phillips -- Interim Chief Financial Officer

Yeah. No, I agree with you completely. And what I would add is that in the second half of the year, we are going to be bringing on some additional equipment. It should add some more efficiencies.

So we do expect the gross margin to continue to improve.

Seth Basham -- Wedbush Securities -- Analyst

Got it. And then last question for me for the time being is just regarding G&A, in particular, the G&A line. Excluding the stock-based comp, it looks like you had some material reduction in G&A. Can you give some more color as to what's going on there and how we should think about G&A going forward?

Joe Megibow -- Chief Executive Officer

Yeah. I mean obviously, we've brought it down substantially since I joined the company. We -- as I said back then, we were a little top-heavy and had tremendous opportunity for just efficiencies and improvements in G&A. I think we've been able -- in some areas, we've been able to successfully grow the business with what we have, which has helped, but we expect we're going to be doing a lot of investments as we grow the business.

It's obviously going to require more labor and just more at the corporate level. Craig, do you have anything specific that I'm not thinking of?

Craig Phillips -- Interim Chief Financial Officer

Yeah. When you compare it to the prior year, a lot of the improvements you're seeing, a lot of it in the prior year, they were costs that were not recurring related to the transaction. So we do have a few open headcounts that we're looking to fill, but as Joe mentioned, it may come up a little bit. But as far as comparing to prior year, the prior year was just higher due to that transaction.

Seth Basham -- Wedbush Securities -- Analyst

Understood. I'll leave it there for now. Thank you.

Joe Megibow -- Chief Executive Officer

Thanks so much, Seth.

Operator

Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed with your question.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Hi, good afternoon, everyone, and congratulations on continued nice results here this year.

Joe Megibow -- Chief Executive Officer

Thank you, Brad.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

I wanted to follow up some on what's going on in DTC. Clearly, making some nice improvements there operationally and starting to reaccelerate the growth. I guess where have you found the greatest opportunities for efficiencies in DTC? And as we start to drive more growth, where do you think there still are more opportunities to find efficiencies?

Joe Megibow -- Chief Executive Officer

Yeah, we -- I mean, honestly, we're in very early chapters with what's possible. If you were to take a look at the site as it was presented and the content on it when I joined, it's been a very modest bit of changes, really, just some lightweight optimization as we've really been focusing much more on the fundamentals of manufacturing and operations and scale. So I think there is an enormous amount we can do. I mentioned in the prepared remarks that we are planning to completely relaunch purple.com, and that's a relaunch from a technical platform capability, it's a relaunch from a design capability, and we're continuing to tune up our brand presentation.

So I mean it's really on all dimensions. We expect us to be better servicing our customer and make sure we're effectively articulating what's so differentiated about our product. To date, it's really been mostly on the marketing efficiency side, just slightly better landing pages and focusing much more on effective spend and cross-channel attribution of that spend. But again, very, very early chapters.

There's a -- it's a pretty big opportunity for us.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

That's great. And then on the wholesale front, I guess could you talk a little bit about the pace of door growth that you're driving right now, and perhaps with more manufacturing capacity coming online, your ability to potentially accelerate additional door growth as we look forward the next year or so?

Joe Megibow -- Chief Executive Officer

Yeah, we -- well, certainly, the growth has been pretty spectacular considering end of last year, we were in the very well sub-100 range. So the pace we've been able to bring stores on in terms of just our ability to load in the beds on the floor and get these stores trained has been impressive, and kudos to the team for their ability to scale in this regard. We continue to see a lot of demand out there from our retail partners, certainly with our largest partner, Mattress Firm. They've continued to express interest in expanding our relationship, and as we continue to build out our capacity, we intend to support that.

And we've had a number of regional strong players around the country who continue to express interest as well. So we -- most importantly, we're making sure that we are managing to what we can deliver to make sure we're continuing to keep quality where it should be and make sure we're delivering timely to our customers. And our record now is phenomenal. That's a big thing we've cleaned up.

But as we've mentioned with Max 5 now fully operational and our work toward getting Max 6 and 7 done early next year, we have a lot of capacity coming online.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

That's great. And just lastly from me, a question on capital structure. Obviously, a much more positive outlook for both revenues and EBITDA today than a couple of quarters ago, much more solid financial footing. How are you feeling about the capital structure? And any potential areas that you may want to change going forward?

Joe Megibow -- Chief Executive Officer

Yeah. Well, I mean, certainly, from a balance sheet point of view, that we're producing cash and continuing to stabilize the business, we believe we've got good opportunity for continuing to invest in the work we've taken on and our many initiatives. Beyond that and from a broader capital structure, we are continuing to explore options in terms of ways to revitalize that, but there's nothing specific that we have in mind right now.

Brad Thomas -- KeyBanc Capital Markets -- Analyst

That's helpful. Great. Thank you so much, Joe.

Operator

Our next question comes from the line of Peter Keith with Piper Jaffray. Please proceed with your question.

Peter Keith -- Piper Jaffray -- Analyst

Hi. Thanks. Good afternoon, everyone. I had a couple of questions.

I want to just first start off with the updated sales guidance. So nice work on raising the outlook. So it looks like there's implied some pretty decent acceleration in the back half of the year from the first half, and I was hoping to get a little more color around that. I think it's a function of easier compares or as you mentioned, maybe DTC should be stronger or even the wholesale accelerating further.

Joe Megibow -- Chief Executive Officer

Yeah. I think it's -- first of all, hi, Peter. Thanks for your questions. The -- I think it's a little of all of the above.

I mean we've just loaded in a significant number of new stores on the wholesale side, and the expectation is that those will ramp meaningfully, and a few more stores we expect to continue to add. We're continuing to see strength in our existing store footprint. The same-store sales are continuing to be promising. With Max 5 coming online, I mean, we've got a decent amount of more capacity.

So in terms of making sure we're fully supporting the demand that's out there, we see a lot of opportunity. And we're -- again, we had -- as I mentioned in the earlier comments, we had shifted spend a bit into investing in wholesale. And now that we've got the team in place and we're investing back into our digital marketing capability in DTC, we expect to meaningfully increase our spend against a capability that we'll perform.

Peter Keith -- Piper Jaffray -- Analyst

OK. That's helpful. Looking at the wholesale opportunity, certainly, the door growth is impressive. If we just go back a year ago, it seems like you guys may have been one of the first digitally native players that was looking to go wholesale.

That does seem to be becoming a more popular theme among digital native players. Are you finding it with some of the early negotiations becoming a little bit more competitive? Or on the other side, do you feel like you're starting to get some momentum where you've proven yourself out?

Joe Megibow -- Chief Executive Officer

Yeah. It's a great question, and thank you for that. I think it's a little of both. We -- early on, and this is what we said at the end of last year as we started to lean into wholesale, as you think of the newer Internet players, what we were observing was much more of what I would think of as a CPG strategy, which is really a distribution model of getting boxes on shelves and which has been a game of linear inches and presentation.

Ours is a very different strategy in that we felt we had a premium meaningfully differentiated product. And our goal is to get as many beds on the floor on display as we could, as close to as much of our target market domestically as we could. And that -- which meant a different group of retailers and a different kind of partnership. And what we found is it worked.

It was the biggest single demand that our customers are saying is we get it, but we'd really like to try to lay on it first and do that in a well-presented way. And our partners have been terrific in helping to present that and educate the customer. But also, we are driving significant foot traffic into our partner stores, and we think that's terrific, and we're converting well. So it's been -- it really has been very symbiotic in that we've got great retail presentation and great sales associates out there who understand the benefits of our product.

But we are doing our part in driving the demand on the brand side and driving the foot traffic.

Peter Keith -- Piper Jaffray -- Analyst

OK. That's helpful. A separate question is just on the antidumping duties that were assessed on the imported Chinese mattresses. You guys don't have a ton of exposure sub-1,000 or even those that are sub-500.

But Joe, I wanted to just get your thoughts on how you think those duties, if they may or may not, have any impact on your demand trends looking out over the next year or two.

Joe Megibow -- Chief Executive Officer

Yeah, it's -- I mean as I think you stated, since we're not really competing in the bottom portion of the market where I think you've had these lower-cost fully imported foam mattresses, hasn't really hit us. We certainly do some components that we have sourced overseas and some nominal impact that we've seen but nothing that has been overly concerning. What we -- we do like that we're seeing more push on domestic in general as a U.S. manufacturer with U.S.

labor and sourcing a significant number of our components domestically. The shift into the domestic manufacturing market has been great for us as it's just building more scale and capacity for us as well. But overall, I think we've been pretty immune to it, and we'll let the bottom shake out as it does.

Peter Keith -- Piper Jaffray -- Analyst

OK. Very good. Lastly for me, just how are you guys viewing input costs? It seems like some players are starting to see some relief on that front, some downward pressure on certain inputs. Any insight there would be helpful.

Joe Megibow -- Chief Executive Officer

On inputs on raw materials-type inputs? Or --

Peter Keith -- Piper Jaffray -- Analyst

Yeah, raw materials. That's right.

Joe Megibow -- Chief Executive Officer

Yeah, we've -- and this is part of the terrific work that John and his team have done. I mean I think we -- yeah, as we've both grown in scale and have had a much better sourcing strategy and taking the right partners, we've been able to continue to negotiate more stable and better terms, and I think that has helped. I think in some areas, we have found opportunities to go overseas, not necessarily into China as there are less risky areas we've been able to go into. But we've been able to dramatically lower costs on some components by going overseas, which has been helpful, certainly on packaging and some things that are a little less core to the quality of our product.

So yeah, it's been a combination of maturing the business, and it turns out, there was quite a bit of headroom, which is part of what's flowing into our margin improvement.

Peter Keith -- Piper Jaffray -- Analyst

OK. Very helpful.

Joe Megibow -- Chief Executive Officer

By the way, one other point while I'm thinking of it, we have also been able to just, in general, get more out of less. Labor is a perfect example of that that we have competitively increased our labor rates pretty dramatically. But alongside that, we've been able to have significant improvements. And the truth in attrition, which means we're getting higher quality labor and more stable labor, and as a result, have meaningfully reduced the labor cost per unit.

Peter Keith -- Piper Jaffray -- Analyst

All right. That's helpful, Joe. Keep up the good work. Thanks a lot.

Joe Megibow -- Chief Executive Officer

Thank you.

Operator

[Operator instructions] Our next question comes from Keith Hughes with SunTrust. Please proceed with your question.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Thank you. You made several references to the Mattress Firm. They're obviously about to do a big product change putting Tempur and Sealy back on the floor. Do you have any feel of how that's going to affect your position in 2020?

Joe Megibow -- Chief Executive Officer

Yeah. Hi, Keith. Thank you. So we -- yeah, obviously, it's something that I'm sure they discuss a lot and we've discussed internally.

I mean our general view is we think Tempur has a great product, and I think they've got a good customer base. Our belief is that getting more qualified customers looking for premium offerings into the store is very good for us. We'll happily put our bed up against any premium bed out there. And I think in a setting like Mattress Firm and with our proven track record there, we've got a good momentum into their fleet.

I think we overall think it's a positive thing.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

You don't expect to lose any slots as a result of this?

Joe Megibow -- Chief Executive Officer

Retail has some fundamental rules, and so long as we continue to both drive foot traffic and meaningfully convert and we see no sign whatsoever of that slowing, we don't expect to see any decline whatsoever. And as we've stated and continue to see, we're continuing to lean into more and more stores.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

OK. Congratulation on the numbers. Thank you.

Joe Megibow -- Chief Executive Officer

Thank you so much.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Joseph Megibow for closing remarks.

Joe Megibow -- Chief Executive Officer

So thank you so much. And to reiterate, we are very pleased with our progress, and we believe our strategy is working. We're thrilled with the growing demand for our amazing products and the ongoing support of our very happy customers. I've continued to state that this is a foundation-building year, and we are successfully executing against that.

Certainly, we still have more to do, and our confidence continues to grow regarding our ability to execute and pursue our many planned initiatives. We have a great team, and I'll thank them again for their hard work and positive results. So thanks again.

Operator

[Operator signoff]

Duration: 39 minutes

Call participants:

Brendon Frey -- Investor Relations, ICR

Joe Megibow -- Chief Executive Officer

John Legg -- Chief Operating Officer

Craig Phillips -- Interim Chief Financial Officer

Seth Basham -- Wedbush Securities -- Analyst

Brad Thomas -- KeyBanc Capital Markets -- Analyst

Peter Keith -- Piper Jaffray -- Analyst

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

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