Participants

Cody McAlester; IR; ICR

Rob DeMartini; CEO & Director; Purple Innovation Inc

Todd Vogensen; CFO; Purple Innovation Inc

Brad Thomas; Analyst; KeyBanc Capital Markets Inc

Seth Basham; Analyst; Wedbush Securities Inc.

Matt Koranda; Analyst; Roth MKM

C.J. Dipollino; Analyst; Craig-Hallum Capital Group LLC

Brian Nagel; Analyst; Oppenheimer & Co., Inc.

Bobby Griffin; Analyst; Raymond James Financial, Inc.

Michael Lasser; Analyst; UBS Securities

Presentation

Operator

Good afternoon, ladies and gentlemen. Welcome to Purple Innovation First Quarter 2024 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Cody McAlester of ICR. Please go ahead.

Cody McAlester

Thank you for joining Purple Innovation's First Quarter 2024 earnings call. A copy of our earnings press release is available on the Investor Relations section of portals website at www.purple.com.
I would like to remind you that certain statements we will make in this presentation are forward looking statements. The 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 we made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements included in our first quarter 2024 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 reference to non-GAAP financial measures such as EBITDA, adjusted EBITDA, adjusted gross margin, adjusted net income and adjusted earnings per share. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures is available within the earnings release, which can be found on our website.
With that, I'll turn the call over to Rob DeMartini, Purple Innovation's Chief Executive Officer.

Rob DeMartini

Thank you, Cody, and good afternoon, everyone. With me on the call today is Todd Vogensen purpose Chief Financial Officer. First quarter marked an encouraging start to 2024. With the second consecutive quarter of year-over-year sales growth sales were within our expected range, increasing 12.5% year over year. And if not for a shift in timing of some shipments into second and third quarter, we would have delivered sales results closer to the high end of our guidance range. Overall, demand played out largely as we expected as our new products and new brand messaging gained further traction, allowing us to continue taking share even as industry trends remain challenged, while comparisons were favorable to the slow start of 2023 ahead of the new product launch in May last year, we are clearly seeing momentum build for our path to premium sleep strategy, adjusted EBITDA for the quarter came in within the middle of our guidance range, positioning us well to meet our 2024 expectations that we outlined on our fourth quarter earnings call, which include returning to positive adjusted EBITDA in the second half of the year.
Looking at our performance by channel, direct to consumer was flat year over year. Within DTC, showroom revenues increased 11%, driven by an increase in average selling price from both price increases that we instituted in January and a meaningful mix shift from our Essentials and premium collections into our higher priced Deluxe collection. Mattress average selling prices increased month by month, as did total revenues, demonstrating the growing adoption of our new product set in the showroom channel, more than 56% of our showroom locations opened for more than 12 months, comped positively in the quarter. And the total store fleet exited March up in the high single digits. Showroom performance was offset by a 4% decline in e-commerce sales, driven in part by price testing and changes to promotions that impacted sales as we continue to adjust our e-commerce strategy.
Our wholesale channel increased 33% year over year with net revenue accelerating as the quarter progressed due in part to the easier compare as accounts limited their receipts ahead of taking new product in Q2 last year. The collaborative partnerships we formed with our retail partners focused on expanding our premium assortment, continued to yield positive results for both parties. We saw revenue per door in the wholesale channel increased around 25% versus last year, supported by strength from our top accounts and a mix shift into our premium collection. We also added approximately 100 new doors late in the quarter as the reception for our new mattress line continues to drive new demand from our wholesale partners. Overall, we're encouraged with our first quarter results, particularly in light of the continued sluggish industry environment. The launch of our three tiered mattress lines, essentials, restore and rejuvenate, combined with our new sleep, better live purple marketing campaign has allowed us to take share and overcome many of the persistent negative industry trends. While broader industry growth has continued to trend negatively, there is meaningful room for further improvement across our business, and we believe we're well positioned to build on our recent trends, thanks to our differentiated products and improving brand strength.
As we look to the remainder of 2024, we remain focused on five key initiatives to drive long term profitable market share gains. First is improving the productivity of our existing showroom and wholesale doors in showrooms. We prioritized profitability over door expansions this year with only one store addition slated for 2024, we plan to drive profitability through a combination of demand driving initiatives as well as cost optimization. On the demand side, we've pivoted our showrooms to a more selling focused environment by introducing new tactics like mattress takeaway, carrying more pillows in stores and additional incentive compensation testing. We also signed a new consumer financing partnership that will be rolling out mid-May, putting purple on a more competitive footing for higher priced product. From a cost perspective, we've successfully renegotiated several leases in our continuing conversations with landlords about at additional opportunities. We've also taken actions to manage payroll and other store expenses to improve profitability with our wholesale partners. We're continuing to focus on deepening our partnerships at each functional touch point, including joint business planning, improved service delivery, collaborative marketing and sales, associate training to maximize productivity and enthusiasm for the Purple brand. We've made good progress in the quarter as we held quarterly business reviews with each of our top accounts, created a new wholesale marketing team dedicated to working with our partners to create new marketing opportunities, partnered with several key accounts to co-market for major holidays throughout the year and refocused our sales team to prioritize sales associate training in our key accounts. Second is improving e-commerce mattress conversion. In the first quarter, we focused on increasing revenue per order and improving margin with the price changes and shipping tests to drive profitability enhancements which, as we expected, has led to lower conversion rates in the near term.
In the second quarter, we'll look to enhance conversion through data enabled personalization, improved customer financing offers and streamlining our website while testing new messaging configurations and techniques. Third is driving gross margin improvement through tactics such as selective pricing actions, continued mix shift towards our premium and luxury collections and manufacturing and supply chain optimization. We've seen some early gains with these initiatives, including decreased discounting and improved production efficiency through multisource procurement and increased plant productivity. Additionally, midway through the quarter, we were able to eliminate the airfreight inefficiencies that stemmed from the product launch while also improving the efficiency of white-glove delivery service through our e-commerce shipping test and increasing carry out in our showroom channel. We're encouraged by the initial progress on these initiatives and expect to see meaningful margin improvements in the second half.
Fourth is our continued focus on innovation we're focused on ensuring our product pipeline is full of new product and sleep technology that's both innovative, desirable and margin accretive. This commitment to cutting edge solutions cements our category leadership enhances the longer-term profile of the Company and supports our longer-term profitability goals.
And fifth is improving our marketing efficiency. In 2024, we're bringing the execution of our paid digital advertising back in house, shifting more spend toward higher converting media, reallocating media based on consumer segmentation and geographical analyses and leaning into new impactful advertising with the goal of decreasing our cost of acquisition. Additionally, we'll look to drive more customer engagement through new marketing techniques. For example, in Q1, we increased showroom traffic with new exposed grid bed demos that intrigue and dry and mall consumers not yet in the market. We also saw increased traffic resulting from our Edcon campaign over the Easter holiday.
In closing, we're confident that our first quarter performance combined with the initiatives we have in place for the balance of 2024, we'll enable us to achieve our financial targets for the year. We're excited by the opportunities ahead to drive sustained profitable growth over the long term as we continue our transformation of purple into the preeminent premium sleep brand.
Now I'll turn the call over to Todd to discuss our first quarter financial results in more detail. Todd?

Todd Vogensen

Thanks, Rob. For the three months ended March 31st, 2024, net revenue was $120 million, an increase of 12.5% compared to $106.7 million last year. The increase was largely due to the growing positive response to our new product lineup coupled with an easier comparison from the year ago period ahead of the product launch in May 2023. This year's top line drivers included higher average selling prices from the performance of our premium and Luxe collections, along with an 11% increase in wholesale partner spots. And based on commentary from others about the overall market, we believe we are continuing to take market share by channel direct to consumer net revenue was consistent with the prior year period. Within D2C, e-commerce declines were offset by an 11.3% increase in showroom net revenue driven partially by the addition of five net new showrooms over the last 12 months, along with higher ASPs compared to last year, wholesale net revenue increased 33.1% in the period, driven primarily by the previously mentioned growth in net revenue per door and slight growth in the wholesale channel.
Gross profit was $41.7 million during the first quarter compared to $40.6 million during the same period in 2023, with gross margin rate at 34.8% versus 38% last year. Gross margin in the first quarter of this year was impacted by a composition of DTC and wholesale revenue that was consistent with the previous few quarters, but was more heavily skewed towards the wholesale channel than the year ago period. Wholesale revenue represented 45% of total Q1 revenues, up nearly 700 basis points compared with Q1 last year. Additionally, use of airfreight early in the quarter, liquidation of discontinued products and costs associated with products shipped in early Q2 for each headwinds to gross margin that we don't expect to recur.
Operating expenses were $64.9 million compared to $65.2 million in the first quarter of 2023. Slight decrease was largely driven by a $5.9 million decrease in G&A expense related to the nonrecurrence of Special committee costs from 2023, largely offset by investments of $3.3 million into ad spend and wholesale marketing and sales expense as a percent of net revenue, operating expenses improved 710 basis points to 54% compared to 61.1% in the first quarter of 2023.
As a result, adjusted net loss in the first quarter of 2024 was $20.4 million compared to an adjusted net loss of $14 million last year. Adjusted EBITDA was negative $13.2 million versus a negative $7.1 million a year ago. In first quarter adjusted loss per share was $0.19 compared to an adjusted loss per share of $0.14 in the first quarter of 2023.
Now turning to the balance sheet. At the end of March, we had cash and cash equivalents of $34.5 million compared with $26.9 million at December 31st, 2023. As we detailed on our Q4 call in March, we completed a refinancing in January 2024 that included the establishment of a new upsized term loan of $61 million that was used to refinance and replace our prior debt facilities while also providing the company with approximately $22 million of incremental available liquidity.
Net inventories at March 31st, 2024 were $72 million, down 17.9% compared to March 31st, 2023, and up 7.7% compared to December 31st, 2023.
Now turning to our outlook for the balance of 2024. Based on our first quarter performance, we are reiterating our outlook for the full year of 2024, we still expect 2024 net revenue to be in the range of $540 million to $560 million and adjusted EBITDA to be between negative $20 million and negative $10 million.
And now I'll turn the call back over to the operator for questions.

Question and Answer Session

Operator

(Operator Instructions) Brad Thomas, KeyBanc Capital Markets.

Brad Thomas

Hi, good afternoon and thanks for taking my question. A couple of financial questions, if I could. First on gross margin, I was hoping you could talk a little bit about some of the opportunities moving forward. Through the year for efficiencies and self-help. Obviously, as I understand, there's a mix headwind that you've been up against, but it seems that there are a number of opportunities ahead that we'd love to hear about. Thank you.

Todd Vogensen

So this time I see the reverse. I should say there was a number of things that happened in Q1 that were non-recurring items that should not recur going forward. So we do get to kind of set those aside as we look into the future quarters. But as we look going forward, we have a number of initiatives underway in our operations group, partially around sourcing and how we that are dual source and competitively source some of our products. And then in addition, in the manufacturing realm as we get further and further past the launch of our new line last year, we're gaining a lot of efficiencies. So those efficiencies in production will help from a direct labor perspective as well as in an overhead absorption perspective. And so a lot of those initiatives will really start to come to fruition. And we've already started to see some of the benefits, and we'll continue to see in Q2, we see the benefits much more significantly as we get into the second half.

Brad Thomas

That's helpful. And then regarding 2Q, is there any more you could share with us about how you're thinking about sales coming together for the second quarter?
I know generally for the industry second quarter is going to be a stronger, stronger quarter from a seasonal standpoint. And that's, I believe how things have played out for you. But anything else you can share with us in terms of what you're thinking that growth rate might be for this quarter?

Todd Vogensen

Sure. So as we look at the second quarter, I know we are going into a stronger selling period with Memorial Day and should feel confident that we're well positioned for that.
As we look at the quarter, though, there is there are a number of industry headwinds that have been noted by folks. So we're going to be working our way through that. As we step back just to kind of set some guardrails for you, we certainly expect to see some some solid, modest growth over last year as we go into Q2, though, maybe not to the same extent as the 12.5% increase that we saw in Q1.
So continuing to look at ourselves is taking share in what is a tough industry and continuing to grow revenue both sequentially and year over year.

Brad Thomas

That's great. And then maybe a last one, if I if I could just for Rob on the commentary about how your own stores have been comping positive was really encouraging. I know you've been working on exercises and training and and point of sales and advertising efficiency. But can you talk a little bit more about about what you're seeing at some of those DOORS and partners that were sort of earlier in the transition year ago as you lap that rollout of your lead?

Rob DeMartini

I'm sure, Brad, thank you. We're seeing really the longer the product has been in the market, the stronger the results and that's both in our own showrooms that have comped up positively. I think it's five out of the last six months. January was soft in showrooms, but the three months prior in the two months since have all comped nicely positive. And then you heard the numbers in my earlier talk about wholesale same-store sales were up about 25% versus same period previous year, and that was a soft shipping quarter, but it shouldn't have been that struck soft from a consumption standpoint because those older products were on the floor. And so that 25%. We're encouraged by and we want to see it continue. Obviously, some of our larger customers make that conversion later. Their business is also positive, but we think still has some healthy upside left on that.

Brad Thomas

That's very helpful. Thanks so much.

Rob DeMartini

Thank you, Brad.

Operator

Seth Basham, Wedbush Securities.

Seth Basham

Thanks, Rob, and good afternoon. And my first question is just on slot growth, encouraging signs it contains again, plus, especially our top accounts. Can you give us some more color on what's driving that, please?

Rob DeMartini

Well, I think it's I think the performance of the Restore line that people are seeing and we gain about 300 slots in the quarter. Some of those coming quite late in the quarter. So they didn't contribute much volume. But the market is certainly difficult and not growing naturally. And I think retailers are very smart to trying to find brands and items that are contributing. And we were fortunate to be part of that and saw some slight growth in the quarter. I want to reinforce that we're really pushing on slot productivity because I think the best way for long-term health is to make sure that our partners are happy with the performance. Our showrooms are performing better, where they are so we are not doing much prospecting right now, but still seeing a little bit of growth there.

Seth Basham

That's great. And then on the e-commerce side, can you give us some more color on the price testing and changes to promotions and shipping what you learned from that in the first quarter and how you adjust going forward to drive profitable growth?

Rob DeMartini

So we definitely are still learn. And I mean some of the price testing we did early on, we saw a pretty positive response. We are seeing less productivity when we're off promotion and I think we're seeing that when we're hearing the same thing from our wholesalers from. But as you know, this category so highly promoted, we are working at ways to get sharper we've cut the discount on a lot of our ancillary products sharply, and we're not seeing negative volume implications from it, mattresses a little bit tougher. It's highly sensitive to promotion right now, and I don't see a near-term end to that in the short run. So I think we got to keep our eyes on that.

Seth Basham

Yes. And then my last question is just on the inventory build from the last quarter, the end of this quarter, is that simply because of the seasonal effects and stronger seasonal sales expectations? Or there's anything else to read into it?

Rob DeMartini

Yes, I think there's two things. I think we ended the year a little lower than we wanted. So based on the demand being a little bit stronger than we wanted and what you're seeing at the end of Q1 is going into Q2, all of the holiday period or promotional periods. So a little bit of build up, but I think if you look at our track record over time, we feel Todd and I feel very confident here, Scott, great command of the inventory and we can keep it where we need it to deliver service. I think the other thing that's clear is our service to our wholesale customers is significantly better than it's ever been before. And we're trying to keep the inventories the right level to be able to keep that up.

Seth Basham

Thank you and good luck.

Rob DeMartini

Thank you.

Operator

Matt Koranda, Roth MKM.

Matt Koranda

Hey, guys, good afternoon. I'm just wondering if you could maybe touch on the cadence of growth during the first quarter. I'm just curious how you kind of perform relative to your expectations relative to the industry. And it sounds like maybe just a little bit of a lower rate of growth in April and May, but still positive thus far can you just clarify that for us and on pricing, you said you took action. Can you just clarify what pricing action we're talking about here?

Rob DeMartini

Yes, we took. So let me go backwards because I'll lose my way. If I don't. We took pricing on mattress in January in our DTC channels and because of the way our agreements work, it didn't take full effect until early March in the wholesale channel. And really what that pricing was was relatively modest, the 4%, something like that, about 4%, and it was really to get us back to our competitive benchmarks. When we launched last May 15th, we went a little bit below those benchmarks and honestly saw nothing for it. So we took that pricing back January through March. The growth in the quarter was it was good in January, I think a little bit more than low double digits. It was high double digits in February. And then high single digits in March. I don't know what really to make it that you get presence stay in there. And what we've seen in April and May is Orbitz is a little bit of softness as we were off promotion, but we still are going to grow versus the base period that we're very confident.

Matt Koranda

Did I miss part of that question map, not you got them all I think on. But I guess just clarifying the April May period was not you didn't see a negative growth?
Brent, it was Apollo.

Rob DeMartini

We're still growing a bit on that. We have grown.

Matt Koranda

And then I just wanted to cover the gross margin commentary and a little bit more detail. I know Todd mentioned some maybe some one-time items or some some items that do not recur for the rest of the year. And I don't think I heard you quantify anything, but so maybe do you want to take a crack at some bridging us on sort of an adjusted gross margin or at least just what items are not going to sustain through the rest of the year that allow the gross margins to step up sequentially?

Todd Vogensen

Sure. So we ended Q1 with margin at 34.8%. It was down 320 basis points versus last year, but about half of that was just pure channel mix. So wholesale grew from 38% of sales last year to 45% this year. And so that had an impact on the margin rate. But then the remainder of it really were things that were very isolated to the quarter. We had I airfreight very early in the quarter, we had the liquidation of some discontinued hybrid mattresses. Those are the mattresses that that were replaced by our restore line.
And then we had some costs for some products that were shipped in Q2. So I guess to give perspective the largest one of those three is the cost associated with the excess and discontinued inventory, which at this point, we've really moved through the bulk of that.
And the other thing I'd note airfreight, airfreight was really limited to January and we haven't incurred any material amount since then, not really planning on incurring any significant amounts for the rest of the year. So and each of those three factors that I mentioned are very unique and they are and the types of things that should not meaningfully impact gross margin as we go into the future.

Matt Koranda

Okay, got it. And then do you want to make it just take a crack at the cadence of gross margin improvement for the rest of the year. I know we've talked or at least qualitatively or a little bit quantitatively last call about maybe reaching 30% are exiting the year in the 30% range. But I do want to kind of help build a glide slope for folks to kind of level set of rows expectations for the remainder of the year in terms of gross margins?

Todd Vogensen

Yes, certainly, it really should progressively improve as we go across the year. A lot of the operations initiatives that we have in place should really start becoming very significant as it has a portion of margin as we get into the second half. So maybe a way to think of it. I know consensus is out there for 38% in Q2. And I think we're comfortable with the way people are thinking about that and then improving from there to be approaching 40% by the time you by the time we exit the year is how we are modeling things at this point.

Matt Koranda

Okay, very helpful.

Todd Vogensen

Thanks, Matt.

Operator

C.J. Dipollino, [Craig Capital Group].

C.J. Dipollino

Hey, everyone. It's C.J. on for Jeremy Hamblin. I wanted to touch on the consumer real quick. We all know, are feeling the effects of higher inflation. Curious what you're seeing from your competitors set in terms of promotions and discounts? And then as a follow-up to that, how are you on kind of how you're thinking about promotions and discounts moving forward?

Rob DeMartini

Well, I think, C.J., it remains very promotional, very promotional and offers have gotten. And again, this didn't just happen has been happening in the last 24 months. They're deeper longer and a significant portion of the year is quote on major promotion. We are trying to find ways to one maintain volume momentum while reducing the overall discount impact on gross margin and profitability. And quite frankly, it's strictly we don't have those answers yet, but we've as I talked about earlier, we've been reducing the depth of some promotion and taking some items off promotion. And quite frankly, it's a challenge because you do sometimes see that in the volume now we reduced some of our ancillary items, as I said before, and have not seen a negative impact. But on mattresses, it's pretty direct. And so we've got to do that cautiously. And I think until the category returns to more normal levels of demand, we're not expecting any big changes in that.

C.J. Dipollino

Yes. Okay. Got it. Thank you. That's very helpful. And then moving to the income statement looks like our marketing and sales took a sequential step down to about EUR41 million is just sort of like a new run rate that we should be taking out thinking about for the rest of bomb of the year, do you see that back now?

Rob DeMartini

We're doing a number of things as we look to control costs and that cuts across, as Rob had mentioned, some of the things that we're doing in showrooms to make our showrooms more efficient, all the way to bringing in-house some of our marketing activities and so this really should be setting baseline for us as we go forward. We'll continue to look for efficiencies. But where you're seeing, it is probably a good place to start.

C.J. Dipollino

Okay. Thank you. Very helpful. I'll hop back in the queue.

Rob DeMartini

Thank you, C.J.

Operator

Brian Nagel, Oppenheimer.

Brian Nagel

Good afternoon. I want to say, I guess I wanted to focus my questions missing, maybe some follow-ups, but just on top line, primarily, you do want to recognize the sales have been sales growth has been bouncing around here a bit, but it will go up. It was a nice improvement from what we saw Q4 to Q1. So I guess plus one to plus 12 plus 13 or so. The question is, how much of that note a how much of that is, was that improvement on internal interim improvements at purple, your versus did did that or did the sector help you out at all?

Rob DeMartini

I mean, again, if as you know, Brian, there's not a great barometer for this category at the consumption level, but I think most of what I've heard is that the category is down somewhere between 5% and 10% and maybe closer towards that high range. So I don't think we got any help from the category. I do think on a compare basis, we got some help from a pretty weak base period as wholesalers were getting ready to consuming at the same rate last year, but shipping in the last as they were getting ready to make the product shift. So I think some of that 12 percentage points is a comparison softness versus all a little more strength, but clearly that's not more than maybe three or 4% of that and probably 8% of it is sell through. I mean, you have 25% door productivity improvement in wholesale and 11% comp performance in showrooms. That's true. That's real growth in a difficult time, and we want to see that continue.

Brian Nagel

Okay. That's helpful. Then record, we have the guidance for the year. I guess the work maybe more qualitatively because we think just as a follow-up to that question, as we look through the balance of EUR24, assuming just for sake of simplicity that the sector's marketing.
Turning to turning a double tailwind. So to recharge, I mean, what are what are the key for me internally, what are what are the key factors that could help to potentially it will drive some type of accelerated acceleration that sales growth?

Rob DeMartini

Well, I think, you know, I do think that our marketing messaging needs to work harder that's working right now. It's working, but it can work harder. I don't think we're differentiating and differentiating our product enough in communicating to consumers what the benefits are. So for marketing team and I are working on that will again, I don't want to make promises yet like the guidance we have out there but we've got to get that investment to work harder. E-comm is a challenge as well. Our conversion rates of late have been weak and we've got to fix that. I'm very optimistic about the way showrooms and wholesale is performing. I'm optimistic about what we're seeing in the supply chain and what's still to come. I'm very optimistic about the way consumers react to this new product we get we do a lot of testing and we're very, very confident that this product is performing better than what ever they were sleeping on before. And we have to just get better at communicating that if we do that, it will accelerate our growth.

Brian Nagel

Got it. And then just one final question, just maybe more for Todd on the balance sheet. So but I think the guidance implies potentially positive EBITDA second half of this year, if I got that correct. But the question I have with that, how do you. How do you view that the cash balance is sufficient at this point to continue to get you through this choppy period?

Todd Vogensen

Yes, we really do believe it is. So we ended Q1 with $35 million in cash. The cash usage we had in the quarter was less than our EBITDA, less cash flow or CapEx. So we're managing cash tightly and as you point out, as we get into the second half, all plans are to get ourselves back to breakeven or better on from both an EBITDA and a cash flow perspective. So I believe we're well positioned from a cash perspective at this point.

Brian Nagel

Appreciate the color. Thank you.

Rob DeMartini

Thank you, Brian.

Operator

Bobby Griffin, Raymond James.

Bobby Griffin

Thanks for taking the questions. Rob, just first on your showroom comments on appreciate the detail there, and I apologize if I missed this question. As part of the script, but did you comment any on how the profitability is trending among those stores? Or are you seeing some of these positive comps? How's the showroom channel profitability trending it is trending in the right direction.

Rob DeMartini

We've got a lot of work left to do, but I think we moved five more stores from negative to positive in the quarter and are now more than half of them are positive. So we got a lot of work left to do, and it's it's tough. I think as I said on past calls, it's when you compare it to the historical pro forma, it's hard to tease out how much of this is brand a relative brand strength to where it was before for so much of its category consumption, but they talked about it in the script, the expose grid. We're in high price locations and we've got to find ways to get people into the stores who weren't otherwise on a mattress shopping trip that that day. And we've got some encouraging things going on. So yes, they're moving in the right direction. Yes, they're getting more profitable and yes, we got a lot of work left to do a good deal.

Bobby Griffin

I appreciate that with especially if the detail was a little over half of them being now profitable when you when you look through now you got 60 showrooms or so when you kind of look through the part that is comp and negative versus carbon positive, are you starting to see some some interesting trends that can now be leveraged to kind of improve. I believe it would be the other 44% that were still comping down during the quarter? Or is it really just kind of wide based on the differences among them?

Rob DeMartini

It's a little bit more hit or miss than what I would like it to be. I mean, we're in the same locations with the same co-tenancy. We do think that we've got a different degree of maturity in that and the staff in the stores and we're trying to make sure that we're coaching them up. But I can't point to one thing and say this is what it is. There are a couple of places where we know, it's just simply a lease that we probably shouldn't have gotten into. But in most cases, it's investing in the people and the training and make sure that the marketing that supports them is getting people to walk in. And when that happens, we've got a very good consumer experience and one that's getting better at selling as well.

Bobby Griffin

Okay. And my last question really just to follow up on, I guess those comments on maybe feeling comfortable where the Street is around 38% gross margin in 2Q, which on we get the step-up from the nonrepeating on issues. Anything else that you're kind of seeing? Is mix moving back in your favor? Would maybe DTC. being a little bit better in 2Q than wholesale? Or is 1Q going to be a peak wholesale quarters? Anything else you're seeing in the quarter to date to help us bridge that step up?

Todd Vogensen

Yes. So this is where wholesale was in Q1 is much what we expect out of the mix going forward to be in that mid 40% range is a solid performance from wholesale and and what we had seen across much of the back half of last year. So really more the driver for us is going to be the things that we have control over we had some certainly some selective price increases that we had gone through in Q1 and so we're getting the benefit of that. In addition, we are already seeing the benefits off of our operational initiatives, both from a sourcing perspective and a manufacturing efficiency perspective. And so those initial gains as they flow through, they really do start to impacts our gross margin pretty significantly.

Bobby Griffin

I appreciate the details. Best of luck here in the second quarter.

Rob DeMartini

Thank you, Bobby.

Operator

Michael Lasser, UBS Securities.

Michael Lasser

Good, Hey, good afternoon. This is Dan Silverstein on for Michael. Dan, thanks for taking our questions and congrats on the progress on. Firstly, just wanted to ask you, given trends in the industry are pretty volatile month to month. Is there a good way to think about incremental or decremental EBITDA margins if sales materialize a bit differently than planned?

Todd Vogensen

We really are trying to manage our cost structure pretty aggressively when we do see trends that are on the downside. But I knowing that we have a gross margin rate of, call it high 30% range a lot of that ends up being variable. And then there's a portion of our G&A structure that can be fairly variable advertising being one of them. And so we haven't given out an exact flow through on it, but I wanted to maybe think about it in the a 25% to 35% range is a fair starting point, makes sense Thanks.

Michael Lasser

And then just one more drilling down on DTC, which was flattish year over year. What magnitude of improvement does your sales guide embed for that channel this year?

Todd Vogensen

I don't think we've gotten down to giving guidance on channel level growth, but clearly, we have a lot of plans in place to get ourselves back to growth in e-commerce as this was a quarter where we did not see growth, and we've had a number of those over the last couple of years. So and the plan really is to get ourselves back on a firm footing and to see a positive trajectory in the e-commerce channel.

Michael Lasser

Got it. Okay. Well, thank you and congrats on the new wholesale doors as well. Thank you.

Operator

Thank you. There are no further questions. I will turn I'll back over for closing comments.

Todd Vogensen

Well, I think just to close, I'd like to make a couple of thank you's. I want to thank the purple associates that have hung in through a very difficult couple of years, and I think we're starting to see some very encouraging growth. We're cautious about the short term, but I'm confident and convinced that this brand is going to be a major contributor to the category. So I'd also like to thank our wholesale partners and appreciate the analysts that did pay attention to what we're doing. Thank you.

Operator

Ladies and gentlemen, this concludes your conference for today. We thank you for participating, and we ask that you please disconnect your lines.