Q4 2020 Earnings Call
Greetings and welcome to there's lots of <unk> fourth quarter fiscal 2020 earnings conference call.
At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
If anyone should a car operator assistance during the conference. Please press star zero from your telephone keypad.
Please note this conference is being recorded.
At this time I'll turn the conference over to Rachel Schacter unless you are Rachel you may now begin.
Thank you good morning, everyone with me on the call, Sean Nelson Chief Executive Officer, Jack crossed President and Chief Operating Officer, Daunted, Alamo Chief Financial Officer.
Before we get started or would like to remind you that some of the information discussed will include forward looking statements regarding future events and our future financial performance. These include statements about her future expectations financial projections, our plans and prospects.
Actual results may differ materially from those set forth in such events.
Discussion of these risks and uncertainties you should review the company's filings with the FCC, which includes today's press release, you should not rely on are forward looking statements as predictions of future that Oh.
All forward looking statements that we make on this call are based on assumptions and beliefs as of today and we undertake no obligation to update them, except as required by applicable law.
Our discussion today will include non-GAAP financial measures, including EBITDA and adjusted EBITDA. These non-GAAP measures should be considered in addition to you and not as a substitute for or in isolation from or GAAP measures.
A reconciliation of most directly comparable GAAP financial measure to such non-GAAP financial measure has been for provided a supplemental financial information in our press release now we'd like to turn the call over Sean Nelson Chief Executive Officer of the lots that company.
Thanks, Rachel good morning, everybody and thanks for joining us today I will begin my remarks by providing an overview of the company's response to the cope at 19 outbreaks followed by a summary of fourth quarter and fiscal 2020 performance.
Then Jack Crouse, our president and COO elaborate on our operational stops to navigate the current environment and outline how we're approaching our key initiatives for this fiscal year.
On a delano our CFO will then review our financial results and a few other items related to our outlook in more detail.
As it relates to the Corona virus pandemic, our number one priority throughout the crisis. So far has been the health and safety of all our associates and customers as previously announced on March 17, we quickly close down all of our retail showrooms temporarily and began operating as a direct consumer web only business, we paid all associates for the full.
First three weeks of the shutdown. We then made it difficult decision to lay off all of our 445 part time associates or 57% of our total company headcount.
And took 20% pay cuts at the top executive level with graduated cuts throughout headquarters and implemented numerous other cost saving measures.
We're taking the point of view that nearly all expenses are variable at this time.
<unk> cash preservation and generation to strengthen our ability to navigate through what could be a prolonged crisis.
Our website has performed very well in the face of the showroom closures year to date.
Since closing showrooms on March 17 through April 12, our E Commerce point of sale transaction dollars have been up over 400% with total Pos dollars up 3.6% versus the same period last year, which included showroom cells.
Thankfully, because our threepl warehousing and distribution system has a share of the grocery market. Our distribution centers have remained open and our shipping loves Soc product in regular course, even since the shut down of many non essential businesses in certain states.
There are other key attributes worth noting that our unique to our company in business model that position luxoft well to successfully navigate through this cobot 19 pandemic.
Number one luxoft has a strong balance sheet with a net cash position over $40 million in cash and 10 million in availability under the line of credit for a total liquidity of 15 million at the outset of the covert 19 pandemic driven showroom closures.
Two we have an evergreen fully shippable product offering.
Websites patented sectionals are essentially the only full sized sectional and so for products that can be delivered to the consumers door via common carriers like Fedex and our giant Beanbags called Sox had become synonymous with the video gaming and movie binge watching lifestyles that are all about just being comfortable at home. We view the reality of so many families stuck at.
Home as part of the possible expansion in demand for our products ongoing versus what we might otherwise expect in a tumultuous time like this.
We've already seen tremendous lifts across both of these are major categories. In Q1, two data this year as reflected in the strong E Commerce performance I just discussed.
Our inventory of these products is not seasonal it never goes bad or become stale. So while we will adjust our inventory balance it's difficult to forecast fluctuations in demand to do not pose a markdown threat to us.
Number three.
We manage a very flexible marketing budget with no long term advertising contracts in place as showrooms were forced to close we quickly retooled all marketing expenditures and communication tactics toward driving sales online and are seeing strong associated results.
Before loved sack has an agile and lean operating model typical staffing model of our small footprint showrooms is five to seven associates, which only two are typically full time.
With our children closures and subsequently off a part time stuff, we have quickly redeployed our entire army full of full time associates to support online sales via Facebook live events.
<unk> backlog outreach and podium technology interactions via text messaging that is proving to be extremely effective toward lifting online cells and has likely revealed new tactics, we will employee even after showrooms open.
The elevated success of our online sales so far throughout this period through these new tactics being employed further strengthens our ability to rapidly grow loved sack share of the 30 billion dollar U.S. upholstered furniture market well ultimately committing to a few physical showrooms is possible, which has always been our goal.
We expect increase negotiating power with landlords in the future.
Number five.
Finally, we continue to diversify sales channels for the future. We're excited to announce our new pilot with best buy as we expand our channel reach beyond our successful Costco partnership and Macy's pilot.
Best buy has already had three loves to shop in shops in market for the past 90 days as a test toward a larger program. While these are temporarily closed at this time, we are very pleased with results, thus far and look forward to seeing the program expand once retail broadly resumed normal operations.
By partnership is not just another sales channel to us, but represents an important strategic alignment with our future product innovation efforts.
Overall, we have been able to adapt quickly interfaces crisis and for the above reasons, we feel that love Soc not only has the ability to successfully navigate through this unique period of time, but because the flexibility of our model will be well positioned to ramp backup slowly or rapidly as things normalize.
Jack will discuss our krona Everest planning efforts, which can be categories in three key buckets team health and safety business strength and financial resilience.
We quickly ranked in stock each possible initiative based on numerous factors and began to take action immediately even weeks before the closing of retail showrooms on March 17th.
We are aggressively managing all aspects of the business to conserve cash and preserve our financial health.
We're working with landlords to minimize cash outlay for any showrooms, we might still choose to open this year.
We have worked closely with all of our landlords for Brent release over the duration of the showroom closures and feel great about the cooperation and partnership overall, we're getting to offset much of that major expense line.
All travel and entertainment all expenses related to training recruiting new hires which was significant given our growth rate.
Overtime sponsorships large format meetings.
And many other expenses have been indefinitely delayed or eliminated.
Marketing spends have been adjusted to drive our business online focused on measurable ROI generating activities.
No supply chain update love sex manufacturing supply chain has been greatly diversified in reaction to the Chinese special tariffs.
After some brief disruptions during Asia's bout with the pandemic things were back in full swing at the beginning of our showroom closings in mid March.
With China, now well past their own Corona virus shutdowns, we are seeing only limited delays.
Just a few of our stock covers our supply chain across Asia is now more diversified than ever and going strong we have sectionals manufacturing now spread across Vietnam, Malaysia, and China, we have fabric milling spread across Indonesia, Taiwan, India, and China, we have gotten sell operations in Vietnam, India, China America.
Okay, and seemed Malaysia, and Indonesia as well.
While our third party custom order selling facility in Los Angeles closed a few weeks ago during California shelter in place or custom order cover cells on the web have always been de Minimis. So we expect no meaningful impact there.
All Saks continued to be stuffed shrunken and shipped out of our third party manufacturing facility in Texas, which has also been allowed to remain open through the shutdown due to some of its other more critical manufacturing activities deemed necessary.
Our current supply chain now has plenty of redundancy and the product. We do continue to manufacturer in China is now subject a hefty negotiated discounts that largely offset the effects of the special tariffs.
All the products, we have sourced outside of China are coming in slightly cheaper than first cost within China.
Even before considering the extra Chinese tariffs.
While these advantage Cogs do begin to flow through in Q1 of this year, we have much tariff latent inventory still in our warehouses that will need to cycle through to have it affect our reported GAAP gross margins and with increasing Fedex costs and other known headwinds we expect the recovery at the gross margin line to get us back to that mid Fiftys range.
In a somewhat protracted manner, we estimate it will require approximately eight quarters to fully recover to that mid fiftys range in gross margin.
While we are happy to have diversified outside of China. So quickly we are grateful that a few of those key moves were in partnership with our longstanding Chinese factory owners standing up facilities for us at their expense in Vietnam, and Malaysia. These deep relationships become Supreme relevant at times like these and our long time overseas partners of ours.
We extended our payment terms by 30 to 60 or more days.
Well, we're confident that they will be willing to flex along with us as the needs of the business change as they often have over our long history together.
Turning back quickly to our fiscal 2020 results, we had a strong into fiscal 2020 as you saw from our earnings release 2020 was a year of many operational milestones for love Sac and we will build on this progress in fiscal 2021.
One we opened 16 net new showrooms in asked why 20 or 21% year over year growth as we focus on growing the omni channel website brand and amplifying our marketing investments with an expanding showroom presence.
Importantly, the returns on our show room investment continued to improve and the payback period on our new Chevron investments have improved to 13 months from 16 months.
For two we expanded our Capex light pop up shop and shop in shop presence.
Launching for Macy's pilot shop in shops, which have performed very well so far.
We operated 756 total pop up shop, 10 day events during the year at Costco up from 553 events your prior.
Number three we increased our marketing investment across digital channels supplemented with traditional spend including TV and generated important learnings from our test and learn work.
Before we continue to strengthen our moat and the inherent designed for life appeal of our product offering with the introduction of the power hub and storage seed and finished the year was a strong 45% attachment rate and associated <unk> hundred 50 dollar increase in Lv on Sectionals because of these introductions.
Number five we made important investments across our business in fiscal 2020, he among these where supply chain systems and process investments as well as important talented additions as we focused on ensuring a solid foundation to support the significant growth that lies ahead for love Sac.
And number six on the sustainability front, we continue to utilize only yarn spine from 100% recycled plastic water bottles, diverting 28 million bottles from the waste stream in fiscal 2020 alone on our Sectionals upholstery fabrics. We also began using repreve recycled yarn in many decorative covers.
Past year.
So in summary fiscal 2020 was a year of many achievements at loves socks, and we made important strides positioning ourselves to continue to disrupt the $30 billion category couches chairs and seating.
In response to the covered 19 pandemic, we swiftly pivoted our focus to prioritizing the preservation of cash and our financial health through these challenging times. While also ensuring we are making important strides on innovation, while standing ready to resume our growth and market share gains as soon as the situation permits.
Finally, I want to thank our entire team for all of their hard work in commitment.
Every loves that could says she has made personal sacrifices and has been working very diligently to pull together and drive our business forward successfully throughout these challenging times with that I will turn the call over to Jack for more detail on our plans to navigate the current environment. That's why 20 highlights and recovery plan for F. Why 21.
Thank you Sean and good morning, everyone fourth quarter was a strong into fiscal 2020 with good operational progress made against our key priorities I'll begin my remarks by elaborating on our approach to managing through the evolving told at 19 pandemic and then briefly discuss our progress on our strategic priorities for the year.
Ending at why 20, and our plans for the upcoming financial your 21.
First on October 19 plan, we've established a crisis management process and team to facilitate rapid decision, making in a systematic manner. We've organized cross functional teams around three key pillars, one team health and safety to business strike.
And three financial resilience first regarding team health and safety. There are number of moves we've made very quickly as soon as we learned about covert 19 as previously announced we close all showrooms on March 17th and paid all full time and part time associates through their scheduled hours through April 5th.
Our headquarter staff is working from home until further notice.
We have been cascading information daily to our entire team with an online resource center for employees updated regularly in addition to our special Bolton's from HR as well the leadership team.
The team is developing a strategy and cadence to safely reopen showrooms when the timing as appropriate.
On the business strength front, we've been working on a number of initiatives to adapt and leverage our resources in a keeping that are full time showroom associates have an active with customers using podium chat technology that enables our associates to help guide customers through the buying process from remote locations at home this technology.
Naples, all of our associates to essentially become remote based selling and customer service agents across the whole country in the past two weeks alone our associates have engaged in thousands of chats with customers.
On product demonstrations on Facebook that it had over 100000 <unk>. We're pleased to say that the full time showroom associates have generated more than enough revenue to cover their payroll during this period.
We will continue to refine and expand this approach as we test and learn new ways to best help our associates serve customers within our omni channel model.
We've increased our communication focus on the loves that value added services, including free shipping returns as wells risk free trial periods that we routinely offer and an increased availability watches that allow customers to feel more comfortable and purchasing furniture without physically experiencing it this is increasingly important.
Particularly in the current environment we're in.
We've seen a surgeon overall social media use as a result of the cobot 19 crisis across Facebook, Instagram and Pinterest platforms to name a few.
As a result, we pivoted our spends and messaging accordingly, we are pleased with the increased efficiency of love back on Pentrust and Facebook campaigns in the past month. This has been driven by refined audience targeting strategies creative enhancements platform optimizations as well as automated bidding and restructuring of our targeting to focus on.
Core audiences were also leveraging direct customer Catholics aimed at helping customers at home with live demos of our product scheduled multiple times a week on Facebook page and the increased availability as watches that I mentioned earlier.
We're very pleased with these efforts are having a big impact on our ability to deliver sales without showrooms since our showrooms closed on March 17th through April 12, our E. Commerce Pos transaction dollars have been up over 400% with total company Pos dollars up 3.6% last week, we also showed or strengthen.
Executing large volume events and the absence of showrooms are Easter Flash event drove the total company Pos dollars of 6.7 million, which was actually 7% comps over last years Easter event with product margins, just 60 basis points below last year. These results give us the confidence that we can continue to pay.
Pivot and successfully navigate this tough environment.
Given this recent success and the cost savings measures Donald will provide a more detail. We believe that we can operate for the balance of the year without showrooms on a cash neutral basis.
Donald will discuss the third pillar financial resilience in a moment.
Turning to our fiscal 2020 operational progress Sean discuss product innovation. The success of this Dorsey and the power hub introductions are a testament to the power of our platform approach to product innovation and we look forward to building on the success going forward.
With only 1% brand awareness and the strong and growing ROI is in our marketing activities, we continue to lean into marketing and this past year, a customer lifetime value or see Lv hit a record of $1835 into fiscal 2020 up from $1540 in fiscal 2009.
Team as expected in fiscal 2020 or customer acquisition cost or CAC increased to approximately $390 from $309 in the previous year as we increase marketing to drive brand awareness through both TV digital and social marketing efforts.
For the year, we increased our year over year marketing expenditures by nearly 59% to 29.2 million and there's the LTV to CAC ratio finished the year at four point Sevenx from 5.0 acts in the prior year, demonstrating the continued effectiveness of our spend even as we.
We scale dramatically.
Importantly, we continue to expand our targeting and segmentation work to drive increased relevancy in in Q4 introduce dynamic video into our digital ads any virtual demo on our website to further improve digital shopping experience.
Next showroom openings overall sales per square foot for our showrooms, reaching all time high and the year at $2083, an increase of 22% over last year.
Our new showroom productivity continues to be excellent with our 2019 class generating a payback of 20 months at the four wall contribution level. This type of productivity continues to give us flexibility in our location and lease strategies showrooms are key to our growth strategy and they serve as meaningful brand amplifiers.
And generate outstanding returns that said in fiscal 2021, or new showroom plans have been impacted by the events related to the covert 19 pandemic when conditions allow we will reopen existing showrooms and resume our showroom expansion. It was important to note that our highly productive showrooms depend on low levels of labor to operate.
Right since we don't manage merchandising assortment slow selling selling stock or incoming shipments associated with the typical store model.
On pop up and shop in shop expansion in fiscal 2020, we launched the pilot of our for Macy's permanent shop in shop locations in L.A., Atlanta, New York City in long Island, and we're very pleased with their performance. In addition, we're pleased to announce that we opened three pilot locations.
In the fourth quarter with best buy.
Mount Laurel, New Jersey, Plymouth meeting, Pennsylvania, and total crossing which got off to a very strong start this shop in shop format continues to provide us with.
With exposure to new customers and a capital efficient manner and allows customers to see and touch and feel our product before purchasing.
The successful launch of these pilot gives us the confidence that we can use this model to expand our footprint in a highly efficient manner, our pop up shop with Costco continues to prove successful in fiscal 2020, we operated 756 pop up shops in combination with for online road shows these costs.
Oscar locations drove significant increase in our other channel sales up to 29.6 million versus 19.7 million in fiscal 2019 pop up shop productivity increased 8% for the year.
In fiscal 2021 as soon as conditions permit we expect to continue our cosco pop up shop locations and also continue to explore the shop in shop format with other retailers given the positive results we've seen thus far.
John provide an update on our supply chain progress as he said in fiscal 2020, we diversified sourcing while investing and distribution infrastructure. This past year, we increased our distribution capacity by securing multiple warehousing and additional processing labor improve the reliability of our suppliers and.
As of orders received.
As planned improve the accuracy of our shipments to customers and we improve system integration between supply chain, our carriers and our threepl distribution centers.
The overall, we made good progress operationally in fiscal 2020 as we look ahead, we'll remain disciplined with expenses in capital with a focus on preserving our financial health and the current environment, while positioning the company to quickly and efficiently ramp up once conditions allow with that I'll turn the call over to Donna to review.
Our Q4 and full year financials provide a quick summary of the financial resilience teamwork, thus far.
Thank you Jack Good morning, everyone I'll begin my remarks, with a review of a fourth quarter results and then provide a framework for how we are approaching fiscal 2021.
The 43.6% increase in net sales to 92.2 million was broad based and driven by strong performance across all channels, including new income Sharon's E Commerce and our other channel, which includes pop up shop in shop in shops out.
Successful digital marketing strategies drove an increase in both ticket and transactions and we saw increases in new customer count as well as repeat purchases.
Please refer to our press release for details on our comparable sales performance and new show on the opening.
Looking at our results by channel for the fourth quarter showroom sales increased 31.9% to 57.3 million ecommerce sales increased 73.9% to 26.5 million and our other channel, which includes our pop up shops in cosco locations.
And shop in shops, and for me sleep pilot locations increased 53.1% to 8.4 million.
Product category, our sectional sales increased 73%, our sock sales decreased 16.4% deal or a national advertising focus on SAP channels and our other category sales, which includes decorative pillows blankets and other accessories decreased 5.1%.
He expected 630 basis point decrease in our gross margin was primarily driven by the 460 point headwind from tariff the impact ended increase in flash shell promotions, which were partially offset by reduced cost of course actual product.
As a reminder, the timing of arc Harris mitigation efforts and increased shipping cost is driving the temporary gross margin pressure as Sean mentioned, and we expect an approximate eight quarter recovery toward normalized gross margin levels in the mid 50% range.
The increase in S. DNA dollars, excluding onetime items was driven largely by increases in infrastructure improvements selling related expenses and stock compensation expense with the 320 basis point year on year improvement in S. DNA rate driven by leverage on the 43.6.
<unk> net sales increased.
Our investments in advertising and marketing, which benefit extended periods increased 5.3 million or approximately 330 basis points to 11.4% of sales largely due to an introduction of additional media involving the holiday season.
Appreciation and amortization increased $900000 from the prior year to 1.5 million principally related to capital investments for new and remodeled showrooms and infrastructure investment.
In the fourth quarter fiscal 2020, there were no adjustments to operating income, which was 5.4 million compared to an operating income and adjusted operating income of 8.2, and 8.3 million respectively in the fourth quarter last year.
Our net interest income for the fourth quarter was $109000, which reflects the impact of our IPO and other primary share financing.
Tax expense in the fourth quarter fiscal 2020, and 29 team was not material. It was related to minimum state income tax liabilities.
Before we turn our attention to net income net income per share and it even though I would like to point out that my discussion of these metrics will focus on net income and net income per share adjusted for the IPO and other financing costs as well as adjusted EBITDA.
Please refer to the terminology and reconciliation between each of our adjusted metrics and their most directly comparable GAAP measurements in our earnings release issued earlier today.
Adjusted net income was 5.4 million worth 37 cents per share in the fourth quarter fiscal 2020 compared to adjusted net income of 8.5 million were 63 cents per share in the fourth quarter fiscal 2019.
Adjusted EBITDA was 8 million as compared to 10 million in the fourth quarter last year.
For details around our full year income statement. Please refer to our earnings press release.
Turning to our balance sheet, our liquidity remains strong as we ended the year with 48 million in cash and cash equivalents and 12.5 million in availability on our revolving line of credit with no outstanding debt on the revolver.
Ending inventory increased 39% year over year, driven by higher sales an increase in capitalized freight and warehousing cost relating to tariffs and increased inventory levels as well as an increased investment in the weeks of supply of inventory on hand.
Free cash flow defined as cash from operations less Capex was the use of 21.7 million in fiscal 2020 as compared to use of 17.8 in the prior year with a year over year change driven principally by the approximate 5.7 million net tariff intact in fiscal two.
20.
In terms of our outlook given the uncertainty around the duration and trajectory of covert 19 related disruption, we're not providing an outlook for fiscal 21 today.
As Jack and Sean mentioned, we are pleased with the strong E. Com performance. We've seen that this has resulted in quarter to date total Pos transaction dollar increase through April 12 of 30.8%.
Oh, So road closures total.
Yes transaction dollar increase was 3.6% through April 12 versus the prior year.
We are aggressively managing costs and cash outlays to current trends, while ensuring readiness to resume full operations as soon as conditions permit.
Traditionally fixed expenses, such as payroll or swiftly being reduced in occupancy and other expenses are being deferred.
All variable expenses are being flat to current sales trend.
As of yesterday April 15th our quarter to date Casper and has been approximately 14 million versus the 10 million cash burn rate in Q1 of last year.
You want to seasonably accounts for a quarter for us and while we have taken Swift action on the cost side in response to covert 19 disruption. The impacted these actions is not yet reflected in this cash burn rate.
We would expect to be roughly cash flow breakeven for the remaining few weeks of Q1 to end the quarter with a cash balance of approximately $35 billion and full availability under our revolver.
As a reminder, our revolver carries no financial covenants other than the requirement to maintain a million dollars of excess availability.
Capex is also very bold this year and given the vast majority of our Capex spend is related to new showrooms delays on this front, how the significant impact on Capex spend.
Depending on the timing of showroom re opening our new showroom opening plans for the year could range from zero to 18.
Capex spend not including new and remodeled showrooms will be in the $3 million to $4 million range. This year.
We do expect to generate cash from working capital this year through inventory reductions and vendor approved extended payment terms.
With the actions we are taking the strength, we are seeing from our ecommerce business, our cash position and revolver availability the variable nature of the majority of our costs as well as our debt free balance sheet, we feel confident that we have sufficient liquidity and financial flexibility to whether this period.
Even if showroom close just continue for an extended period of time.
Well all of the details related to our results. Please refer to our earnings press release.
With that we would now like to turn the call back to the operator, who can open it up for questions operator.
Thank you.
At this time will be conducting a question answer session. If you like to ask a question today. Please press star one from your telephone keypad and a confirmation total indicate your line is into question Q.
You mean fresh start to feel like your move your question from the Q.
Just since using speaker equipment, maybe necessary to pick up for handset before pressing the star Keith one moment. Please hold we pull for questions.
Thank you.
My first question is from the line of Brian Nagel with Oppenheimer. Please proceed with your question.
Hi, good morning.
Hi, good morning.
Congratulations on managing through a difficult quite well.
Thank you.
That's very interesting.
[laughter].
My first question I think each of you mentioned to some extent the just the recent sales trajectory and if I'm hearing the numbers correctly. It implies that they will then significant flex up in online sales is more than offsetting the impact to close stores. So two parts. There why did you just lay out maybe a little more detailed actual components there.
About how how how that's working particularly with what the online and then then in the channel that includes.
Your partners like Costco as well that's schuchat, how should we think about and I recognize you you're not offering guidance at this point, which is understandable, but how should we think about the sustainability of that.
With the idea that.
To some extent we sales that are helping online now may have been influenced by a show group that had been open few weeks ago, but as we as we persist further do its kirby north showrooms could that happen impact at all but sales.
Thanks, Brian I'll I'll handle that and then as Sean and Don If you guys have additional comments please at it.
It's pretty exciting obviously to see that in the Easter week, we comped over shifted Easter plus 7% with no showrooms open them and that was a combination of things one that was a significant increase in our activity from our a showroom associates working from home doing chats and also doing.
The video Facebook demonstrations, we spoke about out of the money out of the dollars they generated which was well over a million dollars in the past week.
Roughly 80% of that was new quotes developed through online interactions and discussion. So what we're finding is that the associates working at home or actually becoming a very powerful tool for driving the online business and then to put in perspective, as we pivoted and obviously I'm, giving you updated information because.
By the time to get to next week, it will be outdated information, but in the last three weeks. The business has basically gone from 60% of the original budget that we had with all showrooms open to 70% to what we believe could be almost 100% and the next couple of weeks. So we're seeing a dramatic shift to know.
They were able to acquire customers obviously the other thing that's happened is there's been a dramatic change in the way we market you know we pulled back from the classic TV more on digital marketing and sales significantly more effort into social which is giving us real nice power. The other thing that's happening within the context to the marketplace.
As I see it costs are dramatically going down in the marketplace because of decreases in demand an advertising and we're finding that actually given our flexibility in our turn towards E. Commerce, we're actually able to take advantage of that and we're finding that our marketing ROI there actually looking to be as good as they ever.
Her with all of our showrooms open so I'm really beginning to feel very confident that even in a worst case scenario, where we don't have showrooms open for a long time that we can operate.
At a level that's at a growth over last year to total company and do it in a very very efficient away.
That's really helpful.
Then the second question I have it just maybe a simple relatively similar number numbers question, but yes, we think about just the cash flow dynamics of the business. You said in his prepared comments that basically managing towards cash neutral if you're going is quite impressive how should we think about just the inventory needs of the business you came into the year relatively heavy inventory.
Can you comment a lot that there's very little and I agree and agreeable risk of inventory about how much could you shouldn't say burden that inventory down as a source of cash should continue to run the business.
In general we have great relationships with our with our vendors and Sean obviously has amazing relationships over 15 years long. So I think they had they give us an amazing ability to flex and had been very open with us in discussions about our need to flex as we build up to a recovery period and also flat.
In terms of payment terms, and all and I'll leave us Sean and I wanted to add additional details.
Yeah, Yeah I would just go ahead go Oh go ahead.
Okay, I, well I'll, let I would just to add to that a.
Remark that we do view inventory as a key asset of the business you know just as we would view cash and our ability to.
Maintain inventory levels that will allow this business to flex as Jack said, because clearly going into this closure of 91 showrooms.
I Didnt know exactly what to expect out of the out of the business and it's the last thing. We wanted to do was put ourselves in inventory shortfall and so we feel good about inventory levels as they stand now.
We we do intend to manage it very tightly very closely and we do intend to take advantage of the terms that you know we've come to expect from our overseas suppliers, which then can allow us to one being in position to exit.
This.
Pullback as it were at some point with significant.
Velocity, we hope and too as you said.
It's actually a hedge as we see it against.
Any further disruption as we're able to turn it and we've proven that we they've been able to turn back inventory into cash and so specifically.
Don't know Donna what you would have to add to the [noise].
Cash side of that equation.
Yeah, I'd just add that are.
And then for a purchases are only committed about 90 days out with our inventory vendors John's point, we get that longer range forecast.
Our commitments are 90 days out our vendors are super flexible with US we've had the ability to build some nice safety stock over the last couple of years, which would give us anywhere between 12 to 16 weeks of well Hey added inventory.
So we do have a lot of flexibility with inventory purchases being the largest cash spend that we that we have on an annual basis.
If the need be we have a lot of flexibility on bringing those purchases back without risking the inventory levels to be there. When we are able to ramp the business back up again and open up the show. So I think we're in a really good inventory position as well as great.
Vendor relationships.
Great and one other thing to add which which is then sort of late breaking for us as you put into perspective and shot as mentioned this many times our inventory is basically ever grade you know itself, we have a core inventory business, so that huge benefit for us relative to some other companies is that.
We're not worrying about what happened to the spring inventory. During this period, we know where it's going to go it's going to go to fall inventory and the other thing that I think it's very important to say that as we've had this dramatic shifts towards the E com business.
The E Com business has basically covered the company's mix the way the company was before me before so one of the fear is we had as we went into this when we see dramatic mix changes away from our key platforms actually know somebody you have not seen it at all in fact satchels have dramatically increased on online obviously on E com.
First so we're actually in a place where we're seeing mix is similar to what you'd original plan and we have inventory data last a long time, so we feel confident about that being an advantage as well.
[laughter] very very helpful. Appreciate that color and best of luck here.
Thank you.
Thank you.
Our next question from the line of Thomas Forte with D.A. Davidson. Please proceed with your question.
Great I had one question and one follow up and then I'll get back into queue for additional questions. So my first question is how should we think about your flexibility on your show room real estate. So when we come out of this for example, do you have opportunities to.
Get out of leases if you want to change locations in the event that some malls in power centers might be better positioned coming out of this as far as to the other tenants in the mall or.
Yeah, I think Tom I'll I'll answer I'll start with that and if you guys have anything to add on it a couple things. One is were extraordinary extraordinarily fortunate that all of our current showrooms are in a malls or better or a great off mall locations and as you know with with over $2200 a square foot.
And productivity there all extraordinarily productive now given that you know we've always looked at the market penetration is a combination of customer acquisition costs, the customer lifetime value and I think what this gives us.
Our real view into the future of is that we really don't need to and best in show rooms that depend on foot traffic I think we've just determined that we can drive around traffic and we can look at a very different asset light executions and I think what we believe now as we have significantly more for.
In terms of the way, we'll think about developing our real estate strategy in the future, which will probably mean not having to spend the kind of capital. We have previously seen in terms of getting the touch points out there that we want to get out there, but no mistake about it given the type of productivity. We we've seen from showrooms will continue to.
Evaluate them as amplifiers or the brand, but I think we're going to get a lot of learnings, but you're going to which give us a much more agile real estate strategy in the next couple of years.
Great and then my follow up question, then I'll get back in acute from bore.
You talked about your liquidity position it sounds like you're in good shape to weather the storm how should we think about your ability to take advantage of the cares Act.
And Ah So we've already had great. Yeah. We've looked at every opportunity there that has presented itself right now the 500 employee.
I will call it cap limitation has.
With the current definitions has restricted us from being able to apply for some of the the larger dollar is that are available to us when that would be available to accompany our size.
It doesn't mean that we're not trying every different angle on with legislators and so on and so forth to see how we can qualify.
And but we are anything related to the payroll tax deductions, we have all that stuff in motion Ah, but unfortunately, the employee cap of the 500 has precluded us for from taking advantage of either the paycheck protection program or.
The disaster mowlam recovery through the S.P.A.
And then the the final thing that came out our last week or so on the 2.3 trillion dollars.
Yes, and adjusted EBITDA calculation, there that right now.
It doesn't fit the loves that profile again that doesn't mean that were not working with the appropriate.
Governmental sources and.
People that were working with honey outside to see if we can get some flexibility and not especially center on the adjusted EBITDA side were significantly our adjusted EBITDA was really impacted by the tariffs and you know to say that.
Tariffs, which is something governmentally in Poland is precluding us from some governmental dollars. It's something you know it or something that we're working on but I can assure you that every notification to every dollar every stimulus package that's coming out there we're on top of it and where researching it.
So to make sure that if there is something available to loves Sackey now that we get ourselves in the Q.
Thank you Donna I'll get back in the a question Q for my additional follow ups. Thanks.
The next questions from the line of Maria Rip with Canaccord. Please proceed with your question.
Hi, good morning, Thanks for taking my questions and I hope everyone has done well.
I think it I think in the past you talked about a expand into 200 showrooms overtime.
The conference Demick change your thinking about that long term target, especially in light of success that you're seeing with <unk> online channels.
And then secondly, how does the current environment impacting your plans around moving production out of China before the end of this year.
Okay, I'll I'll take that first a question and then I'll I'll defer to Sean So I guess I believe look I think that given that type of it the productivity. We've had the showrooms I believe there's certainly an opportunity for 200.
Or even more touch feel points in the country I think what we will really.
Start to look at as what do they look like you know we have these make these tests, we have best buy tests going on.
We have off mall small locations that are being incredibly productive and now we're able to show how we can drive around traffic. So so I think the really answer is we will have probably two to 400, a touch feel points in the United States in the next five years or so, but they may look very different than the current profile.
Right now.
Because we have a high high interest hi, touched fuel product that people want to engage with and will allow him to do it but we'll do it in a way that's incredibly productive and we're certainly taking in the information in terms of that that the relationship between show rooms, and the E Commerce and the showroom employees is really being rich we defined.
As we speak today, you know if you actually think about it right now we have showroom employees working from home and being productive they're not showroom employees anymore. They're trade area employees. So this is something we're really thinking about as we think about trade area model, becoming more and more robust that's just not about showrooms it's about showroom.
Pop up shops, other strategic relationships that are literally man to buy trade area employees. So a lot of exciting thoughts we have and it'll take some time to develop that but but we'll certainly be updating you on that.
John.
Yeah as it pertains to you know trying to manufacturing I think an interesting.
Over the last 90 days in that or with the whipsaw that was first a supply chain disruption potentially out of Asia with pickup in 19 outbreak and then became what became you know.
Central demand disruption.
For a minute there China looks like a real asset to us in a strength because they exited their own belt with depend what could pandemic and.
And where and became a reliable source to us that had both the potential to manufacture sectionals and covers a sound Saxon covered et cetera, and while we didnt know the future reliability of other countries that may yet experienced there.
On outbreak.
Our point being.
Our view toward supply chain is really about redundancy.
And about diversification and that's what we've achieved already to a large degree by moving to all of these you know numerous geography that I listed.
In my remarks, and so I think what I would say about are getting out of China. We're more interested in having a diverse supply chain with plenty of redundancy and frankly, we'd be happy to see China have us a share of data small share of that obviously with the special tariff still in place we're interested in lower cost Edwards.
Moving lower cost almost everywhere else, we go and so we will pursue those on the other hand that puts great pressure on our existing vendors in China to lower their cost one way or another to us and offset a special tariffs with what special discounts, which were also achieving and so you know I believe that our goal has.
Less to do with getting out of China, and more to do with getting our gross margins back to that mid Fiftys range. That's so important to us as we maintain.
Our ability to.
Garner a revenues at a high at hype product margins.
And then also by the way refine our logistics model because that's a big component of our cost of our overall cost of goods sold.
And and get the whole system backup that mid Fiftys range in gross margin and and with with reliability and diversification and by the way I've said it before long long term, we're very interested in manufacturing more locally just from a sustainability standpoint, and we have.
Active projects.
And investments to that end and you'll see that unfold over the next few years.
[noise] that's very helpful. Appreciate the color.
Our next questions from the line of Alex Arnold with Odeon Capital. Please proceed with your question.
Hi, congratulations guys see make it a you make it sounds much easier to be nimble than I'm sure. It's been.
[laughter].
Yeah, the Uh huh.
So I have two questions and they're somewhat high level a ones. Just you you see no I mean, we've all seen a rapid shift toward online purchasing broadly.
For obvious reasons and I'm trying to figure out from your perspective, what types of dislocations in cost changes you're seeing on in terms of shipping and logistics.
And then the second question is more about you know with with definitely sheltering increase gaming all this stuff should be a tailwind for your business, but how do you think about consumer reaction even outside of loves back to higher ticket items in the interface and precession, we got another 5 million job losses. This morning, it looks like.
Oh Wow, there's there's a lot in there that I, probably would leave to Larry summer.
In terms of Larry summers can probably answer the questions about the overall economy, we're certainly looking at.
Our customers and we're very fortunate.
To have a customer base that that's relatively speaking.
Enjoying I'm, probably more a little bit more cushion from the recession than other folks and we're continuing to see significant interest in the product, obviously and as we've gone into this we're saying traffic go up I think they had when we'll be potentially what happens with the economy and who can predict that.
And to your point, certainly, we're saying cocooning gaming.
At home interest shopping from home going up dramatically as shown by EUR, 400% 400, plus <unk> percent increase and the E com sales over the last.
Weeks since the code crisis began so.
It's a for a lot of dynamics, we're being cautiously optimistic and all of our plans. We are assuming we have headwinds for the next 12 months. When we tell you that we think we can continue to operate this business on a on a cash flow neutral basis.
And anything on the logistics for yes I.
Hi, this is going to add on that Alex as far as logistics the call. It will be the is the same for us on because as you remember we're not we have shown wrong, we don't have stories, where people walking out of inventory. So whether it's the purchased through the show around pls or its being purchased through the E Com Pos.
The shipping costs are the same.
Yes in fact as as we you know as we start to expand and get the volume and scale, we're seeing opportunities to continue to look into you know cost savings in that area.
So we don't see that is a big issue you know as we shift it doesn't impact our business in fact, I think I mentioned that up in the script.
Literally we had plus a 7% year over year Pos sales, if you'd look at peak.
But Easter shifts with only a 60 basis point degradation in that case, it was probably because we had some additional discounts.
We added towards first responders switch out was an incredible promotion that we didnt have last year, but the in the absence of that Oh, we feel pretty good about margin our ability to maintain margins as well as transportation costs.
Great. Thanks, a lot.
Thank you for next questions coming from the line of Thomas Forte with D.A. Davidson.
Great. Thanks, I had another question another follow up so you talked a little about this one last one but on the health of your core consumer I'm wondering about levers you can pull providing consumer credit installment plans and maybe even initiating a subscription plan. So that's my first question then I've a follow up after.
Oh, Yeah, we certainly are Tom. We then we've been definitely looking into different tests have extended financing we've had extended financing as part of our programs in the last couple of weeks and we'll continue to evaluate those tests were also continuing to look at new ways to target customers and and new message.
Being as well so those are all part of the package.
And we're doing a lot of testing and learning right now in terms of how customers are thinking about purchasing within the context of this environment.
Great and then for my last question. So I'm sitting on my section on I've got my I phone plugged into my power hub.
And I'm thinking about best buy and your new product pipeline.
So without disclosing any product pipeline, how should we think about why you chose best buy as it relates to your.
Product pipeline.
Well I think you're on the right I mean, I think you know our moves to look we love Sac. We don't do a lot of things or you know there are [laughter] 100 home decor companies that you could buy everything from vote is to candle holders to the candles themselves and fake.
Who knows.
We only do a few things each year, but the things that we do our innovative they are on platform on a platform. Currently we really think of ourselves is having two platforms sectionals socs and building ecosystems around that as you just evidenced by having your phone plugged into the power hub.
Power hub is our telling the water in terms of technology.
And innovation on that front and we view it as very analog we you know at your phone is plug did we we think that there are numerous ways that we can expand the socks off platform and Sox.
Into technology in ways that useful and not just gratuitous or or clever, but but really truly innovative and we have a numerous patents.
Pending and five issued on on different aspects like this.
And you're gonna see some of these things roll out and and clearly a best buy is chosen channel to work with for some of those reasons and so.
I will say this again, we will continue to only do a few things, but the things that we do we will be impactful to the tune of you know weve looked at what happened last year as we launched just the two innovations. We did we while we admittedly have spent a little bit more money on marketing the brand and getting it out there right consciously raising.
Our CAC, we had our cost of acquisition. We have also dramatically raised our CLP and we will continue to do that and eventually.
We believe you know eventually branch out into other platforms as well.
Unrelated to Sectionals or Sox, but all that in due time.
Yeah, and let me add all add something a little more short term or operational which is this you know the trigger one of the biggest triggers for purchases of our products.
As a lifestyle change a move a read back or redecoration ever house et cetera, strategically bestbuy is looking to expand their portfolios. So they are capturing the largest amount of value when customers their customers are making big changes in moving in buying.
Accessories, and we are a perfect partner for them, because we're completely incremental and within the context of forget even watch on talking about may happen in the next six months or a year I can tell you. This the productivity, we're saying at best buy is more than double almost triple of even our own show.
So you can imagine that they're probably pleased with the kind of productivity, they're getting out of our space. Just as we are with Macy's. So while it doesn't seem obvious at some points when we're in the small footprints and we're interacting with customers at the right trigger points. It's an amazing synergy that takes place that's a win win for the host as well as the pop up.
Yeah and by the way that that success that we're seeing on the pilot.
Obviously is just with the product platforms that we currently offer and with the product selection that we currently offer and in fact of truncated selection. So you know it's a major perhaps on the from the outside looking in its its unlikely alignment, but we view it as strategic and and.
It's also working.
Great. Thank you Sean Thank you Jack Thank you Donna stay well.
Thank you.
Thank you.
Our next question is from Atlanta, Alex Fuhrman with Craig Hallum Capital. Please proceed with your question.
Great. Thanks, very much for taking my question and hope you're all are doing well.
About the mix the businesses between your product line as as a your stores have shut down and the business is pretty rapidly shifted it from stores to online are you still being similar trend that you saw in 2019 in terms of national versus that covers and accessories. It's just curious what what customers had been gravitating due at the bid.
And at that shifted online recently.
Well, there's a boy a lot of [noise].
Even the last four weeks has probably like three different periods and it right because the first Bob So initially or right. After the co bad situation became to have started to have an impact we saw a dramatic increase in the interest in Saxon and I think it's it's just.
Facts are naturally have always had a higher penetration on or E. Com business, and I think that sort of that whole coding and the gaming is getting a continued to be a big supporter of the sack business growing as well however, with the pivot we talked about in the focus on our business. The focus of the associates in the last couple of weeks or so.
We have a short amount of data points, but in the last couple of weeks, we've seen a mix online dramatically move towards a mix very similar to what we had coming out of our showrooms and that's extraordinarily good news for us because that means our supply chain is also going to be in a really nice place a as we go forward.
[music].
Great. That's really helpful. Thank you very much.
Thank you at this time I'll turn the floor back to management for closing remarks.
Yes. Thank you all of our investors and analysts who follow the company and truck our progress we appreciate your support.
And we look forward to reporting on Q1 in just a few weeks so.
Speak to that.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.