Q1 2020 Earnings Call
[music], ladies and gentlemen, todays.
Conference is scheduled to begin shortly these continue to stand by thank you for your patience.
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Welcome to sleep numbers Q1, 2020, <unk> earnings conference call all lines have been placed in listen only mode until the question and answer session. Today's call is being recorded if anyone has any objections. You may disconnect. At this time I would like to introduce Dave It's 110th Vice.
Precedent finance Investor Relations. Thank you you may begin.
Good afternoon, and welcome to the Sleep number Corporation first quarter 2020 earnings Conference call.
Thank you for joining us.
I am Dave Schwantes, Vice President Finance and Investor Relations.
With me today, our Shelly I block or president and CEO.
David Kaplan, our Chief Financial Officer.
The three of us arent or Minneapolis offices for the call today, but our social distancing as we sit apart in our conference room.
This telephone conference is being recorded in will be available on our website I sleep number dot com.
Please refer to the details in our news release to access the replay.
Please also refer to our news release for a reconciliation of certain non-GAAP financial measures and supplemental financial information included in the news release or that may be discussed on this call.
The primary purpose of this call is to discuss the results of the fiscal period. Just ended however, our commentary and responses to your questions may include certain forward looking statements.
These forward looking statements are subject to a number of risks and uncertainties outlined in our earnings news release and discussed in some detail in our annual report on form 10-K, and other periodic filings with the FCC the company's actual future results may vary materially.
Ill now turn the call over to Shelly for her comments.
Good afternoon, and welcome to our 2021st quarter earnings call. My sleep acute score was 83 last night.
In just a few short weeks, our lives businesses and the economy have radically changed.
And we are all navigating on familiar environment.
The Kobin 19, pandemic easy human and economic crisis.
Unlike anything our world has ever experienced.
Our Hearts go out to the healthcare workers are team customers partners.
In all the families and businesses, who have been hurt by this virus.
As a purpose driven company, we have focused our energy and resources on keeping our team members safe.
Serving our customers and ensuring our business continuity.
We have closely adhered to the guidelines provided by the CDC and national and local governments.
As a result, our headquarters lab customer service in store teams begin working remotely mid March and by March 31st 80% of our stores were closed.
Our teams have quickly implemented.
Beta alternative solutions to serve our customers and support our operation.
As we announced two weeks ago, we have taken action to preserve our financial flexibility increased liquidity and control expenses.
In mid March we drew down the remaining $262 million available under our revolving credit facility and added $75 million in cash through a term loan on April 3rd.
We begin executing more than $150 million of expense reduction and have decreased capital deployment plans by more than $100 million.
We need the difficult decision to for low or reduced hours were approximately 70% of our team members.
If we do board senior leadership and company wide comp and benefits through variable incentive programs and other actions.
These near term measures are necessary to effectively manage through the current environment.
In parallel we remain intently focused on retaining our sleek leadership position marketshare gain and superior shareholder value creation as this crisis, a base and the economy recovers.
Our significant competitive advantages enabled exceptional first quarter results and extended the double digit demand growth trend up our prior six consecutive quarters through the second week of March.
Disciplined execution of our differentiated consumer innovation strategy produced record first quarter results.
Bite the severe adverse impact caused by cobot 19 on demand in the back half of March.
Q1 results included 11% net sales growth to $473 million with the 7% comp gain and five point from new stores.
61% growth in net operating profit to 11% of net sales.
70% growth in earnings per share to $1.36.
And 54% growth in free cash flows to $75 million.
During the quarter units grew 10% and average revenue per unit rose, 2% driving a 240 basis point increase in gross margin rate to nearly 64%.
These results reflect accelerating consumer demand for the health and wellness benefits provided by our revolutionary Threesixty Smart bad.
In addition to improved operating efficiencies, we drove strong premium mix across good better invest with growth in the attachment of our smart bases with partner Snore in footwear me features.
Our ability to drive growth from both a are you in units overtime is a key outcome of our strategy.
Importantly, these consistent top decile results are the real underlying potential for our business and the performance we expect to return to after this unprecedented crisis.
The near term challenges caused by the pandemic are substantial.
However, the strength of our business and balance sheet and the measures. We have taken in recent weeks combined with our highly engaged <unk> billion team gives me great confidence in our ability to rebound with three.
Here are few highlights, which demonstrate our agility and innovative mindset to ensure business continuity under the current circumstances.
With closed doors in a significant media reduction we refocused our April marketing efforts to target our loyal insiders and brand advocates.
We often highlight how important are referral and repeat businesses, which represents more than 45% of our overall sales.
Our ability to quickly lean into these life long relationships in this time of uncertainty is a powerful advantaged in performance driver.
We implemented numerous digital CRM solutions to enable customers to easily engage in transact with us while retaining the value of our relationship based selling model.
Our new digital capabilities include a blended operating model of team members selling from home via phone and chat open stores and online.
As a result of our actions the composition of our sales in April include approximately 25% of our sales coming from closed stores.
Another 25% from opens doors.
50% of ourselves from online like chat in phone with online sales up 250% over the prior year.
We also implemented customer self service digital solutions, including service request rescheduling and a contact list delivery solution.
Results include sustaining levels of service with approximately 80% of our markets open for home delivery and record high customer satisfaction scores.
As a result of these pivot our sales orders per day has steadily improved in April.
During the last two weeks of March as government mandates CLO mandates close to 80% of our stores our sales orders also abruptly declined.
80% to the prior year.
With the actions we've taken our sales have improved to down approximately 50% in April.
We rapidly modified our manufacturing operations and supply chain to reflect or lower near term sales outlook.
In addition, we are working with our suppliers on plans for acceleration in any ambiguity timeframe.
These actions demonstrate the agility real time visibility and control inherent in our vertically integrated business model as well as the seasoned leadership every possible resilience and purpose driven commitment of our team.
As the pandemic redefine how we all live shop in work.
Deep further advancements in our digital capabilities and technology will be part of how we operate in the future.
I couldn't be more proud of our sleep number team during this difficult time and I deeply grateful for their tenacity and ingenuity.
Every day I the evidence that they are making a difference for each other our customers our company and our community.
Our most South Carolina manufacturing plant for example is supporting the South Carolina Hospital Association by Refurbishing nearly 200095 math fulfilling a much needed supply for healthcare workers.
We never has forged a strong positive connection between proven quality sleep and overall wellness.
The current environment has heightened individuals' concerns about their immunity and emotional and mental resilience.
It is more important endeavor for society to benefit from the proven quality sleep that our life changing 360 smart feds provide.
Near term, we plan to advance our exclusive Threesixty smart bed software features to provide all of our sleep like you customers with personalized wellness reporting circadian rhythm and heart rate variability insights delivery need deeper understanding of the link between.
Leap and overall health and wellness.
We also moved our new Threesixty sparked at launch from second to third quarter when in store operations in media spend are expected to be recovering from current low levels.
Bill we were prepared to launch in April our business model responsiveness is allowing us to postpone introduction without adverse impact to inventory marketing or training.
We expect this kind of agility combined with our mission driven culture to enable us to quickly re scale, our store manufacturing and logistics operations.
We are excited for the launch of this new line to be an important part of our rebound.
Given the uncertainty around the impact in duration of cobot, 19th we withdrew our 2020 guidance. We expect the existing government mandated closures to continue to place meaningful pressure on sale through may into a lesser extent into June followed by.
Gradual recovery in the back half of the year.
As we have more clarity, we will continue to share updates on our outlook.
We are doing everything in our power financially strategically and operationally do effectively navigate through this crisis continue to keep our team and customer safe and help our communities achieve higher quality sleep.
We are extremely grateful to our valued partners and suppliers for their support which has been instrumental in ensuring our business continuity.
Consumer demand for our life changing Threesixty smart beds was exceptional going into the pandemic and we expect it to be exceptional after this crisis.
Our digital traffic remained at double digit increases over the prior year, our brand metrics remain at all time highs and we will use this dislocation to accelerate our mission and strategic opportunity around health and wellness.
Now David will provide additional financial details on our first quarter in our actions to navigate in this challenging environment.
Thank you Shelly.
I'd like to add my best wishes for the health and safety of your loved ones through this unprecedented challenge.
The depth of this crisis in the duration of the recovery or unknowable.
That makes business planning and financial forecasting in this environment extremely complex.
Weve pressure tested our liquidity forecast with a variety of inputs, including some severe what if scenarios.
One example, with a model a liquidity give sales were just 20% of the prior year for the balance of 2020.
That model indicated our current liquidity would take us deep into the fourth quarter.
No and 80% field decline is not realistic since it's materially worse than our actual experience.
However, it does go straight to sufficiency of our liquidity in a variety of inputs, we've considered to effectively manage the business in a highly uncertain environment.
While we're not providing guidance today, we are sharing one set of possible outcomes, we used to inform our cost and capital deployment decisions.
With nearly all states under some form of stay at home order, we expect the most cobiz 19 impact on consumers and businesses here in the second quarter.
Therefore, we modeled Q2 sales at about half of the prior year.
Also remember that Q2 is our seasonally low sales and cash generation quarter.
Well no one knows what the government mandates may still be in effect.
We assume consumer confidence and business conditions will improve through the back half of the year.
One of our models assumes a Q3 sales decline versus the prior year of about half the Q2 decline.
Then with the benefit of the extra week, we modeled Q4 sales to be about flat with the prior year.
Based on these quarterly models and our cost in capital deployment cuts.
Our net debt would peak at the end of Q2 with a leverage ratio still below our 4.5 times EBITDAR covenants.
They also indicate free cash consumption of more than $50 million in the first half this year.
In generation of more than $50 million in the back half.
What's important to understand is that we are actively managing all the levers in our control to balance near term financial risks with our commitment to sustain our advantage strategy.
Our orientation for long term performance embraces and approach now that enables us to rebound from this challenge with pace.
This biased inform the actions we've taken to date.
Our priority along with the safety of our teams and customers.
Use of capital preservation.
Good meaningful and abrupt decline in daily sales in mid March prompted the immediate suspension or share repurchases.
We also drew down the revolver and kicked off the according expansion process.
These actions were taken out of caution rather than need as our modeling indicates we will repay to $75 million alone on used at the end of its 364 day term.
The realities of Kobin 19 are dynamic each week, we learn more.
The actions we've taken to date are based on the modeling I've outlined today.
Our approach is to preserve maximum flexibility to rebound quickly should business conditions improve faster.
Alternatively, if conditions worsen other actions are certainly available and will be pursued as needed.
Having control of our vertically integrated business model enables us to be nimble.
We will continue to act with pace.
Other actions across our business to preserve liquidity and profits include real time adjustments to our components flow to properly balance our inventory enabled by our close ongoing partnerships with suppliers.
Deferral or negotiated concessions from important marketing partners.
Rent deferrals for stores and operating locations impacted by Kobin 19, mandatory closures plus advantaged accounting treatment for those deferrals.
Decisions to close approximately 25 stores on month to month leases with high probability for sales transfers and of the profits associated.
Labour and sales tax recoveries onto the cares Act.
And continued evaluation of other liquidity sources, including the remaining accordion availability of $75 million and other liquidity markets.
We expect to meet our liquidity needs in 2020 from operating cash flow and existing credit facilities.
The fundamentals of our business and our balance sheet, our strong as a result with years of prioritize investment and are decisive actions in recent weeks.
We continue to execute for the long term as we allocate capital.
Given the current environment, we are preserving flexibility by prioritizing projects with more immediate benefits to profit.
For example, our store investments generally have a two year payback. So we have to lead about half of the plants 2020 store actions.
On the other hand, the cost benefit assessment of our new three and a half million dollar Assembly distribution center in Los Angeles indicated we should proceed as planned.
We expect lower total cost of operations. When this 80 see replaces the existing hub in early may.
The business disruption from coal good 19 pandemic and their related actions to date will delay, but not be rail the significant value, creating prospects of our business.
Our continuously improving initiatives across the business that delivered compelling value creation in 2019 did so again in the first quarter of 2020.
The financial performance in the first quarter highlights the strength of the business.
Our net sales of $473 million.
Grew 11%, including 7% calm and five points from new stores.
Units were up 10% in a are you grew 2%.
Average trailing 12 month sales per store of $2.9 million grew 7% with 32% of our stores generating more than $3 million per store.
Online and phone sales in Q1 grew 21% over the prior year.
Our Q1 gross margin improved 240 basis points over the prior years first quarter with favorable mix and operating efficiencies more than offsetting deliver delivery labor inflation.
We also drove Athree hundred 50 basis point increase in our net operating profit rate to 11% of net sales, while spending to support our near and long term growth drivers, including a 25% year over year increase in our R&D spending.
These investments plus approximately $3 million net covidien 19 payroll costs were partially offset by approximately $6 million lower broad participation cash incentive compensation.
With sales up 11% in the quarter and operating profit, 61% our earnings per diluted share grew 70% to $1.36 will absorbing approximately 11 cents of income tax headwind year over year.
The utility of our infrastructure truly 37% increase in trailing 12 month cash from operations, a 19.1% ROI C and a Q1 ending leverage ratio of 2.6 times EBITDAR.
We ended the quarter with $239 million of cash on our balance sheet and added another $75 million through our new facility funded on April Threerd.
These metrics convey the health of our business ahead of Cobiz 19.
They also provide insights of how we'll overcome the challenge ahead.
Sleep number innovations improved health and wellness wellbeing highly attainable with a value packed starting price of $999 foresee to 360 smart bed.
We expect demand to grow significantly as we are able to reopen stores and consumer confidence improves.
We also expect investors to again be rewarded overtime.
Cheryl at this point please open the line for clarifying questions.
Certainly to ask a question. Please press star one on your telephone keypad. The first question comes from John Baugh Stifel. Please go ahead. Your line is open.
Thank you good afternoon, congrats on a great first quarter kudos to management sharing of the economic pain.
I'm not jump right in.
Could you talk Shelly to any states, maybe Florida up in a recently.
I don't quote opened and what exactly is happening with your stores if anything in most states for what you anticipate near term and <unk> states that open.
Sure John.
No as we looked at the stores day has reopened or our own thing there is variation.
Depending on the stake in it it really speaks to what is transpiring locally.
Whether it's in a county or date until you see that variation.
Across the country, so some market.
Opened with.
Significant track I say significant you know we have low loan transaction most of all traffic with with high are you, but customers coming in store you kind of close to the to a regular type environment and then you have other states, where we reopened.
And the customers coming in are all based on our reach out with customers to bring them in so it's different by state and you know I think it's interesting because normally under a normal situation our business.
This is quite consistent across the country, we don't see big Big swings in traffic on sometimes you have some weather impact, but it's very short term.
So generally is pretty consistent and we're seeing this a little different what I really like about what we've learned and executed over these last four weeks is our team's ability to rise above their circumstances and utilize innovative solutions to continue to drive performance.
It is so impressive John it it speaks to our mission driven culture in the tenacity that our team has to figure out away and so we're not sitting here in a situation, where we're opening stores and then dependent on our marketing driving in traffic because of our relationship based.
Selling model and the lead strategy that we have and the ongoing relationships with our insiders, which represent such a significant portion of our business gives us the ability to drive performance and I'm really really pleased with what we've been able to accomplish over the last.
Four weeks in you know unbelievable circumstances.
Yeah, it's unprecedented for sure, but I'm just curious how your how your customers that.
Neither come in from your prompting or maybe comment off the street.
What their comfort level is in laying on a bed and how you're addressing that anxiety or whether you know because you're selling function included.
Basically getting on a bad if youre, new customer and finding your sleep number so I'm curious as to how your navigating the.
Well, John we strictly follow CDC guidelines have since the beginning on social assistance seen on hygiene and fabrication.
Our stores are low traffic low occupancy low occupancy and we have an offer private appointments. We have many ways to work with our customers. We're you know obviously, you know very clean and cautious and we have we have separate hours for.
Elderly and vulnerable.
Populations as needed and you know from the beginning we have you kept the prioritization of keeping our team members safe and our customers.
And community and contributing to our communities and ensuring our business continuity and has consistently.
Oh early then able to pivot and finding the best way forward. So we have you know back to my earlier response, there some markets where customers are behaving very normally and then other markets, where they are more apprehensive and yet you know with the way we conduct our business.
Huh.
And our small store environments with you as you know the only customer in the store. It. It quickly you mitigate any type of concern on our teams so professional and they they have had so much experience already on so it's.
It's been going quite well.
And then my last question is clarity maybe for David could you walk us through again. The April comments was down either is down 50 that well walk us through.
Sightseer orders inch versus shipments I wasn't quite clear. Thank you.
John you're asking for clarity around Q1.
Performance.
Okay for the month of April there was commentary about share orders falling off 80%, another 50% and I wasn't clear on precisely.
April as track so far.
Sure well I'm actually going to start with Q1, because I think it it just help understand the the performance intervals, yes have we came into Q1 with momentum.
Into our seventh quarter, a double digit demand and we had a sale sales growth of up 17% quarter to date through the second week of March and then we were hit with the coal the results of the.
Cobot, 19, pandemic and ourselves of roughly declined and and by the end of March by March 31st we had 80% of our stores close and our sales were down nearly 80% at that time as well.
And every week through April we've been able to improve you know we look at right now our average revenue per day.
Well as you know the weekend different trend line three day 10 day, seven days and we've been able to steadily improve our performance with all of the different digital capabilities and new selling model that we've been able to create until we had consistent improvement and now we're looking at eight.
For all of being down approximately 50%.
Thank you for the and congrats on the top environment very good luck.
Thank you John.
Your next question is from Brad Thomas of Keybanc Capital. Please go ahead. Your line is open.
Hi, Thanks for taking my question for all the color.
I wanted to follow up on on jobs last question and talk a little bit about sales in April.
Some details on this in your prepared remark Shelly, but but of the sales that you converted in April could you talk a little bit about about how much of that dollar value came from.
Yeah, and Internet purchase and how much of that came from a customer that didnt, even go into a store misunderstand trying to understand the strength of your business.
For customers that that may not even go into store and how much of that business to be repaid.
No the consumer wants to say where from stores for sometime.
Yes, Brad you know when you look at the composition of sales in April.
Now I'll start here, 25% came from stores that are close so that means sleep professionals selling from their home.
He there over the phone or be a chat.
No customer interaction at all.
25%.
I was generated from stores that are often and that's a mix.
You know a phone calls and follow up and customers coming into the store.
And then 50% of the total sales from online chat and phone through our you know more traditional channel method.
Great. That's that's very helpful.
And so to move over to that maybe the cost side the equation here.
You talked about maybe a scenario model and have to Q and revenues potentially being down the 50% range can you give us a sense of maybe what operating income might look like if this is where revenues might play out for QQ and and help us think about you know the costs on the equation here in the run rate on costs.
Yes, Brad I am not going to provide guidance, we pulled our guidance for reason this is a very.
Unusual circumstance that we're all working our way through.
And trying to.
Predict what will happen and when he is a bit few tile now what weve provided you.
Some of the modeling that weve used to help us make decisions, we certainly need to make decisions in this environment, we've done that.
However, you can bet that we're going to be working hard to deliver the best possible results that we can and will continue to update you and the rest the group.
As we progress through the year.
Okay fair enough.
Thank you all so much and good luck.
Thanks, Brad.
Your next question Bobby Griffin of Raymond James. Please go ahead. Your line is open.
Good afternoon, everybody. Thanks for taking my questions on all congrats really on freed up first quarter.
Thanks, I guess.
The first I want to talk about Dave all is maybe on or Davor shows on on the way backup and recovery can you talk about what's your what's your kind of look forward to open up stores in a market by market basis store by store. If it's some demand comes back slower than others do you have the ability to keep some stores dark why that demands not quite.
Ready yet in that market.
Yeah Bobby.
Hi.
We follow our local and national government mandates for re opening stores.
So that is that is our approach following CDC guidelines and the government mandates and we are reopening as such.
We have.
Our unique selling model and process as a vertically integrated company, we're able to generate business and we've demonstrated that every single situation to date. So I'll give you. The example of last week, we reopened 44 stores last.
Weak.
And these 44 stores were in a variety of different states.
With different community environment.
And each and every store was able to generate a decent demand for their business now it came in different ways.
Markets had traffic some did not.
And this is this is where we're able to utilize and really focus on our insiders right now our brand advocate as well as the significant digital traffic, we have to be able to build that relationship and convert sales.
Okay. That's fine that's helpful. And appreciate that example, all second we can can you talk about form the consumer financing side of your business.
Synchrony financial firms are an important program, it's been very successful completely different type of slow down than the last recession, but what exactly are you hearing from them in terms of consumer credit availability or what do you see in in terms of all consumer credit availability within your program.
Well Bobby.
Counterparty risk is certainly something that we keep very close to as well and have been.
Tightly connected with synchrony and their management team, we connect with them on a regular basis and.
Their business is very different.
Mostly from the last recession back into eight or nine never part of a bigger company that.
Who is cash constrained versus today, they're highly cash capitalized and so they have.
Significant deposits on accounts and your balance sheet is very strong.
So they have.
Continue to reiterate to me that.
There and it with us they love our customer base, we tend to skew a little.
Higher income in Ohio, and a little bit older and they they love our customer base and.
There are only business is.
As a publicly traded company as well.
Is generating business through their credit.
Operations and so they are there in it with us and they've committed that that's going to continue.
Thank you Dave. Thank you show very helpful and best of luck in the second quarter.
Thanks, Bobby.
Your next question from Peter Keith Piper Sandler. Please go ahead your line is open.
Hey, guys good afternoon, and that really nice Q1, guys that.
I thought to be quite a strong quarter, it's still finished quite strong and even say.
The expectations for down 15, aprils much better we were expecting.
Shall we want to ask you just put the advertising and how you're approaching that in terms of pulling back on the advertising spend.
And is there any delay effect, where maybe they have you advertising remarks is helping April but they'll pull back in April could impact may or June how do you think about that kind of a ripple effect over a couple of weeks for a couple of months.
Yes. Thank you Peter we have we respond immediately in in March right away. When we saw the decline in sales so that takes us back to.
The middle of March and eat it to you know could could we have some hang over here in April.
From the customer having the awareness.
Hi, possibly but at the same time, you know we're not completely dark I mean, we certainly pulled back significantly on our media spend and thinking about it more on on the same level as our sales increase such a good way for you to consider.
You know how deep we've cut.
At the same time, we continue to see double digit digital traffic of which we're very encouraged by along with our it and that's over the prior year along with incredible.
Affection and brand metrics and it does speak to the extraordinary demand we've been seeing we just last our sixtyl quarter here of double digit growth or this is the third quarter of laughing double digit sales growth from from the prior year.
In the first quarter, so it speaks to to the strength and the demand at the Threesixty markets.
Okay.
I also want just wanted to understand maybe the the mix of sales and and attach rate with adjustable bases. It sounded like you.
Your your orders are kind of running down 58, you'd expect us sales in April to be pretty down 50, So maybe really no change to the mix, but could you confirm that for us just with terms of yep.
Are you at attach rate.
Yeah we're.
We have mix change definitely when you look at the composition of our sales with 50% coming from online phone and Chad you know, it's very very very different than our normal composition and our selling process in in store experience has superior.
A are you at as you know and in that speaks highly too they experience in the store, but also that interaction with our team members. So there will be change in mix and you know what you know with.
A big advantage of our strategy. Peter is the fact that we can drive growth from both a are you in units and you know ideally where we're always driving it from both we certainly do on an annual basis and you can see in a quarter like Q1, when we have growth in both in the quarter.
It's quite explosive and we're really pleased with our 64% gross margin in Q1 as well.
During this time.
And certainly during April you're going to see fluctuations in a are you you're in and their mix and <unk>.
And there is going to impact margin as well on and we're probably not going to be attaching at the same rate as we were before on and at same time will probably mix down because of GE online sales you know I think it's important to remember that these are our short term. This is in the short.
Our term there's going to be the fluctuation.
The great thing is that we can feel drive.
Barman, you know from both and we're going to be trying lots of different tactics. You know, we quickly pivoted and changed our strategy for April to drive sales to focus more on insiders, where we don't have to spend the level of marketing and we're really pleased with what we've been able to do.
You know with with our advantaged model and competitive advantages.
Okay. That's great. That's certainly I think down 50 is much better than go what is expected at this point lastly from me is just on the deliveries.
Because people have to have.
Sleep number even come into their home to some of the beds is there any push back on that.
Yeah, maybe customers are our has been are delaying some of the shipments I'm just kind of understanding how that that could could carry forwards and in coming months.
Oh.
Peter we've been able to continue to deliver in about 80% of of the markets and I have one point this was down to around 75% and now it's 80.
And clearly followed the CDC guidelines and all the sanitarium precautionary.
Approaches here and people at same time people want their bad on they may be in a situation, where they don't have a bad or.
In many situations people are recognizing the importance of their sleep right now for their overall health and wellness and they want this bad that delivers proven quality sleep.
In in addition.
We also added a capability of rescheduling online and so that gives customers the ability, especially with marketplace changes.
To to be able to have creative reschedule and that's very efficient and effective for both the customer and for us.
Okay. That's very helpful. Thanks, a lot guys and good luck.
Thanks Peter.
Your next question is from a tool my has flurry of yes. Please go ahead, Sir your line is open.
Good evening, Thanks, a lot for taking my questions. So when you did the stress test on sales being down 80% for the full year.
What fixed cost did you assume that analysis. There is obviously rent for your stores and as we have manufacturing or distribution facilities and then you have the corporate center cost. So what are their fixed cost did you assume and and are you able to size or quantify these cost for us in anyway. Thank you.
Well.
[music].
At our level.
All of our costs are variable and are just about and so we.
Our.
That model, it's it's a very unusual one to model out because its.
It's not a normal business operating condition situation, obviously so.
It required significant reductions in our cost structure across the business. However.
You know, though the intent was.
To be relatively conservative in our assumption so that we could see what.
Hello, how are we would flatten our liquidity burn in a way that would.
You know support the business as long as possible. So it's just one of them. Many scenarios that we ran I provided that as an illustration.
I wouldn't suggest to you.
You know use it in your and your modeling of how we what we expect from the business this year, but nonetheless.
The cash commentary I talked about.
Regarding our free cash.
Usage in the first half versus the free cash generation in the back half or more illustrative of of what were you know directionally talking about.
As a reason more reasonable set of parameters for the for the for what we're seeing so far.
Understood. Thank you that's that's very helpful and just as my follow up.
In the past what percentage of sales involved delivery in assembly of products that customers homes, and then along those lines on your contact list in the re initiative can you just provide a little bit more color on how you're going about it.
So for example are you providing some sort of an online took oriented consumer figure shopper. So that they can assemble the bench themselves just just any color here would be very helpful. Thank you.
With our smart beds all of our pads are home delivered.
And that's a change that transpired when we moved to all smart beds seven quarters ago.
Regarding the contact list delivery. We're you know in early stages of age. We just spend you know testing that here in the last couple of weeks, but it's essentially assembling the bad for the customer Oh, yeah, and delivering it to complete in their garage or.
Adjacent so no. We we do not have here's how you assemble it online it is a specific.
It is a specific response.
To a customer who wants this type of delivery.
Very small in the percentage, but importantly, we have a solution.
Understood. Thank you and good luck with Russian here.
Your next question is from Curtis Nagle of Bank of America. Please go ahead. Your line is open.
[laughter] very much for.
Taking my questions first just more of a quick follow up.
On the question on synchrony.
Crushing or you know at this point it's.
Kind of tightening in terms of standards.
So centers that they're putting through or do you have an expectation that you know that could occur in Utica remind us what percent of sales credit accounts for.
Sure.
We have not seen anything at all.
And don't really expect that to happen in the near term, obviously credit conditions for some of their customers maybe different than you know what they're seeing with our portfolio.
But they've been in exceptional partner for us engaged with us and being creative about how to do business in this environment and we very much appreciate that partnership.
About half of our business.
In 2019 was financed.
Thank you for the teacher and then just two quick ones in terms of just order and cost flow.
[laughter].
And Halston does sort of you see in the second house.
More shifts upon you know in March were approached it didnt.
Until QQ given that you know, there's a lag between orders and deliveries occur.
Curtis I'm, a little I don't know if I heard that quite clearly you're asking about cost from Tokyo, So for Q U.
Yeah. So the question are asking is.
A quick revenue would corporate mission problem, so no problem.
Question. So the question is you know you show a big falloff in demand and.
Orders in the back part of March.
The second half.
Good that all flow through in March or did it.
Spill over into the second quarter, just because of you know, they're getting a wide between those orders and when to deliver is actually occur when costs will be recognized.
Right, so surely highlighted that.
Through June through the second week, we had really strong.
Demand and the last three weeks as the quarter.
Demand was affected as were deliveries.
She highlighted as well that at one point.
A portion of our delivery capability was shutdown as well [noise] of about a quarter of the country and so there was some in back in.
Q1 on our deliveries and their demand you know capabilities in error.
Total demand in the quarter within the quarter.
Okay, and then mineral fault.
Thanks very much appreciate it.
Okay Curtis.
Your last question from Seth Basham of Wedbush. Please go ahead. Your line is open.
Thanks, a lot and good afternoon.
First question, it's just a clarifying question to the last one just thinking about the timing of impact you know from a slowdown in activity at the end of the quarter given that lag between the time that you take orders and you actually to look for them I would presume that most of the personnel the impact both from a top and bottom line.
From that slowdown didn't occur in the first quarter it occurred and the second quarter is that correct.
Well so.
Couple of things you can point to is look our demand as Shelly highlighted was up 17% quarter today through March 2nd week in March.
And we posted net sales growth of 11%. So there was certainly some impact on a total sales recognition in the quarter in the first quarter.
Certainly would have been much stronger if not for Cobiz 19, if that's what you're looking for.
In terms of costs, clearly, we had cost impacts in the quarter as well.
We didn't have the efficiencies of our operations.
Those last three weeks as well you know our factories weren't as busy.
The things of that nature, so we absorbed quite a bit of cost pressure those last three weeks.
Gotcha.
And second point of clarification, just on the April commentary is making a 50%.
Sales rate.
Is that a current run rate or is that a month to date.
Figure.
That was month to date.
Month today, Okay. Thank you so presumably it was worse than that thing at April and improve the better and that that at this point in time.
Yeah. Initially said it was you know even worse the last couple of weeks in April for I mean in March and then proceeded to to get consecutively better each week this month.
Got it and then the last question I had is thinking about the scenario analysis that you laid out.
What.
Cash generation that 50 million in the second half basing yourself assumptions et cetera, There's obviously some cost assumptions involvement and up.
Scenario and I understand you're not going to provide any insights and exactly what you're thinking kind of cost management standpoint, just more broadly how are you thinking about your labor management as demand ramps back up or how are you going to.
Bring back labor relative to your sales can you manage that pretty fluid like.
Yes, I think this.
The evidence is in the decisiveness, we've already demonstrated.
So I think.
Having 70%.
Of our teams on either for lower reduced hours and then.
Labour cost reduction initiatives on a lot of other fronts as well.
Across the entire company and.
We've taken.
About a quarter of our costs out of our.
Operating expenses from what we planned.
You know the balance that last nine months of the year.
And we believe that.
We'll be cautious on bringing labor back, we obviously want to see.
You know demand come before we.
Start to accelerate our labor, but.
They do go hand in hand in some cases on and we will manage that very closely.
And the related to that when you think about the risk of losing employees that you have on furlough.
Is that kind of playing your plans is that a real risk.
Well certainly.
We are it's a real we think of our team members as family and so.
The pain that it that we incurred when we had to make those decisions is is challenging but this is necessary for the.
The overall health of the total business and then certainly all of the actions that we're taking to drive.
Strong performance faster. So we can bring people back sooner certainly that is top of mind for everybody.
Okay and last question interest on labor in terms of when you're operating a store, what's the minimum labor requirement to talk right that store.
On a daily basis.
Well it depends because we've actually gone to a modified our structure. So that's less than it once was and so we're able to.
Staff our stores with a couple of people were in the past uses a minimum looks like three.
You know across the country.
Understood Alright, thank you very much and best of luck right.
Thanks, a lot.
There are no further questions at this time I will turn the call over at the company for closing remarks.
Thank you for joining us today, we look forward to discussing our second quarter 2020 performance with you in July sleep, well and Dream Big.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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