Q1 2021 Lovesac Co Earnings Call
[music].
Hello, and welcome to the loves our first quarter fiscal 2021 earnings call.
This time all participants are in listen only mode. A question answer session will follow the formal presentation.
Hi, Richard require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Mitch <unk> Mis Rachel Schacter with RCR.
Thank you may begin. Thank you good morning, everyone with me on the College, Todd Nelson Chief Executive Officer, Jeff.
In it and Chief operating Officer, Dr., Donald <unk>, 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 future expectations financial projections, and our plans and prospects.
Actual results may differ materially from those set forth in such statements are discussion of these risks and uncertainties you should review the company's filing with the FCC, which includes today's press release, you should not rely on are forward looking statements as prediction of future events.
All forward looking statements that we make on this call are based on assumptions and beliefs.
Today, we undertake no obligation to update and 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 our GAAP results.
Reconciliation of the most directly comparable GAAP financial measure to such non-GAAP financial measure has been provided a supplemental financial information in our press release now I'd like to turn the call already showing Nelson Chief Executive Officer of the watch that company.
Thank you Rachel good morning, everybody and thank for joining US today I will begin my remarks by providing an overview of the company's continued response to cope with 19, followed by a summary of our performance for the first quarter, then drug Crouse, our president and COO will discuss the operational highlights of our fiscal 21 first quarter performance and progress being made.
In our key initiatives against the current backdrop.
So on a delano our CFO will then review our financial results in a few other items related to our outlook.
I want to offer some quick thoughts on the ongoing tumultuous events in our country.
Of course, we have previously addressed to cope with 19 pandemic Kabul for human level and in terms of the impact on our business. We are so grateful for the first responders healthcare workers and essential workers, who are on the front one of the style.
Robin appreciate you and are committed to doing all we can to continue to wonder support.
Secondly, but no less importantly, the health and safety of our associates and customers continues to be our number one priority to that end all of our showrooms remained close for approximately half of the quarter. Beginning March 17 through the end of the first quarter, that's customer spend more time at home. We responded with a rapid and successful pivot to a web only model.
Resulting in very strong ecommerce performance in the face of showroom closures.
More recently of course, the nationwide civil unrest in the wake up the appalling Minneapolis event. The tragically, it's not an isolated instance, that's cost further dislocation.
Let me just say this.
The board room to the break room, where her broken the country continues to enter the painful legacy of racism and we are eager for auction to solve it.
That's for the tangible impact on our business. Firstly, we are grateful for our team members who are safe.
We have not sustain the store damage, but the unrest has somewhat complicated our store reopening planning.
So it has not changed our fundamental approach, namely the economy begins to reopen and the unrest dissipates.
We're going to approach our own reopenings in a measured manner adhering to local regulations and strict health and safety standards.
This means not being a leader when it comes to the pace of Reopenings and instead deploying a phase three opening plan, which Jack will discuss in more detail in just a moment.
Not only is this the rights you could do for our associates and customers, but we are fortunate that the continued strength of our E. Commerce performance affords us the opportunity to be far more deliberate in our approach to reopening taking into account myriad factors.
Turning to our Q1 results, we reported Q4 results a little over six weeks ago and at that time provided detail on our Q1 quarter to date results through April 12.
We're very pleased to be aggregate, 400% E Commerce Pos transaction dollar increase we stopped post showroom closure through that date. After you referenced our last call was more than just a trend.
It reflects a fundamental business advantage of a company with multi channel selling disciplined logistical expertise and its deanna.
Through the end of Q1, we saw total company sales growth of 33% versus last year.
This post show in close your performance, particularly in the month of April illustrates the strong customer appeal of our changeable flexible sustainable Upgradable on shippable design for life seats inside that are driving market share gains with stock sales also showing strong growth of 63% and sectionals of 30.
3%.
It also reflects the agility and execution of the entire loves tag team, who adopted swiftly to the rapidly changing operating conditions and I want to extend my deepest appreciation to every one of our team members for their efforts.
We are of course cognizant of the need to compliment as topline growth with the kind of operational excellence that yields sustained profitability and bottom line improvement.
Our head wins in this respect include most notably the impact of tariffs, which was the primary contributor to a 110 basis point decline in gross margin versus last year before the tariffs were elevated at the current levels.
I do want to reiterate that we have taken and we'll continue to take aggressive steps to mitigate the tariff impact.
We're currently manufacturing the vast majority of our Sectionals inserts in Vietnam, and Malaysia regions that are outside the purview of the special tariffs.
We are still manufacturing the majority of our sound. Good second starts to be imported and Sylvan, Texas, along with shock and Sectionals covers in China.
We are actively knowing fabric for some of these items in Indonesia, now and we'll be doing some selling of these goods in Vietnam by the end of Q2.
And receiving goods in Q3.
Oh, the production that still remains in China now all first costs have been discounted significantly to mitigate much of the impact of tariffs.
So we continue to see gradual recovery at the gross margin line, even as we face some expected elevated cost in our distribution network, namely Fedex rate hikes and near term de leveraging as we expand to multiple warehouses.
Last quarter, we stated that we expect gross margin recovery from tariff pressured to take about eight quarters, we still expect to gross margin recovery, but given the unforeseen disruptions lucky and ability to travel abroad, right now, which has slowed our resourcing efforts a bit in the nearest term as well as some movements in timeline for warehouse initial.
It was caused by the pandemic disruption the recovery may take slightly longer than we originally anticipated.
From a profitability perspective, our adjusted EBITDA loss of 5.7 million was only $1 million below Q1 last year, despite having our entire showroom fleet close for half the quarter.
This reflects our proactive and purposeful steps in the wake up the pandemic to reduce our cost structure preserve liquidity and run as lean as possible without compromising operational excellence.
Importantly, our liquidity remains strong as we previewed on our call in April.
After the end of Q1, we had 45.5 million in cash no debt and 11.4 million in availability under the one of credit.
During the quarter, we focused on reducing expenses working capital and capital expenditures as Donald will discuss we.
We continue to prioritize cash preservation, which combined with our strong liquidity provides us with the financial flexibility to continue to successfully whether this period.
Thus far in fiscal Q2, we have reopened 89 of 91 showrooms as of today in some format. Many still virtual or appointment only we are in continued conversations with landlords, where showrooms are still close and our conversations have been productive in terms of shop in shop and pop up shop.
Ops with Costco best buy Macy's, none are opened within markets, where these retail partners have reopened their stores.
However, regardless of the pace at which showroom and shop in shops reopen we continue to believe that we are very well positioned within the current environment and beyond given the unique attributes of our company and business model, including number one our strong balance sheet and financial position number two.
Evergreen shippable product offering that resonates during this time and lends itself, particularly well to eat DTC only environment.
Number three.
Very flexible marketing budget with no long term advertising contracts in place is enabling whatever pivots, maybe necessary as the environment changes.
Ever for an agile and lean operating model.
Never five a diversified sales channel that allows us multiple high return options to expand our brand reach.
These attributes continue to serve us well and so far in Q2, we are seeing an acceleration in April business trends I discussed.
Driven in large part by the success of our heroes campaign as well as overall demand.
However, it is impossible to predict how long this demand surge made last.
As I said earlier, we are focused on executing against our key strategic priorities and positioning love stack for continued market share gains irrespective of the macro backdrop.
Before turning the call over to jog I want to again, thank all of our employees for their hard work seamless execution and continued commitment to serving our customers in a challenging and evolving environment.
We are grateful for all of their efforts that have contributed to our financial and operational performance. During these unprecedented times.
With that.
Turn the call over to Jack to discuss our planned to navigate the current environment and the recovery plan for F. Why 21.
Thank you Sean and good morning, everybody I'll begin my remarks by elaborating on our continued approach to managing the cobot 19 pandemic and then I'll briefly discuss our plans for fiscal 21, as Sean said the strength of our multi channel model illustrated in the 255% E Commerce increase in Q1 that enabled off.
Reserve more than all of our prior period sales in a post coded close showroom environment.
We're pleased to see contained strength and our E Commerce channel performance, so far in fiscal Q2 and with approximately 89 over 91 showrooms open as of today do not need. We're also very encouraged by the initial performance of showrooms in these early days of reopening our very effective heroes campaign that kicked off in late March and then it a few days ago.
Well the significant contributor and these strong results.
Moving to our response to cope with 19, our efforts have remains centered around the three pillars that I outlined last quarter and executed by cross functional teams across the organization, which a lot of developed plans on a parallel path ensuring an effective and rapid response. These pillars are one team health and.
Safety to business strength, and third financial resilience health and safety of our associates and customers remain our number one priority. Our headquarter staff continues to work from home and we're currently in the process with opening showrooms at a very measured pace and adhering to local government regulations, we are implementing.
Three phased approach to show them openings.
Phase one we'll be opening in a virtual environment and what your so should operate from showrooms without customer traffic and this phase they respond to phone calls chat online and fulfill swatch request as well provide virtual demos to our customers.
I used to begins after two weeks of phase, one and if conditions permit and phase to the showrooms walk right on an appointment basis, only allowing one customer at a time into the show room in phase three we will open showrooms to foot traffic law abiding by all locally mandated social distancing and protection standards.
These phases will be based upon CD recommendations and local walls and therefore, we may have showrooms revert back a stage of local conditions require increased restrictions.
On the business strength front, we continue to leverage our DTC model and adapt to the current environment.
Full time associates, a close showrooms continue to be active with customers using digital platforms, such as podium to help guide customers through the buying process from remote locations at home serving as remote based customer service agents for their trade areas.
These associates have been incredibly nimble and have continued to generate more than enough revenue to cover their payroll. During this period going forward, we fully expect to leverage our associates utilizing a far more trade area approach to serving customers across all channels as we navigate a return to a new normal over the last nine weeks showroom to.
Teams have conducted more than 80, Facebook wife sessions with 278, Pete viewers on average these sessions combined with post engagement the equivalent of performing 1.2 million product demos. In addition, our showroom teams have averaged 195 plus unique web chats a day since installing the podium widget on the web site.
And averaged 1.1 million in sales per week from web chat alone.
On the marketing front, we continue to increase our communication focus on the love Sac value added services, including free shipping returns risk free trial period and increased availability of swatches also recognition of the incredible contribution of our central workers, We launched our heroes campaign in the first quarter, which started on four 320.
And it it on 531 20 with the redemption period still continuing through middle of this June. This campaign has offered 40% off to all frontline workers and has seen very strong traction.
In terms of marketing mix, we continue to be pleased with increased efficiency of lumps Act on Pentrust, Instagram and our search campaign as well as they jump in conversion rates associated with our email and digital marketing programs. Additionally, as we continue to see significant increases in traffic to our web site. We're pleased that website conversion.
Has also increased leading us to believe that we're attracting a much more targeted engaged visitor.
Got it will discuss the financial resilience in a moment, but to reiterate sean's comments the quarter spin off to a very strong start remain very comfortable with the liquidity position with our debt free balance sheet over 45 million in cash. This is a testament to the core appeal of our platform as consumers focus more on their homes as well the flexibility adaptability.
And the dedication of the entire loves Sac organization.
As we look ahead the current environment continues to evolve on a daily basis, and it's hard to determine the duration of the strengthened demand that we've seen but we're staying flexible. We're also not losing sight of our strategic priorities well the timeline for each maybe all third as circumstances dictate we remain focused on key priorities, which are one.
Nation, we're excited about the new product launches in the pipe pipeline that will be additive to the sectionals platform, we're continuing to evaluate the appropriate launch timing, which it originally been slated for this fall, but will likely be pushed into the early calendar of 21, given the macro economic environment.
To utilizing effective and efficient marketing strategies as we've discussed our ability to rapidly pivot to a DTC only model. During this crisis has been very effective we remain both agile.
And discipline with our marketing efforts and are focused on maximizing ROI.
We are pleased we were able to achieve across channels. In addition, our successful heroes campaign. We saw strong results from paid search social media digital remarketing and our affiliate programs. Many of you have likely seen or TV ads and I'm pleased to share that are TV ROI since starting the ads in early may have been very strong.
Improve performance had been driven by rates, which had been lower than expected as well as strong and engaged web traffic.
Third store openings and new Sherman plans already discussed our approach to showroom reopenings the range of potential newsrooms. This year is likely to be between 15 and 18 as we've been working with landlords to adjust and continue to expand our footprint.
For operating Cosco pop up shop locations and test shop in shops, with Macy's and bestbuy, while we have little and the way of updates to covert 19 pandemic, we remain optimistic about our prospects with all these important channel partners, while continuing to explore the shop in shop format with other retailers given the Pos.
The results we've seen thus far.
Lastly, we continue to make disciplined investments in our infrastructure, including technology and supply chain on that supply chain side, we opened or third party managed California warehouse in February and are continuing to ramp up operations and expect to be operating hundred 50000 square feet of space by August the.
Combined with the planned opening of our East Coast warehouse late this fiscal year or early next fiscal year is expected to help drive reductions in freight costs as we head into fiscal 22. In addition, we are engaged in a multi phase project to launch a supply chain management system, which will drive efficiencies and planning production management.
In order fulfillment functions. This will begin in the second quarter and would be completed by the first half of fiscal 22, we expect to see benefits in phase, one including visibility of tracking demand planning and forecasting which will positively impact our ability to execute with excellence.
In the fourth quarter. This fiscal year. So we're very pleased with how the businesses performed as we continue to adapt to the challenges of the current environment Importantly, we could not be more proud of the entire loves that team and how they have continued to demonstrate great resilience throughout this period.
I was encouraged as we are by the strong E commerce trends, we've seen in this environment. We do expect in moderation given that our heroes campaign I discussed earlier has ended and as our showrooms continue to reopen well there are some uncertainty on how sales will trend as states reopening consumers adjust to the evolving economic realities, we're confident that the unique advantage.
Use of our business model will continue to serve us well and in combination with the disciplined execution of our strategic priorities position us well to build on our market share gains.
With that I'll turn the call over to Donna to review, our Q1 financials and provide a quick summary of the financial resilience teamwork Donna.
Thank you Doug Good morning, everyone. I will begin my remarks with a review of our first quarter results and then provide a framework for how we're approaching the remainder of fiscal 2021.
The 32.8% increase in net sales to 54.4 million was driven by triple digit growth in our Internet channel along with an 11% increase in our other channel related to our shop in shop locations. This was partially offset by show room revenue decrease due in.
Harley Covidien 18 related temporary showroom closures. Please refer to our press release for details on our comparable sales performance.
Looking at our results, but channels for the first quarter showroom sales decreased 32.7% 18.1 million due to Clover 19 related temporary showroom closures.
Internet sales increased 255.4% to 30.1 million as a result of the successful to that we need to focus on our E Commerce channel in a close showroom environment.
Our other channel, which includes our pop up shops in Cosco location in shop in shops and for Macy's and Threed. That's my locations increased 11% to 6.2 million.
This year over year increase was driven my Macy's and best buy shop in shops, partially offset by a slight decrease in our cosco business as a result into Kobin 18, driven temporary fault can pop up shop activities at Cosco.
By product category or Saxon sales increased 33.4% or sock sales increased 63.3% and our other category sales, which includes decorative pillows blankets and other accessories decreased 58.7% due to a decreasing sales related to certain instructional accessory.
Okay, and new platform product introductions like the power hub are now being captured in their respective Jacksonville, and Soc platform net sales figures.
The 110 basis point decrease in our gross margin was principally driven by the impact of terrorists an increase in promotional activity specifically related to our heroes campaign and an increase in freight costs, which were partially offset by reduced product costs, resulting from church mitigation related vendor.
Negotiations as well as a continued shift in product sourcing out of China, Vietnam and Malaysia.
As a reminder, the timing of our tariff mitigation efforts and increased shipping costs are driving this temporary gross margin pressure and as Sean said, we expect gross margin recovery over time.
The 8.3% increase in S. Genie dollars, excluding one time I know this was driven largely by increases in infrastructure improvements relating to our ecommerce platform and an increase in selling related expenses related to the increase in net sales. These increases were partially offset by a decrease in equity.
Compensation expense.
And <unk> as a percentage of net cells leveraged a thousand is 75 basis points as a result of the cost reduction measures previously mentioned by Jack as well as the decrease in equity based compensation expense.
Yes, you named financially me billions measures we have taken so far has had a slight impact on the first quarter. The full impact of those measures will begin in Q2.
Oh investments in advertising and marketing, which benefit extended periods increased 2.8 million were approximately 190 basis points to 15.1% themselves.
The increase was driven by our focus on communicating important low stock value added services, such as free shipping returns and risk free trial period, as well is marketing and that's been Fourk content production product innovation and research spend in fiscal 2021.
It was expensed in the first quarter fiscal 2021.
His first quarter 2021 expense production innovation in research costs of approximately 750000.
Were included in prepaid assets in other current assets on our balance sheet as of February 2nd 2020.
Depreciation and amortization increased $570000 from the prior year period to 1.6 million principally related to capital investments for newly remodeled showroom and interest or <unk>.
In the first quarter fiscal 2021 operating loss was 8.4 million as compared to an operating loss of 9.3 million in the first quarter last year driven by the sales increased in SG any leverage I just discussed.
Our net interest income for the first quarter was $56000.
Tax expense in the first quarter fiscal 2021, and 2020 was not material and it was related to minimum state income tax liability.
Before we turn our attention to net income net income per share any EBITDA. Please refer to the terminology in reconciliation between each of our adjusted metrics and the most directly comparable GAAP measurements in our earnings release issued earlier today.
Net loss was 8.3 million or a loss of 58 cents per share in the first quarter fiscal 2021 compared to a net loss of 9.1 million or a loss of 67 cents per share in the first quarter fiscal 2020.
Adjusted EBITDA was a negative 5.7 million as compared to negative 4.7 million in the first quarter last year.
The reason for the year over year decrease in adjusted EBITDA as compared to the year over year decrease in operating loss is related to the net reduction in adjusted EBITDA at docs principally equity compensation.
Turning to our balance sheet, our liquidity remains strong as we ended the first quarter with 45.5 million in cash and cash equivalents.
And 11.4 million in availability.
Revolving line of credit with no outstanding debt on the revolver. This is better than expected by about $10 million.
I was Pos transactions exceeded our projections for Q1.
Ending inventory increased 8.1% year over year, driven by higher sales in an increase in capitalized freight and warehousing costs related to charts and increased inventory levels.
Free cash flow defined as cash from operations less Capex was used approximately $2.7 million in a 13 weeks ended may 3rd 2020, as compared to use of approximately $10.1 million in the prior year quarter.
A year over year improvement was driven principally by an improvement in cash from working capital.
In terms of outlook given the continued uncertainty around coogan 19 related disruption, you're not providing an outlook for fiscal 21 as Jack and Sean mentioned, we are pleased with the continued strong E. Commerce performance, we've seen to date as well as the performance of our showrooms and the initial days of reopening.
However, we know that our heroes campaigns have redemption could dollar tree June 14 has been a big driver of the strength in performance and it's hard to determine the duration of tailwinds like increased customer interest in home related categories like ours.
We will continue to stay flexible and tightly manage our expense structure to revenue trends as we navigate the uncertainties of the current environment.
Our quarterly operational cash burn for Q2 in Q3. This fiscal year is expected to be lower than the corresponding prior year period, and we expect to enter fiscal year with healthy cash balance no borrowings under our line of credit.
We still expect to generate cash from working capital this year through accounts receivable inventory reductions relative to sales volume and vendor approved extended payment terms.
Our expectations reflect the capex would be in the $12 million to $14 million range with 15 to 18 planned new show when openings for the year.
With the business trends, we're seeing our continued cost in cash management discipline, our debt free balance sheet and strong liquidity position, we feel confident in our financial strength, our ability to successfully navigate the current environment and position love Soc for continued market share gain.
With that we would now like to turn the called out to the operator, who can open it up for questions operator.
Thank you at this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
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Our first question comes from the line of Thomas Forte with D.A. Davidson. Please proceed with your question.
Great. Thanks for taking my question two questions. They don't get back into queue. So the first one is I wanted to know if you can give some additional thoughts and the new tools and your tool shed you've learned during the pandemic such as essentially are telesales effort and how you may employ them in the future when you're showrooms are fully reopened.
Hey, Tom Thanks for the question I'll take that this is Jack I think it's it's definitely changed our perspective on the way we look at our showrooms and in fact, the nomenclature really in inside the company really is in terms of moving from showroom employees to trade area voice I think it has a dramatic impact on the way.
Anything about a lot of things. So I think it had an incredible ability to make more efficient as a company. If we think about utilizing our largest fool employees to flex up and down between service in sales and other activities. So it's really been a and eye opener force. The other thing I think that's been really.
Hi opener for US is how quickly we can't transformed from a sort of a traffic dependent company to a destination company and when you do that that opens all kinds of opportunities. So a lot of things were analyzing obviously, there's so many dynamics changing but we see a lot of opportunities to continue pursue in terms of.
Changing the way, we market and really leveraging our associates.
Great. That's wonderful news and then my second question and I'll get back in line is can you talk about the financial state your core consumer given we have 13.3% unemployment and your bad debt expense in particular are bad debt exposure in particular.
Yeah, I think we don't we don't have a lot of insights right now things have been changed so much we obviously feel that within the context of our business. We know we have an affluent customer.
[noise] does not appear to be in the immediate danger being impacted by by what's happening last month. However, it's very unpredictable in a long run but.
We feel we have to write target customer, where a premium brand and so as much as that can help to insulate us I think we feel good but there's so many unknowns out there in terms of what's going to happen in the next month.
Good actually more but I'll get back into line got shot <unk> dollar Donna.
Tom and as far as bad debt, we have minimal if any exposure.
The majority of ourselves we've done through credit cards, even our synchrony financial credit card, which is about 40% of our volume is the financial will say at the financial burden is on synchrony, we do not bear that burden.
And our wholesale receivables are principally cosco. So we don't feel that there's any right there at all either.
Great.
Thank you. Our next question comes from line of Brining all with Oppenheimer. Please proceed with your question.
Hi, good morning.
[noise] for next quarter my congratulations on that metric Robert Willy Walker.
[laughter] first question I want to ask yes, if we look at discontinued search in online sales.
I know, it's hard to break it out you mentioned it in a in the <unk> eight the positive impact eight euros kept pace, maybe you could just one question Peter size that if you can't better because all sorts of as we work is already wouldn't know.
How did the portion of customers that are coming due to <unk> to go to go to the love Saks land and then if you take about that is that more the split between just kind of the overall shifting dynamic within retail that what people spent all versus some of the changes you've made your your own marketing going more digital.
I think there there's a lot of I'll try to answer that question and Sean a daughter you guys.
Yeah, I think there's a lot of.
Number one our new customer count was pretty dramatic in the first quarter. So we saw.
The highest level of a new customer in terms of increase.
Quarter over quarter that we've seen since we've been recording it. So we saw almost a 50% 60% increase in new customers. So clearly I think that indicate that during the disruption of the brick and mortar environment.
We became a real go too and I think obviously that disruption will oh will be reduced in the next couple of them up but I think there are some luck lapping effect that will stay honest forever. So that happened now so we really have two groups of customers. We're talking about we're talking about new customers coming to into a new disruption and then we have groups.
Customers that we know put off purchases due to show was being closed they opened were seeing those trade areas open as well I think with it tells US is the way. We're thinking about this is that showrooms are always going to be important and well let me put it this way touch feel points will be important for people, who buy four to $6000 crop.
[noise], knowing now now that we can drive our business as a destination business redefine what a touch feel point is whether it's a shop in shop, whether it's a strip location, whether it's even a person who does a demo at somebody house, we're really opening our minds up in terms of what does it look like in terms of creating.
The touch feel points that we need to have in an effective way and mix them with a marketing plan now that we know we can drive our business as a destination business. So there's a lot lot up there and there's a lot of Tailwinds, we had to do so quite frankly in the last couple of months, we've had lowered add rate.
Okay and increased interest, obviously and nothing and increased returns on our E. Com business, we don't know what's going to happen in the next couple of months in terms of a short term dynamic, but we do believe the trends we're seeing allow us to really be smarter as we go forward and thinking about a real estate strategy, we will come.
Thank you to have shop in shop.
And showrooms, but I think we'll be very.
Very aggressive in a way, we think about negotiating the future.
<unk>.
And then the follow up question I had thought.
Jack Accordingly.
And again I know, it's early this year as you're starting to reopen your show groups and.
Considering some of the adjustments you have to make now put sort of step coast Cobot World should we think this we.
Well there could there be any type of significant shifting the expensive restructure of the showrooms.
I don't think there's anything.
That I could I can say at this point I think.
The answer is no I think what we'll do is in the way, we're thinking about our business and our service model and our show remodel we will get.
Okay and increase the ability to leverage our expenses and to grow without raising.
The rights of labor as we go forward. So I think will become more efficient as we grow but other than that nothing dramatic.
I appreciate all the color. Thank you.
Thank you.
Thank you. Our next question comes from the line of more events with Canaccord Genuity. Please proceed with your question.
Great. Thanks for taking my question.
Just wanted to ask about your advertising and marketing spend and Oh. So can you just maybe update us on your thoughts around brand spending in general.
Do you still see that as a big opportunity for the company and how should we think about the level and progression of ads and ask them through the year and that and I have a follow up.
Thanks in general a couple of things I think dawn I mentioned in her script.
There was a pretty big increasing spend over prior year in the first quarter and a lot of that had to do with Prepays moving out of the last year into this year. So as we're currently looking it's Dan we're still looking at a normalization around marketing spends to be anywhere between 10% to 13% total business, we're not seeing a need for.
Dramatic change in fact, ROI for actually going up right now so we're no real real good place, where we're able to manage our spends very efficiently and getting higher ROI is actually in the first quarter than we then than we have seen today. So I think that bodes well as we go forward and see our ER.
This is accelerating but not having to depend on outside marketing growth.
Got it and secondly did you have any online Costco events in Q1 and are there any sort of expectations for the rest of the year.
And.
We had one event Donna are you.
One of that.
We will we will have a online events with Costco, we are working with Costco in terms of our road show, obviously with the pandemic all kinds of organization have changed their priorities of Costco is change some of their priorities and obviously different mixes and merchandising mixes of change so we'd be.
To put on hold with them, but in terms of the performance prior to the pandemic and our expectation go forward is that we will likely be reengaging in and getting that business going into second half of the year, but I can't give you any insights specifically.
Great. Thank you.
Thank you. Our next question comes on line of Matt Koranda with Roth Capital Partners. Please proceed with your question.
Hey, guys. Good morning, Thanks for taking the question.
Just wanted to see if I could follow up on some earlier questions.
How important was that euros campaign in terms of sales mix to your Q1 and as that rolls off do we replaced that campaign with something else heading into Q2, and what the benefit from from an additional campaign sort of accrue to the show room or online side of the business.
The heroes campaign for the here appears campaign was very important is we look at may it ramped up to be coming over 50% of sales for the.
Hi volume weeks prior to Memorial day. So we do expect obviously to lose a percentage of that momentum as we come out at Memorial day, we've reflected that in our internal plans understanding, but we don't foresee ourselves needing to depend on events like the heroes of that throughout the year.
It may be something we do a based on.
Market conditions, but the one thing I would say, we don't see a need to we don't see discounts increasing in the second half of the year at any rate that.
The any different than what you've seen thus far.
Okay and on the show him or online front in terms of accrual to the benefit of for looks out of the business.
Where did you see I guess the biggest benefits, obviously I guess would come from.
E Com this line item.
Got it right, Yeah, and I think a couple of things I think yeah online is definitely where the impact came in I think because there was obviously a marketing focused on the target groups and the access online with dramatically higher than obviously showroom. So I think proportionate to everything that happened in the quarter that was.
Adequately driven by online.
Got it and then just on the showroom fronts I know, it's it's sort of a choppy environment, but any help in terms of.
Trying to triangulate how to model, Yes, Q2, <unk> on show room, I mean, maybe you could help us understand.
You know traffic trends conversion at the show firms that have been opened or we comping up year on year for the for the terms that had been opened thus far.
Any help on that front that'd be helpful.
Super This is like I mean this is.
We lap internally this is almost like business at the speed of gaming so.
We had a week and a half ago, we had 40 something showrooms open and up to a you know what we had or in June 989, So theres a lot and within those openings. There are a series of remember they're all three phases. So there's some that aren't even taking in traffic. So we can't really measure traffic right now and half the showrooms.
We can tell you that's the ones that are taking appointments, we're seeing some really interesting things going back along with our learning so so.
The appointments for.
Sure arms that have gone into appointments have jumped up to having positive comps immediately and all showrooms that have opened have taken the trade area trends significantly up. So it's certainly goes back to say look showrooms are really really important they drive the trade area. They drive interest in the brand.
And ER and we'll just have to see what happens in the next couple of months.
Alright, Thanks, I'll jump back in queue guys.
Thank you. Our next question comes from the line of coming on line with BTG. Please proceed with your question.
Thanks, everyone. Good morning.
Sean I wanted to go back to some of that gross margin comments that you laid out in your prepared remarks. Thank you talked about Ah well you talked about a lot of puts and takes to the gross margin component and.
Culminating in what looks to be a little bit of at a delay in the resumption of mid Fiftys, a gross margin target by the end of next year.
Could you just provide a little bit more detail around the influencers to that and maybe that where in this two year process do you see that delay a crane is it in this year at the back half of the year is it a into next year I'm, just trying to get a little bit more precision around the comments that were made.
Yeah, Hi, good question we.
Late late like as mentioned on the <unk> you know I guess in this in your script we.
Aren't traveling abroad, and so that combined with other delays you know that we're kind of obvious in terms of what's been going on in the World is we are we're opening for instance, our second.
Warehouse on the distribution front domestically, we ran into is the covered 19 pull backs and delays there and so all these things combined have just sort of kick the can down the road a little bit for us.
And so rather than commit to especially right now while it continues to be so.
Messy in general rather than commit to a number of quarters in terms of what that recovery looks like we've chosen to just.
You know put out there that we still expect the same kind of recovery or it will just continue to be prolonged because of these sort of disruptions that are beyond our control and frankly beyond our ability to predict totally what's around the next corner, but.
Our first cost continue to improve on a on a continued basis. You know this is due to our resourcing efforts that haven't been sward ahead, just sort of size slowed down in certain aspects in certain and in certain pockets and so you know as I mentioned most of our site.
Sectionals now, which represent most where sales are made outside of China and Ah you know we continue to Oh, we continue to make moves on the sound goods in real time. So all these things are still happening a certain pockets are just could just continue to get pushed back and so sorry to be vague, but it's impossible for us to at this point.
Everything is disrupted as it has been and unpredictable.
Give much better guidance then.
We had put out there before.
If I could just ask a follow up on that.
Are you seeing that just the progression of sequential improvement is less than what you had anticipated before or that their actual or the there'll be some moments and you know to up the go forward period, where gross margins.
Could actually kind of refer back and take some sidesteps before starting to that to get to that sequential improvement line.
Oh, hi, coming on its Donna Yeah, just I'll take the part on I guess, you want to use the term step back a little bit on gross margin improvement on relative to a building inventory the investments that we're making into additional space I think jacket mentioned.
The time August rolls around 150000, 150000 square feet on additional space, we need to take we will see that impact on gross margin in the second quarter, so quarter over quarter were projecting a decrease maybe double what we saw.
We're right around double what we store in the first quarter, so in contemplating and building and and looking at your models you probably want to take that into consideration. So on a step back we'll call. It out there and work where we are.
In our internal models again, we're not giving guidance, but second quarter will be that's what are we see the biggest year over year decreasing gross margin impact.
That's perfect. Thank you for that that color and then just that the follow up had the second question that was you talked about Oh, you're cadence of store showroom opening 15 to 18 ton is there anything you can provide from a cadence throughout the quarters as to how we should fit model the openings.
And are you getting any rent concessions its looks like you're having very good negotiations with those landlord John These new openings.
Yeah, I mean, obviously, they didnt happen in the [laughter], they're not happening where we thought that they would originally happened in our models a few months ago, where we thought that they wouldn't be happening first second third quarter. So they are later in the year as far.
How we built our capex spend on that 15 to 18 show rooms, so taking that into consideration and looking at your models you see the capex.
And now, it's Ben <unk>, which happens after opening well it happens before during and after opening rates were building your models, but that was all contemplated in the limited information I provided on liquidity and our cash usage in Q2 in Q.
Three being slightly less than last year's gas usage from operations.
Do you Wanna mention something about right concession.
Yeah, we've been fortunate I think we decided to take look we believe and the value of our showrooms and the value of our relationships, obviously with the landlord so.
We have basically at this point I would say without getting into details had concessions in about a 70, 60% to 75% of our.
Oh, gosh with landlords unpacking, 65% to 670% of fleet and it's really worked out in addition to that in terms of new openings. Yes. We have worked through concessions that help help us open and aim laugh.
Less predictable environment that are win win but there are different in different cases, so I just keep it a little bit general if we'd been.
Very aggressive and being proactive and keeping our relationship positive with these landlords and I think that's what's helped us to to still be able to say, we'll be opening a fairly heavy amount of showrooms in the second half year.
Fantastic. Good luck guys. Thank you very much.
Thank you. Our next question comes online and Alex Fuhrman with Craig Hallum capital.
Your question.
Hi, guys. Thanks for taking my question and congratulations on on such a strong quarter. During these difficult times one thing I wanted to follow up on is I think Jackie you mentioned during the DQ in a that you work your showrooms that have now reopen for appointment and I know, it's so early in its only such a small number Russia.
Our room insight, but considering inertia rooms were the majority of your revenues last year I feel like it is an important kind of drill into into whatever you know it is that that you are seeing now and I are you seeing that as your showrooms reopen at least on an appointment basis is the lift you're seeing now has it been pretty uniform across the country are there certain.
Regions or or certain impact a you know, perhaps places that have been impacted more or less by the virus that have come back quicker just curious, what you're seeing and and what we could perhaps expect to see as as more of your showrooms start to move through the three phases of reopening that you've laid out.
Hang up pretty good I I, what I'll say and it's it's sample sizes and the time frames are so strange and dynamic it's good.
You know, it's literally the amount of showrooms that we're open to appointments doubled in three days. So so we got to be really careful about how we talk about it but what we are saying.
Is the showrooms that had been opened two appointments the longest and have started to engage our basically filling out there appointment books to the maximum level and are seeing conversion rates that are three to four time, what we've seen in the past and obviously when you do appointments, that's what happens, but I think it's starting to enlighten us back.
The idea.
The Sharon as a place to engage and convert and feel the product not necessarily a source of awareness in the future and I think what we are seeing and getting amazing feedback from our associates is the one on one engagement is creating possibly a better a better brand experience. So.
There are a lot of silver linings, we're trying to work out through this process.
We don't know what's the you know what the new normal will be with traffic relative to conversion, but our I think though that that the high side of that is that we don't believe the new normal the way we operate we will be disadvantaged at all because we do believe people go to showrooms and continue to go to show room, but the showroom maybe one.
Got a three visits and two out of three maybe online and that's just fine for us.
Great. That's that's really helpful. And then just a quick follow up if I could I'm curious where I'm all of the leads for these appointments have had been coming from as it is it mostly people that had been interacting with your customer service online I I noticed that you know you're not you're not you know exactly a you know hanging big Grand opening banners of you know.
Back open come to the store, which which which certainly seems smart. So I'm. Just curious you know where you've been getting this pipeline of appointments coming from and if you think that can last a year I think it's it's two areas I think one is obviously there will be a boost in the short run of picked up is that a pent up demand by people who back then and.
Age with a showroom employees.
And basically stopped their decision and we know it at some point roughly six months six weeks ago, 30% to 40% of or we had 30% to 40% of our people who had been in showrooms are holding off a purchase because they wanted to come back. So we know we're gonna get that lift. However, we are seeing significant increases in our.
Ability to use you know the podium and that digital chatting to talk to our customers. So literally what I think I described it last time, but literally that enables a customer someone's going online in their area to talk to the showroom a leader and that show them leader can set up an appointment with them through a chat and then basically star.
The relationship there and bring them into the showroom. So I think the power of the chat has really surprised stuff and the way, it's energizes with E commerce as well as just even making appointments is continue to be the pleases. So a lot of positives out of it but we just don't know how it's going to work as things start to settle down with within the post.
Cobot, you know economy.
Sure if that makes sense. Thank you very much.
Thank you. Our next question is a follow up from the line of Thomas Forte with D.A. Davidson. Please proceed with your question.
Great. So two quick follow up questions and then everyone. Please stay well so from my two follow ups I want to know if your new product Road map, it's still too big a division of the year, but that's the pace and then second on my appointment retail.
Do you have a pretty light labor model, but will that change your labor model at your showrooms.
Yeah. So on the on the innovation front the cadence that we had been trying to.
You know set internally was a couple of small innovations per year, and hopefully a bigger innovation.
You know every year or so they will you know what they will take us into an either a new.
Expand our total available market as we see it or extend into a demographic or customer base. That's.
A new to us and so.
We're still working on how the balance of this year shakes out you know we have tees for long time that we expected to launch a a one of our <unk> what will we think of its one of our more important innovations. This you later this year.
And for US that's kind of still on the bubble based on what's happening in the world and.
No. The good news is as I said before we're not too concerned about.
Ultimately, whether whether the timing of that specifically because we had in our own plans.
No revenue associated with the new product launch for this year was more about being a soft launch in getting getting it out there and really becoming part of sales mix for the balance of this year and I'll, let Jack answer your second question.
Yes.
Labor model question isn't it.
I can't give you a lot of detail on other than to say as you know with that change from a show where showroom.
Perspective unemployed to a trade area. It makes a thing a lot more I think creatively and terms of.
Applying our associates to a in having full time associates that can flex.
Got to do chats, when traffic and showrooms is low or do other things to counterbalance what they've experienced within the foot traffic driven environment allows us to think about thing incredibly differently. So we're still trying to understand how to maximize our employees. If we go forward.
Great. Thank you.
Thank you, ladies and gentlemen that concludes our question and it's a session I'll turn the floor back to Mr. Nelson for any final comments.
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