Q2 2020 Sleep Number Corp Earnings Call
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Welcome to sleep number second quarter 2020 earnings conference call all lines have been placed in listen only mode until the question answer session. Today's call is being recorded if anyone has any objections. You may disconnect. At this time I would like to introduce you wanted Vice President Finance Investor Relations. Thank you you may.
But again.
Good afternoon, and welcome to the Sleep number Corporation second quarter 2020 earnings Conference call. Thank you for joining us.
I am Dave Schwantes, Vice President of Finance and Investor Relations.
With me today, our Shelly I Bock, our president and CEO and David Kaplan, Our Chief Financial Officer.
The three of us our social distancing in our Minneapolis offices for the call today.
This telephone conference is being recorded and will be available on our web site at sleep number dotcom.
Please refer to the detailed 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 SEC.
The company's actual future results may vary materially.
I would now I'll turn the call over to Shelly for her comments.
Good afternoon, and welcome to our 2022nd quarter earnings call, Mike Sleepiq used car was 75 last night.
The mission of sleep number to improve lives through individualized sleep experiences has never been more important for more relevant than it is today.
Our unwavering belief in our company purpose in our resourcefulness in finding ways to serve our customers have enabled sleep number two.
Affectively navigate one of the most challenging period in our nation's history.
I am grateful for our team's dedication to our mission and unrelenting focus on ensuring business continuity as we continue to create opportunities for market share gain profitable growth and significant shareholder returns overtime.
Our better than expected second quarter performance in the face of monumental global health economic and social concern demonstrates the significant competitive advantages of our integrated business model and is a testament to the resilience passion and commitment of.
Our sleep number team.
This with didn't bold actions, we've taken to combat the impact of the pandemic, including keeping our team state serving our customers and maintaining our financial flexibility underscore the strategic financial and operational agility, we have built over the past.
Last several years.
As a reminder, we took immediate actions to increase liquidity and reduce expenses, we prioritized investments and initiatives to drive near term performance.
Aid, our recovery and feed our return to long term growth.
We quickly scaled digital CRM solutions that retained the value of our relationship based selling approach through a blend of phone chat online selling from home and private appointments.
We seamlessly pivoted to remote headquarter operations customer service and innovative sales and delivery option.
And we prioritize our marketing efforts on loyal insiders in brand advocate a powerful competitive advantage, which represents our most efficient source of sales.
As a result second quarter financial results exceeded our expectations, including net sales of $285 million, which were 20% below prior year with an average of 53% of our stores open during the quarter.
Net loss per share of 45 cents.
Year to date operating cash flows of $87 million up 24% versus the prior year to date.
Net debt of 226 million, which was $54 million lower than a year ago.
Overall, we experienced improving sales trends through the quarter with high single digit demand growth in May and June combined compared to 2019.
Several factors contributed to our better than expected performance, including.
Our pivot to virtual relationship selling nationwide with impressive results, which mitigated the closed store impact.
Stellar growth in our online chat in Poland sales up more than 200% from the prior year second quarter.
Year to date, we have surpassed 2019th total revenue from these touch points.
Effective reopening of stores aided by referrals and repeat sales from our lifelong relationships with sleep number customers.
An immediate shift in our approach to customer acquisition.
We increased our media mix into digital resulting in a step up in digital traffic from Q1.
We also placed increased emphasis on financing and promotions, while significantly reducing overall media spending.
Growing engagement with our brand as consumers respond favorably to the proven quality sleep of our 360 smart beds.
And the agility real time visibility and control inherent in our vertically integrated business model, which enabled us to quickly translate insights into operational and strategic advancements as we worked in lockstep with our partners and suppliers.
Throughout the intense disruption of the pandemic and civil unrest, we have taken decisive actions to drive near term results, while advancing our pioneering innovations enhancing our culture of individuality and broadening our relevance to come.
Tumors.
In the second quarter, we began providing new proprietary software features including circadian rhythm insights and personalized sleep wellness reports to all of our sleep by two customers.
Through our research informed Threesixty smart beds sleep number is delivering proven quality sleep supported by science based evidence that links quality sleep.
Overall wellness.
Koeppen 19 has heightened individuals' concern about their immunity and resilience.
There is increased understanding its fleet is vital for healthy living and quality sleep actually boost ones immune system.
Our data shows that sleep by Q sleepers, our sweeping better.
Since a pandemic began our sleep by Q sleepers have gained an average of 11 minutes of restful sleep per night.
This improvement is in sharp contrast to surveys about fleet within the general population, which indicate that 58% of individuals who reported a change in their sleep sensor pandemic, our sweeping less.
We are working closely with our new scientific Advisory Board and interdisciplinary group of physicians clinicians and researchers with expertise in sleep science in health.
The advisory Board is providing console as we mine our longitudinal data.
Which includes over 800 million sleep sessions.
We are bullish on our scientific accuracy and our ability to utilize the data elements with the highest impact on sleep quality.
In August we plan to commercialize individual heart rate variability insights as the next advancement in proactive health and wellness.
Threesixty smart bed sleepers will benefit from understanding how the third night time heart rate variability impacts their activity level and energy each day.
With the reopening of our stores, we are excited to introduce our new and seven and I 10, Threesixty smart beds in the coming weeks.
With more than 80% of consumers challenge by temperature concerns during sleep, our new Threesixty smart beds feature temperature balancing layers.
These beds are designed to more closely contour to the body for greater support in spinal alignment.
Increased pressure relief and reduced motion transfer.
While we temporarily halted most discretionary capital spending in the second quarter, we've maintained our investment in life changing innovations that ensure our continued long term success.
For example, we recently acquired a patent portfolio from Gen Therm, the global development developer of thermal management technologies.
These patents support the cooling and heating technology for our beds embedding and further strengthen our competitiveness.
We plan to introduce our climate 360 bed in 2021, and these additional patents will embolden our longer term innovation roadmap.
The current environment remains dynamic and we expect continued disruption due to cope with 19 and the us presidential election in the second half of 2020.
Weve demonstrated our agility and perseverance and we'll continue to benefit from our culture of innovation strategic advantages and execution discipline.
Our strategy is designed to deliver growth through customer acquisition and retention net operating profit leverage and to drive strong cash generation and mid teen ROI fee.
And we expect this strategy to drive solid financial performance through these challenging times as we have for multiple years.
Today more than 95% of our stores are open and we continue to drive triple digit online chat and bone growth.
Our brand metrics are at all time high.
Customer satisfaction engagement digital traffic and conversion are all exceeding prior year.
Our balance sheet remains strong and we have significantly more liquidity than a year ago.
We expect the powerful combination of our proprietary innovations data and digital communications.
Direct to consumer distribution customer loyalty and mission driven team to drive demand during the second half.
In addition, the pandemic has served as a catalyst for positive longer term change in reinvention.
In the week of our necessary immediate actions to reduce cost and preserve our financial flexibility. We have identified new ways of doing business, such as virtual relationship selling and digital lead management and we are accelerating other initiatives such as Connectedhealth.
These opportunities are leading us to reallocate headcount and strategically invested new capabilities that will support our future growth.
Consistent with our past, we will use our experience and learning to strengthen our competitive mode and advance our purpose.
The structural shift in consumer attitudes and behavior is related to health and safety, which have been accelerated by Covidien 18 is likely to continue.
Consumers are increasingly prioritizing the wellbeing of their family and home with more than 25% of consumers expecting to purchase a health related product before year end. According to a recent Nielsen Global survey.
Quality sleep has the power to improve health and wellness and sleep number is at the forefront of delivering life changing benefits to individuals in the world.
The tenacity and ingenuity of our team the disciplined execution of our differentiated strategy and they affect abuse of our capital position us well to deliver long term profitable growth.
Now David will provide additional financial details on our second quarter.
Thank you Shelly.
The second quarter was all about agility and progression.
We demonstrated agility by acting with urgency based on the real time performance metrics, we used to run the business.
We learn to do things differently hunter extremely challenging conditions.
And we Levered, the technology and growth driving capabilities, we built the past few years.
While our selling from anywhere capabilities helped us reach customers throughout the quarter. The progression of our sales has certainly benefited from being allowed to reopen how our stores.
Today more than 95% of our nearly 600 stores are open.
In April just 23% were opened on average followed by 47% in May and 81% in June.
While uncertainty remains regarding future impacts of cobot 19, we have demonstrated our ability to improve lives even in the toughest conditions.
Our financial performance for the second quarter was significantly better than the models, we used to inform our cost and capital deployment decisions.
April demand was down 48% versus the prior year, followed by high single digit growth in May and June combined.
This hyper V shaped change in demand understandably stressed our fulfillment capacity, resulting in more than $30 million incremental deliveries carried carrying forward into Q3.
Looking forward the labor day timing shift is expected to move about $10 million in deliveries from Q3 into Q4.
And we expect Q4 sales will also benefit by more than $25 million from an extra fiscal week this year.
Net sales in Q2 of $285 million were 20% lower than the prior year compared with a 50% reduction assumed in the scenario used to support our cost and capital allocation decisions.
More than 27% of our sales in Q2 came from online and phone sales compared with 7% the prior year.
Despite this error you was just 4% lower than the prior year on mix shifts, partially offset by higher bedding sales.
Golden 19 closures resulted in delivered mattress units, 17% lower than the prior year.
The mix shift and operational inefficiencies from cobot, 19 closures and lower unit volumes pressured our gross margin rate in Q2 by 380 basis points versus the prior year to 57.2%.
Managing that dynamics of extreme demand challenges changes in Q2 has certainly been challenging.
Through the fast actions of our teams and agility of our global supply partners, we had no significant supply disruptions during the quarter.
Constraints and coded related uncertainties that affect the flow of goods globally continue to be top of mind and managed to day to day by our team and partners.
One specific example of this during Q2 is our newest distribution center in the Los Angeles area.
We opened in May as planned. However, we managed very real cobot 19 challenges to staff and operated properly.
As a result, we elected to run it temporarily as a hub rather than a mattress assembly location.
We've leveraged learnings from operating previous distribution centers and love this location.
We expect to converted to our fourth Assembly distribution center. After we managed through Labor day volumes.
For similar reasons, we also postpone the opening of our fifth planned AIDC in Dallas until next year.
These decisions were necessary to mitigate coded related business risks.
We will continue to provide updates each quarter on this multiyear initiatives.
During our first quarter earnings call I highlighted scenarios that if realized would consume about $50 million of free cash flow from operations in the first half.
Our sales in Q2 were stronger than modeled and our early and aggressive actions resulted in $35 million.
Lower operating expenses than in Q2, the prior year.
This while continuing to support our performance driving initiatives and absorbing severance and year to date incentive compensation true ups.
Our year to date financial performance also reflects the agility of our business model in the face of extreme challenges.
We reduced expenses, 3% in line with year to date net sales change, while investing 14% more to support our innovations.
Despite the impacts of Cobot 19, our gross margin rates in the first half is 10 basis points higher than the prior year to date and our net operating profit is up 2%.
Our first half EBITDA was equal to the prior year, and we generated $65 million of free cash flow year to date up 79% versus the first six months of 2019.
Our commitment to efficient capital management and this performance enabled us to pay down nearly $300 million of our revolver at the end of the quarter.
We ended Q2 with $226 million of net debt down $54 million compared to a year ago, while increasing liquidity by $129 million, including the addition to 75 million dollar one year term loan.
Our 2.8 times ending leverage ratio improved from three times.
EBITDAR for the same period last year.
Remember that our covenant maximum is 4.5 times and our targeted operating leverage range is 2.5 to three times EBITDAR.
The fundamentals.
Of our business and balance sheet our strong.
We are well capitalized to support our initiatives with pace and confidence while navigating through ongoing covidien 19 related challenges.
We're pleased with the performance of the business.
We also acknowledged that uncertainties remain for the back half of the year from covert 19, the presidential election and possible recession pressures.
As a result, we've built our spending plans for the balance of the year based on demand approaching flat to the prior year, including the extra week benefit this year.
Our long term bias favors continued prioritization of our innovation and marketing initiatives.
We intend to lean more heavily into these growth drivers in the back half of 2020 and beyond.
We expect somewhat less gross margin rate pressure from mix shifts in the back half of the year as consumer shopping preferences include both in store and online purchases in advantage of our vertical business.
We continue to actively balance near term business risks with our commitment to sustain our advantage strategy.
Our orientation for long term performance embraces and approach now that enables us to rebound with pace over the coming quarters.
In closing I'd like to add my thanks to the sleep number team and business partners across the country, who have worked tirelessly to drive performance and to improve lives through proven quality sleep. Thank you.
Shentel at this point please open the line for clarifying questions.
As a reminder to ask the question, we'll need to press star one on your telephone to apply your question has the founder hash key please standby when we compile the Q and a roster. Our first question comes from Peter Keith with Piper December Your line is open.
Hi, Thanks, Good afternoon, everyone. Thanks for taking the question.
I was hoping you could just expand upon.
The comments around the 30 million of backlog.
From the quarter that got pushed to Q2 into Q3 I think you had commented that you don't have any supply chain issues. So.
What exactly caused that backlog and was it maybe demand related in the final weeks of the quarter.
Sure Hi, Peter you know, we have been giving a little more color intra quarter than normal here since since cobot 19, and this is really an example of doing that if you think about where we were in April.
Down nearly 50% and at that time, we had an average of 23, 23% of our stores open and in May We had an average of 47% open ended in June 81% open and now nearly all of our stores open.
And if you think about the progression of the sales down nearly 50 in April and then high single digits for May and June that did become a big swing in our overall performance during that time and I also mentioned that our sales performance.
I have been progressive and throughout the quarter. So that gives you a good indicator of.
How that slowed on how it built through the quarter and there is also very strong correlation with us opening our stores and our performance growth.
So naturally.
Because of Maine.
Significant performance and June.
Both both very strong month it it built an increase in the backlog.
Peter I'd just add on.
Having that kind of demand change that we're talking about with April down, 48% sudden and dramatic growth in may and June.
That causes some pretty big fluctuations for us to manage through and and Thats part of what you're seeing with $30 million of.
The additional business to be delivered in.
In the Q3.
Okay.
Fair enough and.
I guess it to clarify what has gone.
On that is both.
May and June.
We're up or was it just the balance combined work were up.
Yes, each of those months, we're obviously prior year.
Okay, and so you had mentioned you had pulled back on advertising during the quarter, which I think makes a ton of sense not not very different from other players in industry. How are you thinking about advertising now going into Q3 is something that you want to increase and lean into or you're still a little bit.
And with some of this backlog.
No. We're we're leaning into this Peter you know, we we did have a significant decrease in our media spend in Q2.
And I also have to say the precision of our media strategy has really been a significant advantage for us that in the fact that we have internal.
Digital find in the quarter, we had the ability to pivot in shift our spending to reach and find an engaged customer even with the significant media reductions and.
That combination with our virtual relationship selling and helped us build.
When you look at main to think that we were up over last year with an average of 47% of her stores open it's a pretty remarkable.
Pretty remarkable progression into where we are definitely adding back media at pace and we expect to navigate around many hurdles here in the back half as well.
Both around.
The cobot 19 pandemic and also around the political environment.
Okay fair enough. Thanks for the answers and good luck.
Thank you thanks Peter.
Our next question comes from Bobby Griffin with Raymond James Your line is open.
Good afternoon, everybody appreciate taking my question.
Dave I first wanted to clarify your comments earlier about the back your point, you're spending plans for the back half I think you mentioned something of a revenue or demand kind of equal to last year can you maybe.
Clean that up from where I understand it and I guess it was put in context sense, we're running up in orders now and you're shifting and 30 million worth of deliver on deliveries in Q2 as well as you've got the extra week I was just I'm getting a little continues on.
Hi, guys, having revenue flat versus a backup.
I'm glad you on this isn't just conservative and.
Uncertainty out there or whatever you might want to put around that'll help me think about it.
Hi, good I'll do that.
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We're not providing guidance for small and this isn't guidance and we're trying to talk through how we're thinking about running the business in a very challenged environment, where theres a lot of uncertainty still.
To be absorbed I mean, you look at the changes even this week in California, We don't have control over when jurisdictions are going to close stores or what have you. So.
We're navigating through a pretty challenging environment and in that environment. We're talking about how we're thinking about our spending in the back half of the year and we're basing our spending based on.
Sales growth versus the prior year, that's flat to the prior year, including the benefit of the extra week.
That's just how we're thinking about it in this environment. That's how we're managing the business I'd hope you'd think that that was appropriate given the uncertainties ahead.
Okay that makes that makes sense. Thanks.
For instance, I guess the second part of my questions selling I was just curious as you've seen your stores reopened have you noticed anything different about customer behavior inside the store.
Versus kind of three told at levels and you guys have a pretty unique selling process their sleep number so I'm just curious.
Any tidbits you picked up for customers as they return into your stores.
Hi, Bobby we see.
Retail a wide variation of of.
Consumer.
We have year based on state and county, and how the pandemic has played out in different areas and we're all about.
Be in individualized, it's all about individualization for us in all aspects of our business, including our beds.
With the individualized comfort and end, we individualized they experience in this is where having our talented frontline team.
Next with the customer and same with our home delivery teams in their connecting with the customer there. They are weighing out in understand the sensitivity where the customers at and they meet them in a way that that helps make the customer feel very comfortable and safe and meets their and.
We're able to meet their needs and deliver a really stellar experience and yen, it's exciting to to see such high customer satisfaction scores.
During such a challenging time.
Ill jump back in the queue. Appreciate it will you answered my questions.
Thanks, Bobby.
Your next question comes from Seth Basham Wedbush Securities. Your line is open.
Thanks, a lot and good afternoon.
Hey, Hey sets.
You commented on some of the recent trends in May and June perhaps you give us some more color around out sales are trending in key markets like Florida, Texas, and California, We're seeing a rise in car buyers cases and recently.
Yes, again, we're seeing very more variation than we normally would across regions and county, where you see the coal bed 19 flare ups or concentrations.
Yes, I would also share with you that as we bump in stores all of our stores and yes throughout the country has quickly become productive certainly some more than others.
But I think this is a good. Good example of the ongoing relationships our front line building with with their their long term customers, then and benefiting from that repeat and referral. It helps us to have a jumpstart right from the beginning and then.
Also our digital lead management is helping with that as well.
And ensures a strong start.
Gotcha.
Looking for example at the group of stores that were already reopened the beginning of June how did those progress through the month could you see send trail off in year over year growth trends as we got later in the month over the course with the fourth of July holiday weekend with the rise in car buyers basis.
Yes, as we shared the.
Progression through the second quarter and it continued to progress in a positive way through all the full quarter and we saw the consistency or correlation to the opening up our stores. So we we averaged 81% of our stores open in June SaaS and.
Now, where we're at about 95% and we've seen the progression of sales.
Match the progression of openings.
Yes, I'm sorry, just to clarify my follow up question. There. If you look at stores are opened earlier say the group of stores that was already opened up beginning of June how did sales in those stores progress over the last six weeks.
Well I'm not going to get into detail on the third quarter, but as I've stated we've seen a.
Good.
Strong progression of our business and that also includes stores that have been open.
Got it thank you very much.
Thanks Seth.
Your next question comes from Brad Thomas with Keybanc capital markets. Your line is open.
Yes, thanks for taking my question.
I wanted to first ask about.
The strength you're seeing in the direct.
And I.
I was curious if you could talk a little bit more about.
If you think this is going to be sort of a permanent shift for you.
Do you think this is going to be sticky as a growing percentage of sales or do you think as you reflect on the last few months, perhaps there were individuals that visited the store they hadn't closed yet and they decided to end up finely converting online I'd be curious Marty in place you're saying here.
Well, let me start with it to the fact that were 100% direct to consumer which is very unique to sleep number.
All of our distribution comes through either our stores online chatter phone and and it. Yes. This is this is what we've designed strategy for for the customer to be able to interact with US. However, she wants we see the customer interact through multi.
I will touch points generally and we've certainly been pretty aggressive in in our digital communication as well as our digital lead management.
To be able to serve her particularly during this time in a different way.
As David highlighted the.
Online phone and in Shout sales were 27% of our business and I mentioned Weve already surpassed 2019 numbers I expect this business to continue to be a larger part of our total as we move forward.
As our stores have reopened we've continued to see triple digit growth in on our online sales and we know there's still going to be a lot of fluctuation.
Around cobot 19 here in the back half so it's hard to it's hard to.
Provide clarity about what this is going to look like I think importantly, we're going to be very fluid and weve, showing our ability to pivot and be agile and be responsive to the consumer where she wants to shop in the end. Maybe this is double the penetration it was in the past.
We absolutely see it is additive and complimentary to our stores in the long term.
That's very helpful Shelly and if I could ask one of of David.
Recognizing you're not giving guidance, it's not can stop us from trying to get more color how do you.
I guess in a world where you're planning for.
The demand growth, including the extra week to be flat.
Can you help give us some insights into maybe.
Puts and takes so think about from a gross margin.
<unk> expense standpoint.
Okay I will do my best.
How we're thinking about it Brad is.
We're planning the expenses based on as I said demand Thats about.
Even with the prior year, including the extra week.
However, we also plan to lean into our innovation drivers, our long term growth drivers and our near term growth drivers through marketing capabilities.
So you will see a little bit of an uptick in those areas in the in the back half of the year relative to prior year.
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In addition to that I guess in on the gross margin side.
The mix shift with higher.
Mix of our sales coming from online phone and chat.
The natural tendency is for the mix to move a little bit down. The line you saw that that impacted us by impacted our air you by about 4% in it and it had a pretty reasonable impact on our gross margin rate, we expect less of an impact on our margin rate in the back half.
As we expect to have more of our stores open the majority of the back half, but again, we don't know for sure what thats going to look like and so giving you guidance on or give you kind of color on what to expect on gross margins really tough.
But thats how were thinking about it.
Yes.
Great very helpful. Thank you also much.
You bet.
Your next question comes from at Curtis Nagle with Bank of America. Your line is open.
Thanks, very much chicken one question so.
First a quick one on the store based so I think you closed 19 in the quarter.
How many of those were part of the 25 stores you had a bumps month leases that you had indicated were a potentially closed.
Thank you to close permanently and how many.
We are part of the basic relocation plan and how should we can go up flipper cooler senior.
Yes, the majority of those were.
On month to month leases that we were taken action on you know.
Given the environment and our ability to transfer the majority of those sales and profits from from those stores to other stores in the June geography.
We're pretty much through that part of the effort at this point and we're really leaning into our growth drivers on all fronts, we have.
You know our capitalization is very strong and we have lots of liquidity to support our initiatives and will be leaning into our capex thinner and our store expansion plans.
In the back half as well.
Okay understood.
And then just.
Thank you will get more about the.
So slight downtick in.
Robust per mattress indicated that it's due to the online mix shift, which makes total sense.
I guess, how much was that due to perhaps.
Im sorry, maybe not being as.
A stronger how much is not due to an actual.
Product mix, so it will people mix, a little bit lower terms as well.
The actual actual bed so there will be board.
Seabirds relative to other beds.
How do we chemicals.
Well you know our business model is more we have touch points with our customer the more often we.
Reach out to have contact with them if they only have a transaction online it generally.
Comes in at a lower.
Model of product.
And the more often we have interaction. So if we have online plus chat it moves up the line and if it ends up in the store. It's got the best total home solution for the customer and frankly highest satisfaction for the customer highest NPS scores et cetera. So not only does it come with higher a are you with those in store transaction.
And but its overall a better overall experience in total we have improved significantly through the digital capabilities that we've been talking about.
So there was only a minor slippage of the air you down 4% I think thats pretty minor given the mix of sales of 27% coming from these these other touch points of online phone and chat.
However.
That that is primarily changes in model mix not not as much about lower attach.
Okay very clear thank you.
Okay.
Your next question comes from a tool networking with CBS. Your line is open.
Good evening, Thanks, a lot for taking my question on.
So is online pool.
Channels are still going on the percent even with.
All of your shores open.
Thank you rethink your shore strategy going forward.
When you look to pare back on your expectations.
Adding mid single digit square footage every year or will you even potentially move lower square footage going forward.
We've contemplated this as part of our strategy for multiple years and we constantly go back to our real estate strategy in look at a five year horizon with changing consumer behavior. We see this 10 10.
Already and.
Why we've held to having a distance of.
About 20 minutes on between our stores, having the availability for our customer to have an in store experience. We still see is very important for of a brand like like ours in a brand that you're going to be highly engaged with and on yes. We see this is complex.
Entry and yes, we still have a triple digit ice a triple digit not not 100 and.
We're excited about that and we see it is additive and we intend to grow all touch points.
Yes.
On the strength.
And just taking a follow up and I know the system should one earlier, but may and June were up high single digits and I understand you to want to getting too many specifics here.
How would you compare that high single digit to how these first two weeks since July has trended.
Just any color Directionally, all happenstance remained in line or Hexis decidedly direct generated versus manager.
Yes. This is very similar to have a question I had earlier and I indicated that our sales of them progressive throughout the second quarter and there's been a strong correlation with us opening our stores in the increased number of store openings along with.
Our.
Stronger.
Overall topline performance and as a reminder, in June we averaged 81% of our stores on fund and right now we have 95% of our stores open.
Okay. Thank you.
You bet.
Our next question comes from Peter Keith with Piper Sir Your line is open.
Hi, Thanks, again, guys. So a couple of follow ups.
Yes, David last call you talked about a 150 million annualized cost reduction plan. So the sales have gotten better much faster than you thought where would you sort of peg that.
But cost reduction plan on annualized basis, given sort of the framework you provided for that the back half year to us.
Peter we that plan was based on as you recall.
Scenarios that included down 50% in Q2 down 25% ish in Q3 in flattish sales in Q4.
Clearly down 20% here in Q3 or excuse me in Q2.
There are significantly more variable costs associated with the higher sales levels and talking about the back half being essentially flat to the prior year for the whole back half.
Clearly, there's going to be more variable costs that are.
Being incorporated in there so we're not going to give an update.
The overall spending cuts but.
We did everything that we thought we would be doing anymore.
You can look at the cash generation in Q2, as a indication and I tried to give you some kind of.
Comparison in the sense that we expected based on those models to consume about $50 million and cash from our free cash flows from operations in the first half and instead generated significantly more in that one was at 65.
65, or so million dollars in that same period. So.
Pretty is pretty significant swing in overall liquidity and performance in that first half. So we're just continuing to be appropriately conservative given the uncertainties on our spending in the back half and.
We will continue to pull every lever to drive performance, where those opportunities allow and.
Needed to we can always pullback.
As well.
Yes, Peter you know the Ed I'll I'll provide here is as we went into.
The pandemic and we took actions against all those costs, including significant furloughs and now at this point.
We have brought back our.
The majority of our team.
The change in business and the trajectory and challenges did did result in some job eliminations along the way.
And at the same time, we continue to place the business in a path that we have the financial flexibility.
And yet we want to keep building in driving our our performance overall. So it's just it's important to make the necessary costs and at the same time be able to pivot and grow or cut more depending on on where were at.
So we're we're going to remain very agile and I think we demonstrated our ability to do that.
In short periods of time in pretty dramatic way here in the second quarter.
Okay Fair enough that's a good answer.
Also I wanted to circle back on.
Maybe sales trends at stores that have been opened for over a month or two.
One thing we hear industry wide is that the average selling price just continues to strengthen week over week as we move through June and into July.
Are you seeing that that at stores that perhaps opened up in may and is there theres sequential improvement in those stores or the tends to open up and then kind of hold steady from that that first week.
Well, our our model so different than than most d. and we have quite a bit of yeah on consistency in in our sleep professionals performance with our selling process and that delivers a very consistent and growing a are you and that's what we.
Scene and so as you know we're now today now in this position of 95% of our stores own fine.
Then our overall a are you is is far more normalized.
We've we've seen that im pretty immediately as stores have opened on Ari are you is right, where you would expect it and I think thats one of the.
One of the exciting things I've seen in the business Peter is Hum cash our.
Our.
Second and third tier metrics have held even with all this disruption have held so steady in you know the the fluctuations and Dave the as things move back they move right back and.
That's very encouraging.
For our ability to be able to navigate through all of this.
Over an extended period of time.
Sure. Okay. What one last question for you guys then and.
Sorry for maybe specifically targeting June.
But you've you've kind of using two different phrases around demand growth and sales growth.
You have this big this backlog in June that would have impacted sales for the month, rather dramatically where sales in June overall positive despite that that $30 million backlog.
So when we're talking about this demand and sales on an interim basis, we're talking about sales orders.
And not necessarily delivered sales delivered net sales.
But but the answer is yes they were.
Delivered net sales.
Both.
Okay, well that's impressive alright, thanks, a lot guys appreciate the extra insights.
Okay. Thank you.
There are no further questions at this time I'll now turn the call back over to the speakers for closing remarks.
Thank you for joining us today, we look forward to discussing our third quarter 2020 performance with you and October sleep, well and Dream Big.
This concludes today's conference call you may now disconnect.
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Welcome to sleep numbers second quarter 2020 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'd like to introduce these launches Vice President Finance Investor Relations. Thank you you may begin.
Good afternoon, and welcome to the Sleep number Corporation second quarter 2020 earnings Conference call. Thank you for joining us.
I'm, Dave Schwantes, Vice President Finance and Investor Relations.
With me today, our Shelly I block, our president and CEO, David Kaplan, our Chief Financial Officer.
Three of us our social distancing in our Minneapolis offices for the call today.
This telephone conference is being recorded and will be available on our web site at sleep number dot com.
Please refer to the detailed 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.
I would now I'll turn the call over to Shelly for her comments.
Good afternoon, and welcome to our 2022nd quarter earnings call. My sleep bikes used car was 75 last night.
The mission of sleep number to improve lives through individualized sleep experiences has never been more important for more relevant than it is today.
Our unwavering belief in our company purpose in our resourcefulness in finding ways to serve our customers have enabled sleep number two.
Actively navigate one of the most challenging period in our nation's history.
I'm grateful for our team's dedication to our mission and unrelenting focus on ensuring business continuity as we continue to create opportunities for market share gains profitable growth and significant shareholder returns over time.
Our better than expected second quarter performance in the face of monumental global health economic and social concern demonstrates the significant competitive advantages of our integrated business model and is a testament to the resilience passion and commitment.
Our sleep number team.
This with didn't bold actions, we have taken to combat the impact of the pandemic, including keeping our team say, serving our customers and maintaining our financial flexibility underscore the strategic financial and operational agility, we have built over the past.
Several years.
As a reminder, we took immediate action to increase liquidity and reduce expenses, we prioritized investments and initiatives to drive near term performance.
Aid our recovery.
Feed our return to long term growth.
We quickly scaled digital CRM solutions that retained the value of our relationship based selling approach through a blend of phone chat online selling from home and private appointment.
Seamlessly pivoted to remote headquarter operations customer service and innovative sales and delivery option.
And we prioritize our marketing efforts on loyal insiders in brand advocate a powerful competitive advantage, which represents our most efficient source of sales.
As a result second quarter financial results exceeded our expectations, including net sales of $285 million, which were 20% below prior year with an average of 53% of our stores open during the quarter.
Net loss per share of 45 cents.
Year to date operating cash flows of $87 million up 24% versus the prior year to date and net debt of 226 million, which was $54 million lower than a year ago.
Overall.
We.
Periods, improving sales trends throughout the quarter with high single digit demand growth in May and June combined compared to 2019.
Several factors contributed to our better than expected performance, including.
Our pivot to virtual relationship selling nationwide with impressive results, which mitigated the closed door impact.
Stellar growth in our online chat in Poland sales up more than 200% from the prior year second quarter.
Year to date, we have surpassed 2019 total revenue from these touch points.
Effective reopening of stores aided by referrals and repeat sales from our lifelong relationships with sleep number customers.
An immediate shift in our approach to customer acquisition, we increased our media mix into digital resulting in a step up in digital traffic from Q1.
We also placed increased emphasis on financing and promotions, while significantly reducing overall media spending.
Growing engagement with our brand as consumers respond favorably to the proven quality fleet of our Threesixty smart beds.
And the agility real time visibility and control inherent in our vertically integrated business model, which enabled us to quickly translate insights into operational and strategic advancements as we worked in lockstep with our partners and suppliers.
Throughout the intense disruption of the pandemic and civil unrest, we have taken decisive actions to drive near term results, while advancing our pioneering innovations enhancing our culture of individuality and broadening our relevant.
To consumers.
In the second quarter, we began providing new proprietary software features including circadian rhythm insights and personalized sleep wellness report to all of our sleep by two customers.
Through our research informed Threesixty smart beds sleep number is delivering proven quality sleep supported by science based evidence that links quality sleep.
Overall wellness.
Koeppen 19 has heightened individuals' concerns about their immunity and resilience.
There is increased understanding sleep is vital for healthy living and quality sleep actually booth, one immune system.
Our data shows that we thank you sleepers, our sleeping better.
Since a pandemic began our sleep by Q sleepers have gained an average of 11 minutes of restful sleep per night.
This improvement is in sharp contrast to surveys about fleet within the general population, which indicate that 58% of individuals who reported a change in their sleep sense, a pandemic our sweeping left.
We are working closely with our new scientific Advisory Board and interdisciplinary group of physicians clinicians and researchers with expertise in sleep science in health.
The advisory Board is providing consul as we mine our longitudinal data.
Which includes over 800 million sleep session.
We are bullish on our scientific accuracy and our ability to utilize the data elements with the highest impact on sleep quality.
In August we plan to commercialize individual heart rate variability insights as the next advancement in proactive health and wellness.
Threesixty smart bed sleepers will benefit from understanding how their night time heart rate variability impacts their activity level and energy each day.
With the reopening of our stores, we are excited to introduce our new and seven and I 10, Threesixty smart beds in the coming weeks.
With more than 80% of consumers challenge by temperature concerns during sleep, our new Threesixty smart beds feature temperature balancing layers.
These beds are designed to more closely contour to the body for greater support in spinal alignment.
Increased pressure relief and reduced motion transfer.
While we temporarily halted most discretionary capital spending in the second quarter, we've maintained our investment in life changing innovations that ensure our continued long term success.
For example, we recently acquired a patent portfolio from generator, the global development developer of thermal management technologies.
These patents support the cooling and heating technology for our beds embedding and further strengthen our competitiveness.
We plan to introduce our climate 360 bed in 2021, and these additional patents will embolden our longer term innovation roadmap.
The current environment remains dynamic and we expect continued disruption due to covert 19, and the us presidential election in the second half of 2020.
We demonstrated our agility and perseverance and we'll continue to benefit from our culture of innovation strategic advantages and execution discipline.
Our strategy is designed to deliver growth through customer acquisition and retention net operating profit leverage and to drive strong cash generation and mid teen ROI C.
And we expect this strategy to drive solid financial performance through these challenging times as we have for multiple years.
Today more than 95% of our stores are open and we continue to drive triple digit online chat and bone growth.
Our brand metrics are at all time high.
Customer satisfaction engagement digital traffic and conversion are all exceeding prior year.
Our balance sheet remains strong and we have significantly more liquidity than a year ago.
We expect the powerful combination of our proprietary innovations data and digital communications direct to consumer distribution customer loyalty and mission driven team to drive demand during the second half.
In addition, the pandemic has served as a catalyst for positive longer term change in reinvention.
In the week of our necessary immediate actions to reduce cost and preserve our financial flexibility. We have identified new ways of doing business, such as virtual relationship selling and digital lead management and we are accelerating other initiatives such as Connectedhealth.
These opportunities are leading us to reallocate headcount and strategically invested new capabilities that will support our future growth.
Consistent with our past, we will use our experience and learning to strengthen our competitive mode and advance our purpose.
The structural shift in consumer attitudes and behavior is related to health and safety, which have been accelerated by Covidien 18.
Is likely to continue.
Consumers are increasingly prioritizing the wellbeing of their family and home with more than 25% of consumers expecting to purchase a health related products before year end. According to a recent Nielsen Global survey.
Quality sleep has the power to improve health and wellness and sleep number is at the forefront of delivering life changing benefit to individuals in the world.
The tenacity and ingenuity of our team the disciplined execution of our differentiated strategy ineffective use of our capital position us well to deliver long term profitable growth.
Now David will provide additional financial details on our second quarter.
Thank you Shelly.
The second quarter was all about agility and progression.
We demonstrated agility by acting with urgency based on the real time performance metrics, we used to run the business.
We learn to do things differently hunter extremely challenging conditions.
And we lever the technology and growth driving capabilities, we built the past few years.
While our selling from anywhere capabilities helped us reach customers throughout the quarter. The progression of our sales has certainly benefited from being allowed to reopen how our stores.
Today more than 95% of our nearly 600 stores are open.
In April just 23% were opened on average followed by 47% in May and 81% in June.
While uncertainty remains regarding future impacts of cobot 19, we have demonstrated our ability to improve lives even in the toughest conditions.
Our financial performance for the second quarter was significantly better than the models, we used to inform our cost and capital deployment decisions.
April demand was down 48% versus the prior year, followed by high single digit growth in May and June combined.
This hyper V shaped change in demand understandably stressed our fulfillment capacity, resulting in more than $30 million incremental deliveries carried carrying forward into Q3.
Looking forward the labor day timing shift is expected to move about $10 million in deliveries from Q3 into Q4.
And we expect Q4 sales will also benefit by more than $25 million from an extra fiscal week this year.
Net sales in Q2 of $285 million were 20% lower than the prior year.
Paired with a 50% reduction assumed in the scenario used to support our cost and capital allocation decisions.
More than 27% of our sales in Q2 came from online and phone sales compared with 7% the prior year.
Despite this error you was just 4% lower than the prior year on mix shifts, partially offset by higher bedding sales.
Golden 19 closures resulted in delivered mattress units, 17% lower than the prior year.
The mix shift and operational inefficiencies from cobot, 19 closures and lower unit volumes pressured our gross margin rate in Q2 by 380 basis points versus the prior year to 57.2%.
Managing that dynamics of extreme demand challenges changes in Q2 has certainly been challenging.
Through the fast actions of our teams and agility of our global supply partners, we had no significant supply disruptions during the quarter.
Constraints and covered related uncertainties that affect the flow of goods globally continue to be top of mind and managed to day to day by our team and partners.
One specific example of this during Q2 is our newest distribution center in the Los Angeles area.
We opened in May as planned however, we manage very real cobot 19 challenges to staff and operated properly.
As a result, we elected to run it temporarily as a hub rather than a mattress assembly location.
We've leveraged learnings from operating previous distribution centers and love this location.
We expect to converted to our fourth Assembly distribution center. After we managed through Labor day volumes.
For similar reasons Weve also postpone the opening of our fifth planned AIDC in Dallas until next year.
These decisions were necessary to mitigate coded related business risks.
We will continue to provide updates each quarter on this multiyear initiatives.
During our first quarter earnings call I highlighted scenarios that if realized would consume about $50 million of free cash flow from operations in the first half.
Our sales in Q2 were stronger than modeled and our early and aggressive actions resulted in $35 million.
Lower operating expenses than in Q2, the prior year.
This while continuing to support our performance driving initiatives and absorbing severance and year to date incentive compensation true ups.
Our year to date financial performance also reflects the agility of our business model in the face of extreme challenges.
We reduced expenses, 3% in line with year to date net sales change, while investing 14% more to support our innovations.
Despite the impacts of Kobin 19, our gross margin rates in the first half is 10 basis points higher than the prior year to date and our net operating profit is up 2%.
Our first half EBITDA was equal to the prior year, and we generated $65 million of free cash flow year to date.
79% versus the first six months of 2019.
Our commitment to efficient capital management and this performance enabled us to pay down nearly $300 million of our revolver at the ended the quarter.
We ended Q2 with $226 million of net debt down $54 million compared to a year ago, while increasing liquidity by $129 million, including the addition to 75 million dollar one year term loan.
Our 2.8 times ending leverage ratio improved from three times.
EBITDAR for the same period last year.
Remember that our covenant maximum is 4.5 times and our targeted operating leverage range is 2.5 to three times EBITDAR.
The fundamentals of.
Of our business and balance sheet our strong.
We are well capitalized to support our initiatives with pace and confidence while navigating through ongoing covance 19 related challenges.
We're pleased with the performance of the business.
We also acknowledge that uncertainties remain for the back half of the year from covert 19, the presidential election and possible recession pressures.
As a result, we built our spending plans for the balance of the year based on demand approaching flat to the prior year, including the extra week benefit this year.
Our long term bias favors continued prioritization of our innovation and marketing initiatives.
We intend to lean more heavily into these growth drivers in the back half of 2020 and beyond.
We expect somewhat less gross margin rate pressure from mix shifts in the back half of the year as consumer shopping preferences include both in store and online purchases in advantage of our vertical business.
We continue to actively balance near term business risks with our commitment to sustain our advantage strategy.
Our orientation for long term performance embraces and approach now that enables us to rebound with pace over the coming quarters.
In closing I'd like to add my thanks to the sleep number team and business partners across the country, who have worked tirelessly to drive performance and to improve lives through proven quality sleep. Thank you.
Shentel at this point please open the line for clarifying questions.
As a reminder to ask a question we'll need to press star one on your telephone to apply your question press the pound or hash key please standby when we compile the Q and a roster. Our first question comes from Peter Keith with Piper December Your line is open.
Hi, Thanks, Good afternoon, everyone. Thanks for taking my question.
I was hoping you could just expand upon.
The comments around the 30 million of backlog.
From the quarter that got pushed to Q2 to Q3. If you had commented that you don't have any supply chain issues. So.
What exactly caused that backlog and was it maybe demand related in the final weeks of the quarter.
Sure Hi, Peter you know, we have been giving a little more color intra quarter than normal here since the since cobot 19, and this is really an example of US doing that if you think about where we were in April.
Down nearly 50% and at that time, we had an average of 23, 23% of our stores own fun and in May we had an average of 47% open and in June 81% open and now nearly all of our stores open.
And if you think about the progression of the sales down nearly 50 in April and then high single digits for May and June that did become a big swing in our overall performance during that time and I also mentioned that our sales performance.
Ben Progressive and throughout the quarter. So that gives you a good indicator of.
How that flowed how it built through the quarter and there is also very strong correlation with us opening our stores and our performance growth.
So naturally.
Because of Maine.
Significant performance and June.
Both both very strong month it it built an increase in the backlog.
Peter I'd just add on.
Having to kind of demand change that we're talking about with April down, 48% sudden and dramatic growth in may and June.
That causes some pretty big fluctuations for us to manage through and and that's part of what you're seeing with $30 million of.
Additional business to be delivered in.
In the Q3.
Okay.
Fair enough and.
I guess it to clarify what has it gone that is both May and June.
We're up or was it just the balances combined work were up.
Yes, each of those months, where our other says prior year.
Yes, Okay, and so you had mentioned you pulled back on advertising during the quarter, which I think makes a ton of sense not not great different from other players in the industry. How are you thinking about advertising now going into Q3 is that something that you want to increase and lean into or you're still a little bit has dealt with.
Some of this backlog.
No. We're we're leaning into this Peter.
We we did have a significant decrease in our media spend in Q2.
And I also like to say the precision of our media strategy has really been a significant advantage for us that in the fact that we have internal.
Digital fine.
In the quarter, we had the ability to pivot in shift our spending to reach and find and engage customer even with the significant media reductions and.
That combination with our virtual relationship selling.
Helped us build when when you look at main to think that we were up over last year with an average of 47% for stores open it's a pretty remarkable.
Pretty remarkable progression and so where we are definitely adding back media at pace and we expect to navigate around many hurdles here in the back half as well both around.
The cobot 19 pandemic and also around the political environment.
Okay fair enough. Thanks for the answers and good luck.
Thank you thanks Peter.
Our next question comes from Bobby Griffin with Raymond James Your line is open.
Good afternoon, everybody appreciate taking my questions.
All of that Dave.
Just wanted to clarify your comments earlier about the back your point, you're spending plans for the back half I think you mentioned something of a revenue or demand kind of equal to last year can you maybe.
Clean that up from where I understand it and I guess it was put in context sense, we're running up in orders now under shifting in $30 million worth of deliver on deliveries in Q2 as well as you got the extra week I was just I'm getting a little confused on.
Hi, guys, having revenue flat versus the back half.
Right, Okay, just isn't it just conservative and.
Uncertainty out there whatever you might want to put around that will help me think about it.
Hi, good I'll do that.
Yeah.
We're not providing guidance first of all and in this isn't guidance and we're trying to talk through how we're thinking about running the business in a very challenged environment, where there's a lot of uncertainty still.
To be absorbed I mean, you look at the changes even this week in California, We don't have control over when jurisdictions are going to close stores or what have you. So.
We're navigating through a pretty challenging environment and in that environment. We're talking about how we're thinking about our spending in the back half of the year and we're basing our spending based on.
Sales growth versus the prior year, that's flat to the prior year, including the benefit of the extra week.
That's just how we're thinking about it in this environment. That's how we're managing the business I'd Hope you think that that was appropriate given the uncertainties ahead.
Okay that makes that makes sense. Thanks elements for instance, I was the second quarter. My question. So I was just curious as you've seen your stores reopening have you noticed anything different about customer behavior inside the store.
Versus kind of three told at levels and you guys have a pretty unique selling crosses their sleep number so I'm just curious.
Any tidbits you picked up for customers as they return into your stores.
Hi, Bobby we see I would take a wide variation of.
Consumer.
Behavior based on state and county, and how the pandemic has played out in different areas and we're all about.
Be in individualized, it's all about individualization for us in all aspects of our business, including our beds.
With the individualized contracts and end, we individualized they experience in this is where having our talented frontline team.
Connect with the customer and same with our home delivery teams in their connecting with the customer there. They are weighing out in understand the sensitivity where the customers at and they meet them in a way that that helps make the customer feel very comfortable and safe and meet there.
And were able to meet their needs and deliver a really stellar experience and yen, it's exciting to to see such high customer satisfaction scores.
During such a challenging time.
Ill jump back in the queue appreciate it will loans from my questions.
Thanks, Bobby.
Your next question comes from Seth Basham Wedbush Securities. Your line is open.
Thanks, a lot and good afternoon.
Hey sets.
You commented on some of the recent trends in May and June perhaps you give us some more color around out sales are trending in key markets like Florida, Texas, and California already seen rising crown buyers cases and recently.
Yes, again, we're we're seeing very more variation than we normally would across regions and county, where you see that cobot 19 flare ups or concentrations.
Yes, I would also share with you that as we bump in stores.
All of our stores and yes throughout the country has quickly become productive certainly some more than others.
But I think this is a good. Good example of the ongoing relationships are frontline's building with.
With their their long term customers and and benefiting from that repeat and referral. It helps us to have it at jumpstart right from the beginning and then also our digital lead management is helping with that as well.
It ensures a strong start.
Gotcha and looking for example at the group of stores that were already reopened the beginning of June how do those progress through the month could you see some trail off in year over year growth trends as we got later in the month over the course for the fourth of July holiday weekend with the rise in car buyers cases.
Yes, as we shared the.
Progression through the second quarter and.
We continue to progress in a positive way throughout the full quarter and we.
But needs.
Yeah, I'm sorry, just to clarify my follow up question. There. If you look at stores are opened earlier say that group of stores I was already opened at the beginning of June how did sales in those stores progress over the last six weeks.
Well I'm not going to get into detail on the third quarter tight as I've stated we've seen a.
Good.
Strong progression of our business and that also includes stores that have been open.
Got it thank you very much.
Thanks Seth.
Your next question comes from Brad Thomas with Keybanc capital markets. Your line is open.
Yeah. Thanks for taking my question.
I wanted to first ask about the strength you're seeing in the direct business.
And I was curious if you could talk a little bit more about.
If you think this is gonna be sort of a permanent shift toward you do you think this is gonna be sticky as a growing percentage of sales where do you think is you reflect on the last few months, perhaps they were individuals that visited the store they hadn't closed yet and they decided to end up finally, converting online I'd be curious mark.
Again, thank you are saying here.
Well, let me start with it to the fact that were 100% direct to consumer which is very unique to sleep number <unk> all of our distribution comes through either our stores, you know online chat or phone and.
Yeah. This is this is what weve designed strategy for the customer to be able to interact with US. However, she wants we see the that customer interact through multiple touch points generally and Weve certainly been pretty aggressive then in our digital communicate.
And as well as our digital lead management.
To be able to serve her particularly during this time in a different way as David highlighted you know the online phone and in Shout sales were 27% of our business and I mentioned Weve already surpassed 2019 numbers I expect this business to continue.
The new to the a larger part of our total as we move forward.
As our stores have reopened we've continued to see triple digit growth in on our online sales and we know there's still going to be a lot of fluctuation around cobot 19 here in the back half. So it's hard to you know it's hard to Ah.
Provide clarity about what this is going to look like I think importantly, we're going to be very fluid and weve, showing our ability to pivot and be agile and be responsive to the consumer where she wants to shop in the end maybe this is double the penetration it wasn't the path.
We absolutely see it is additive and complimentary to our stores in the long term.
That's very helpful Shelly and if I could ask one of a David.
Recognizing you're not giving guidance, it's not going stop us from trying to get more Colorado.
I guess in a world where you're planning for.
The demand growth, including the extra week to be flat can you help give us some insights into maybe puts and takes so think about from a gross margin.
And expense standpoint.
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Okay I will do my best how we're thinking about it Brad is.
We're planning the expenses based on as I said demand that's about.
Even with the prior year, including the extra week.
However, we also plan to lean into our innovation drivers, our long term growth drivers and our near term growth drivers through marketing capabilities.
So you will see a little bit of an uptick in those areas in the in the back half of the year relative to prior year.
In addition to that I guess in on the gross margin side.
The mix shift with higher.
Mix of our sales coming from online phone and chat.
The natural tendency is for the mix to move a little bit down. The line you saw that that impacted us by impacted our air you by about 4% in it at a pretty reasonable impact on our gross margin rate, we expect less of an impact on margin rate in the back half.
As we expect to have more of our stores open the majority of the back half, but again, we don't know for sure what thats going to look like and so giving you guidance on or give you kind of color on what to expect on gross margins really tough.
But thats how were thinking about it.
Yes.
Great very helpful. Thank you also much.
You bet.
Your next question comes from at Curtis Nagle with Bank of America. Your line is open.
Great. Thanks, very much for chicken one question so well.
First a quick one on the store based so could you closed my team in the quarter.
How many those were part of the 20 Fiveish stores, you had a bumps month leases that you'd indicated were a potentially closed.
Yes, it's actually a to close permanently and how many.
We are part of the basic relocation plan and how should we think about footprint for this year.
Yes, the majority of those were.
On month to month leases that we were taken action on you know.
Given the environment and our ability to transfer the majority of those sales and profits from from those stores it to other stores in the June geography.
We're pretty much through that part of the effort at this point and we're really leaning into our growth drivers on all fronts, we have.
You know our capitalization is very strong and we have lots of liquidity to support our initiatives and will be leaning into our capex winner in our store expansion plans.
In the back half as well.
Okay understood.
And then just.
Taking a little bit more about the.
So it's a flight downcycle.
Rubs per mattress. So you know you indicated that it's due to the on like mix shift, which makes total sense.
I guess, how much was that due to perhaps.
Im sorry, maybe not being as a stronger how much is not due to an actual product mix. So you know people mixing a little bit lower terms as.
Actual actual bad so there'll be aboard.
Seabed relative to other beds, how do we kinda conclude that.
Well you know our business model, a more we have touch points with our customer more often we.
Reach out to have contact with them if they only have a transaction online it generally.
Comes in at a lower.
Model of product.
And the more often we have interaction. So if we have online plus chat it moves up the line and if it ends up in the store it's got the best total.
Solution for the customer and frankly highest satisfaction for the customer highest NPS scores et cetera. So.
Not only does it come with higher a are you with those in store transactions, but its overall a better overall experience in total we have improved significantly through the digital capabilities that we've been talking about.
So there was only a minor slippage of the air you down 4% I think thats pretty minor given the mix of sales of 27% coming from these is other touch points of online phone and chat.
However.
That that is primarily changes in model mix not not as much about lower attach.
Okay very clear thank you.
Oh.
Your next question comes from a tool networking with CBS. Your line is open.
Oh good evening, Thanks, a lot for taking my question.
So with online on Oh.
Channels are still growing on the percent anyway with nearly all of your stores open does it make you rethink your store strategy going forward, we look to pare back on your expectation of.
Adding mid single digit square footage every year or will you, even potentially look lower spread focus going forward.
We've contemplated this as part of our strategy for multiple years and we constantly go back to our real estate strategy in look at a five year horizon with changing consumer behavior, we see this pandemic.
Hey, guys, yes, absolutely a catalyst to not only you know shift consumer attitudes around health and wellness, but also you know how they shop and this has been contemplated in our strategies is why we have such a high average revenue per door or.
Ready and why we've held to having a distance of.
About 20 minutes on between our stores, having their availability for our customer to have an in store experience. We still see is very important for of a brand like like ours in a brand that you're going to be highly engaged with and yeah. We see the.
Country, and yes, we still have a triple digit I said triple digit not not 100 and.
We're excited about that and we see it is additive.
And we intend to grow all touch points.
On the student and just as my follow up and I know that she's Michigan earlier, but may and June were up high single digits and I understand you don't want to getting too many specifics here, but.
How would you compare that high single digit to how these first two weeks since July has trended.
Just any color Directionally all happenstance remained in line or hopes is decidedly direct salaried workforce management.
Yes. This is very similar to have a question I had earlier and I indicated that our sales of them progressive throughout the second quarter and Theres been a strong correlation with us opening our stores into increased number of store openings along with our.
Our stronger.
Overall topline performance and as a reminder, in June we averaged 81% of our stores open and right now we have a 95% of our stores don't but.
Okay. Thank you.
You bet.
Our next question comes from Peter Keith of Piper Salmon. Your line is open.
Hi, Thanks, again, guys. So a couple of follow ups.
Yes, David to last call you talked about a 150 million annualized cost reduction plan. So the sales have gotten better much faster than you thought where would you sort of peg that.
That cost reduction plan on annualized basis, given sort of the framework you provided for that the back half year to us.
Hi, Peter we that plan was based on as you recall.
Scenarios that included down 50% in Q2 down 25% ish in Q3 in flattish sales in Q4.
Clearly down 20% here in Q3 or excuse me in Q2.
There are significantly more variable costs associated with the higher sales levels and talking about the back half being essentially flat to the prior year for the whole back half.
Clearly there is going to be more variable costs that are already incorporated in there. So we're not going to give an update on the overall spending cuts but.
We did everything that we thought we would be doing in more.
And you can look at the cash generation in Q2, as an indication and I tried to give you some kind of.
Comparison in the sense that.
We expected based on those models to consume about $50 million in cash from free cash flows from operations in the first half and instead generated significantly more in that when it was at 65.
65, or so million dollars in that same period. So.
Pretty pretty significant swing in overall liquidity in performance in that first half. So we're just continuing to be appropriately conservative given the uncertainties on our spending in the back half and.
We will continue to pull every lever to drive performance, where those opportunities allow and if we needed to we can always pullback.
As well.
Yes, Peter you know they the add all I'll provide here is as we went into.
The pandemic and we took actions against all those costs, including significant furloughs and you know now at this point.
We have brought back our at the majority of our team.
The change in business in the trajectory and challenges did did result in some job eliminations along the way.
And at the same time, we continue to place the business in a path that we have the financial flexibility and yet we want to keep building in driving our our performance overall. So it's just it's important to make the necessary.
Hi, Jeff and at the same time be able to pivot and grow or cut more depending on on where we're at.
So we're we're going to remain very agile and I think we demonstrated our ability to do that.
In short periods of time in pretty dramatic way here in the second quarter.
Okay Fair enough that's a good answer.
Also I wanted to circle back on.
And maybe sales trends at stores that have been open for over a month or two.
One thing we hear industry wide is that the average selling price just continues to strengthen week over week as we move through June and into July.
Are you seeing that at at stores that perhaps opened up in in May and is there theres sequential improvement in those stores or the tends to open up and then kind of hold steady from that that first week.
Well, our our model so different than than most Dia, we have a quite a bit of yeah consistency in in our sleep professionals performance with our selling process and that delivers a very consistent and growing a are you and that's what we.
Theme and so as you know we're now today now in this position of 95% of our stores own side, you know than our overall you know a are you is is far more normalized.
But we've we've seen that im pretty immediately as stores have often Ari are you is right, where you would expect it and I think thats one of the one of the exciting things I've seen in the business. If Peter is on cash our you know our.
Second and third tier metrics to have held even with all this disruption has held so steady in you know the the fluctuations and Dave the as things move back they move right back in.
That's a very encouraging.
For our ability to be able to navigate through all of this.
Over an extended period of time.
Sure. Okay. What one last question for you guys had and.
Sorry for maybe specifically targeting June.
But you've you've kind of used to different phrases around demand growth than sales growth.
You have this big this backlog in June and that would have impacted sales for the month, rather dramatically where sales in June overall positive despite that that $30 million backlog.
So when we're talking about this demand and sales on an interim basis, we're talking about sales orders.
And not necessarily delivered sales delivered that sales.
But but the answer is yes they were.
Delivered net sales.
Both.
Okay, well that's impressive alright, thanks, a lot guys appreciate the extra insights.
Okay. Thank you.
[laughter].
There are no further questions at this time I'll now turn the call back over to the speakers for closing remarks.
Thank you for joining us today, we look forward to discussing our third quarter 2020 performance with you in October sleep, well and Dream Big.
This concludes today's conference call you may now disconnect.