Q2 2021 Lovesac Co Earnings Call
[music].
At this time, all participants Oh listen only mode. A question and answer session will follow the formal presentation. If he would like to ask a question you May press star one on your telephone keypad during today's presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Ms., Rachel Schacter up I see our thank you. Please go ahead.
Thank you good morning, everyone with me on the call, Sean Nelson, Chief Executive Officer, John <unk>, President and Chief Operating Officer, Donna <unk> Chief Financial Officer.
We got started I would like to remind you that some of the information just got.
Well include forward looking statements regarding future events.
Future financial performance.
Do you think statements about our future expectations financial projections and our plan.
Actual results may differ materially noted fourth we touched.
For a discussion of these risks and uncertainties issue reviewed the company's filings. It does he see which includes today's press release.
You should not rely on are forward looking statements that prediction.
Sure.
All forward looking statements that we make all the call are based on assumptions and beliefs as of today, we undertake no obligation to update them, except as required by applicable law.
Our discussion today will include non-GAAP financial measures, including EBITDA and adjusted EBITDA.
These non-GAAP measures should be considered in addition to you and not as a substitute for or in isolation from our GAAP results.
Reconciliation of most directly comparable GAAP financial measure to such non-GAAP financial measure has been provided supplemental financial information in our press release.
Now I'd like to turn the color there showing Nelson Chief Executive Officer lots that company.
Good morning, everyone and thank you for joining us today.
I will begin my remarks by providing an overview of our continued response to a dynamic operating environment, followed by a summary of our performance for the second quarter.
Jack Crouse, our president and COO will discuss our fiscal second quarter operational performance and progress being made on our key initiatives against the current backdrop.
Don't have Delano our CFO will then review our financial results in a few other items relating to our fiscal 2021 outlook.
Well the operating environment in the second quarter continued to be challenging I'm very pleased with our teams resiliency and ability to adapt because we continue to serve our customers.
During the quarter, we began reopening showrooms through a measured and phased approach with our ecommerce platform continuing to serve as an important first step into customers transaction.
And in many cases, serving as the platform for their love stock purchase experience from start to finish.
We ended the quarter with all showrooms opening some format, many still virtual or by apartment only as we continue to prioritize the health and safety Barr associates and customers and utilize our full time associates as trade area represents jets I also leveraging our enhanced technology capabilities.
In terms of our shop in shops, with Macy's and best buy five of our seven were open as of the ended the quarter and the remaining two reopened in August post quarter end, we operated only 19 Costco in store pop up shops in Q2, EPS compared with 209 in the prior year.
Period, as Jack and Dawn I will discuss shortly.
The strength in customer demand for our changeable flexible sustainable Upgradable and shippable designed for life sectional seats inside.
Combined with our ability to successfully adapt to the changing operating environment, including a very strong heroes campaign, all drove a 28.7% overall Q2 sales increase including 387% ecommerce growth.
Our heroes campaign, which honor first responders in frontline workers was very successful attract new customers to our brand while driving over half of ourselves during the period in which it ran from April 3rd 2020 to May 31st 2020, which redemption lingering into early June 2020, and impacting a little over one month.
Fiscal Q2.
We are pleased to see strengthen the business even post the end up its campaign.
In an effort to appropriately manage the business in this uncertain environment, we tightly managed inventory purchases, an extensive and we were conservative with marketing and promotions in Q2.
As we continued to successfully navigate the pandemic disruption and ensure a healthy financial position.
Operational discipline, coupled with some benefit from the timing of expenses helped drive an almost 28% increase in gross profit dollars.
The positive adjusted EBITDA of 2 million.
This call some mark the first time that Luxottica's achieved positive adjusted EBITDA in this fiscal quarter other than Q4 as our business overall continues to mature toward Cashwell positivity.
With tight working capital management and disciplined capital expenditures, we ended the quarter any strong cash position of almost $55 million.
The end of this pandemic is not yet insights and the nesting behavior has created an almost unprecedented demand for home related products and solutions, particularly for products like ours that can be easily configured and shopped online and deliberate quickly in a touch with way the effects.
Further our unique commitment to sustainability combined with the quality of our product offering and the ease of fulfillment remain important differentiators in key drivers of customer purchase decisions.
We're leaning into these differentiators and highlighting them even more in our go to market strategy.
Specifically the success, we've seen from utilizing our full time shoulder employees to manage a trade area versus just to show room has proven very successfully especially when combined with technology enhancements such as podium shot systems and our recently re platformed enhanced website with new capabilities that Jack will discuss.
Just a moment.
We expect all of these important distinguishing attributes to even better position us to capitalize on the subsequent market share opportunity going forward.
As we execute in the near term and navigate this very dynamic operating environment. We are advancing the initiatives that underpin our long term growth strategy to that end, we continue to make strategic investments in our infrastructure that will support our growth.
While also creating efficiencies and elevating the customer experience.
We're very excited that the August launch of our completely new E. Commerce platform went very smoothly, even amid such rapid growth.
This new platform has several improved capabilities to highlight the uniqueness of our product offering.
Allowing us to more rapidly advance our plans of improving the seamless omni channel experience for the customer.
On the supply chain side, we continue to plan for the opening of our East Coast warehouse late this fiscal year, which is expected to help drive reductions in freight costs in fiscal 2020 too and beyond.
From a product development perspective, we remain keenly focused in the nearer term on delivering a new product innovation that will be additive to the sectionals platform.
We still anticipate the launch of our previously discussed Sectionals platform technology innovation early in our next fiscal year.
Moving to our current performance we are fresh off a very strong labor day period, where weve turned back on the marketing machine that we had let coast for that in order to avoid any inventory challenges in the wake up early coated caution on inventory level.
We feel well position now the second half of the year, our inventory flow has ramped back up and we are again, making the investment in infrastructure and bringing back expenses that had been temporarily halted or reduced particularly on the marketing front to drive even more growth.
We remain agile as we navigate this environment and relentlessly continue to test and learn on the marketing front innovate on the product fraud, and elevate the omni channel customer experience to seek increase share of the strike antic upholstered furniture category, which we still have less than 2% penetration.
As we look for the remainder of this year, we feel confident about our ability to drive strong year on your growth, but we recognize that the environment remains uncertain outlook.
As such we will continue to be nimble and flexible and we will remain disciplined in our approach to running the business.
As we think about the back half the year. We're currently planning to open seven to 10 more showrooms, but at this point expects no contribution from Costco in store road shows as Jack and Donald will discuss further.
We expect continued sales strength in Q3, not dissimilar to the sales growth, we delivered in Q2 and with cost coming back into the business and marketing turned back on we currently expect adjusted EBITDA pressure in Q3 for returning to healthy profitability and growth at the adjusted EBITDA line in the season.
Really high volume fourth quarter.
And of course, we will remain adaptable opportunistic and net returns focused as we grow our brand and further strengthen our omni channel customer experience.
So in summary, I'm thrilled with the execution of the team to date and how we have navigated the rapidly evolving backdrop.
We have a strong balance sheet and financial position and the offering that resonates, especially well during this time.
And agile and lean operating model that includes a flexible marketing budget and a diversified sales channel to help expand to reach of our brand before turning the call over to Jack I want to thank all of our associates for their hard work and dedication to our customers. During these challenging times with that I'll turn the call over to Jack to provide you an operational up.
Okay and discuss the progress being made on our key strategic priorities.
Thank you Sean and good morning, everyone 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 the remainder of fiscal 2021.
Throughout the second quarter, we remain nimble and agile prioritizing the health and safety of our team members and customers. The successful operational pivot we discussed at like last quarter continue to serve us well as we reopened showrooms in many cases in a very limited capacity and our disciplined management of expense.
This is working capital and capital expenditures all reinforced our financial resilience.
Healthy demand environment, and our execution is evident in our topline growth of 28.7% during the quarter and our new customer metrics.
We attracted 50% more customers than last year and had an almost 70% increase and factional platform new customers.
We start with an update on a showroom operations.
We launched a phased approach to reopen showrooms beginning in mid may with the safety of our customers in our employees in mind, we implemented three unique showroom operating models virtual.
Appointment and walk in these three operating models allowed us to safely reopened and many trade areas, while providing the continued ability to easily flux between models as pandemic conditions worsened or improved currently all up back brick and mortar showrooms as well, it's seven shop in shops with Macy's at best buy.
Our open and one of these three phases.
During the period of time, where showrooms were temporarily closed we've learned a great deal about how to love fact, dot com customer engages with arc showroom teams and it was a result, we leaned into offering this type of sales and service as part of our go forward strategy.
As mentioned in our quarter one earnings call. The podium platform continues to be a successful tool for our associates to engage with our customers online with the expansion of this approach we've seen a dramatic improvement and wait times. We've also seen a significant number of customers come back with US do this platform today and are converting at higher levels.
We have previously seen in showrooms or online. These are customers that would not have been able to interact with a salesperson on our website prior to this podium launch in expansion.
We also now know that the fashions demos, an essential part of our selling process Swift continued to use Facebook live to reach a much larger audience with strong increases in live broadcast and viewership in the second quarter.
In terms of our staffing model and associate utilization and the second quarter, we continued to make strides in aligning or selling in service teams to provide one seamless experience for the customer. This strategy provides us with the ability to flex our people resources to meet the customer either digitally on phone when the showroom, whereas.
With the customers on their shopping general journey.
In the last 10 weeks since expanding this initiative, we've seen double digit increases in internal service metrics, such as accessibility as well significantly reducing the average wait time for customer to speak to an agent. We are very proud of how nimble our sales and service teams have been throughout this time.
Even as we have navigated the rapidly changing operating conditions of the last few months, we remain focused on advancing our key strategic priorities to drive long term growth and market share gains as well the effective scaling. This business. These priorities are one product innovation.
Through efficient marketing and promotion strategies.
Three new show room growth.
For expanding other channel presence in sales and five making disciplined infrastructure investments.
In terms of product innovation, our new product innovations of the power hub and storage see continue to drive ASV in margin more specifically, we are seeing over one enforce actuals orders include almost two storage seats on average and one in seven include at least one power hub, we're actively working on our innovation agenda with a new product in development.
Got a slated for a quarter one launch.
On marketing and promotion.
Second quarter marketing spends were extremely efficient as many advertisers pulled back on their advertising spend temporarily driving down the advertising cost for the market.
We have been agile and opportunistic with our marketing spend focused on maximizing ROI as we lean into platforms, where a customer has increased their adoption of over the top media flash, who the which were currently planned to represent a meaningful amount of our TV spend during the upcoming campaign.
In addition, we saw strong results from our successful heroes campaign paid search social media digital remarketing and affiliate programs.
Digital conversion channels.
But just search social affiliates et cetera, so some of our strongest ROI today as well.
And the second quarter, we applied many of the Q1 learnings from testing new strategies on a larger scale. We had some great success and positive ROI with what we called warm prospects, where those shoppers who have taken an action like ordering swatches are having opened quote we have targeted messaging to them specifically based on the action that they had taken and this targeting has done through.
Email social media marketing as well as Retargeting ads and as we test and learn more about these segments. We continue to expand the ways, which we can reach them throughout their digital journey.
As we discussed in the last call our heroes campaign drove a great deal topline sales prior to and during the Memorial day holiday made up over half of our sales when it was running in June and July we began to strategically pull back on a promotional and marketing spend including a year on year moderation in media spend in the balance of the quarter Post Memorial day.
Okay, that's wealth and promotions, where we lapped the flash sale last year that we did not repeat this year. We did this while successfully balancing and managing the associated top and bottom line impact as a result, we're feeling more confident about the opportunity to effectively manage volume margin and supply chain with a mix of higher margin.
Activities.
As we think about the marketing for the rest of the year. The media market dynamics are changing from covered driven cost tailwinds to pre election driven cost headwinds.
Next ability and a disciplined focus on returns remains critically important as we continue to navigate this environment.
In terms of new show rooms were still on track to open between 15 and 18 showrooms in this fiscal year and expect to end the year with a total of 100 and for 207 showrooms during the second quarter. We opened eight showrooms in six markets. We have moved to a soft launch mode absent of Grand opening events and new showroom performance is consistent with the condition.
And in which they are operating in the markets.
I've learned a great deal in the past couple of quarters about our ability to operate a truly omni channel business in market results continue to show us that showrooms are driving customer acquisition and we will continue to open showrooms in the future. However at the same time, we've learned a tremendous amount about our ability to reach customers, while they're researching or products.
And this will lead to some exciting new approaches rather touch points strategy go forward that we believe we'll make customer acquisition, even more effective for us.
Expanding other channels.
We remain optimistic about the longer term prospects a channel partnerships and we'll continue to explore the shop in shop format with retailers, where it makes sense from both a brand awareness and economic standpoint.
We have just signed an agreement with best buy to sell limited selection of love back factional and facts on best buy Dot Com, which we expect to launch in the second half of this year.
John mentioned earlier, we only ran 19 physical road shows with Costco in the second quarter, representing a significant the decline in volume from last year, which was a 4.4 million decline or 60% year over year. While we don't currently expect any contribution from Costco for the balance of the year the volume uncertainty is off.
That by no material impact on profitability given mix driven margin benefits.
We have higher financial expectations of our partner channels, given our growing ability to drive brand awareness on an organic basis.
And finally on infrastructure.
In mid August we launched our new E Commerce platform, which is powered by Magento backed by Adobe Magento stated the art ecommerce platform enables the advancing up our seamless omni channel sales approach to meet and exceed the changing needs of our customers make covance and post covered world customers can utilize their website to fully understand that.
Power and uniqueness of our product platforms and have a unified experience with our showrooms. Some notable feature and functions.
Enhancements include the product Configurator.
Which is our new three D. 360 degree product visualization software, which allows customers to create their own factional, adding pieces rearranging changing it customizing their covers easily adding accessories, all from one location and with an environment they choose.
And enhance showroom locator allows the customer to easily find details and communicate with their preferred show room as well to obtain driving directions powered by Google maps directly on Love fact, dot com, notably the customer no longer needs to leave the website find direction their preferred showroom.
Advanced web site targeting capabilities can be utilized to drive customers to desired shopping behaviors based on what the local conditions and customer needs to dictate their new payment options such as Apple pay would you give the customer more choices and simplify the conversion process.
These new enhancements will allow us to more effectively operate and all showroom model virtual appointment and new normal customer experience, it's completely omni channel.
On the supply chain side, we continue to reduce our final mile costs by adding two more regional distribution facilities to our operations.
One in California, and one in Pennsylvania.
Although the California facility rollout was plan due to cover 19 by three months.
We've ramped up operations and our operating 150000 square feet. This combined with the planned opening of our East Coast warehouse late this fiscal year is expected to help drive reductions in freight costs and further improve customer experience in fiscal 2022.
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 and order fulfillment functions worked again in the second quarter and we currently expect to be completed by the first half of fiscal 22.
We expect to see visibility tracking demand planning and forecasting which will positively impact our ability to execute with excellence in the fourth quarter of this fiscal year.
We continue to make progress and the execution of our Resourcing plan proving our cost of sales while at the same time mitigating our supply risk post covert 19, and we have three production sources and three countries for Satchel inserts and we've secured additional discounts to offset China tariffs.
So in summary, we're very pleased with the execution of the entire love sack team as we have adapted to the changing operating environment and simultaneously advanced our strategic initiatives are operational pivot in response to the pandemic, but meaningful and successful as reflected in our second quarter result.
Yes.
This pivot was supplemented by our efficient marketing efforts, coupled with our disciplined approach to managing effective promotions in the quarter, including the heroes campaign in the first quarter, we were able to drive demand and cut costs during an uncertain period and the second quarter, we're able to drive demand did a memorial day holiday and six.
Successfully managed demand and our supply chain through the balance of the quarter, while strategically reducing discounts.
As a result, we're gaining confidence in our ability to balance demand quality of service and discount levels and this operating environment, which has been evident in our successful labor day results.
As we've discussed we reduced and deferred a significant amount of costs in the first half the year during the pandemic that will return in the second half of the year as we focus on capitalizing on our long term growth opportunity. These include reinstating compensation instituting increases for a majority of our workforce hiring new positions to support and.
For structure growth reinvesting in market test and product development as well as increasing operational expenses associated with opening new showrooms.
As we continue to focus on creating a more seamless omni channel experience for customers. We are excited about the improvements rolled out to our digital platform that has already elevating the customer experience.
Looking ahead, we will remain discipline and flexible and there's still uncertain environment as we continue to innovate test and learn and expand brand awareness and elevate the customer experience.
With that I'll turn the call over to Dawn out to review, our Q2 financials and a few details related to our 2021 outlook.
Thank you Jack Good morning, everyone. I will begin my remarks with a review of our second quarter results and then provide a framework for how we are approaching the remainder of the school 2021.
The 28.7% increase in net sales the $61.9 million was driven by triple digit growth in our Internet channel.
This was partially offset by a decrease in showroom sells a 58.9% due to the impact of showroom closures related to cool that 19.
And a decrease of 59.3% in other cells related entirely to Cosco in store pop up shop that Sean and Jack discussed.
Total comparable sales increased 72.4% in the quarter.
Higher comparable sales growth relative to total sales growth is you do the decrease in our other channel and non comparable show themselves.
Our other channel sales decreased 59.3% or 4.4 million principally related to a significant degree in cosco in store pop up shops related to coordinate team. In addition, there was a decrease in our non comparable show themselves 63.3 person.
Well at $3.7 million related cool the 19 showroom closures. Please refer to our earnings press release for all other details I'll comparable sales performance.
By product category, our socks, and all sales increased 39.7%.
Sock sales decreased 18.3% and our other category cells, which include decorative pillows blankets and other accessories increased 188.5%.
The decrease in stock cells is related to the declining cosco pop up shops, Assa index higher within this channel coupled with promotional activity heavily weighted towards sectionals in our showroom and internet.
The 30 basis point year over year decrease in our gross margin was primarily driven by 190 basis point increase in distribution entire related expenses.
Partially offset by 167 basis points of improvements in product costs. As a result, the vendor negotiations associated with tariff litigation and continued shift a product sourcing from outside China.
The modest 6.5% year over year increase in SGN $8 spend reflects the impact of the Kobin released its financial reasons measures put into place and it's just of expenses that took place starting mid way through quite a one.
Excluding prior year as financing related expenses the year over year increase was driven largely by increases in infrastructure improvements relating to our E Commerce platform.
Increased rent associated with our 97 showrooms.
Increase in insurance costs as well as an increase in equity compensation relating to the expense associated with the equity grants awarded in the schools 20 and 21.
These increases were partially offset by a decrease in pop up shops fees relating to the decrease in pop up shops sell.
Decreased employment costs related to the reduction in headquarters pay and part time showroom associates, whose mission.
And decrease travel as a result restriction.
Kobin 80.
I see today as a percentage of net sales decreased 785 basis points as a result of the leverage lending club rent and selling related expenses, such as credit card fees, the pop up shop fees.
Actually offset by increases in insurance costs equity compensation computer expense related to infrastructure investment.
Yes, Hey, financial resilience measures, we have taken starting in Q1, resulting in a cost savings and deferral of approximately $4.2 million during the second quarter.
This expense discipline and deferral also impacted our advertising and marketing.
Which increased by only $1.1 million in Q2 as compared to Q2 in prior year.
The financial resilience measures, we have taken starting in quarter, one resulted in advertising and marketing savings in deferral approximately $4.3 million during the second quarter. This year.
The year over year dollar increase in advertising and marketing you do it increased media and direct to consumer program spend which contributed to the second quarter sales increase.
As a percentage of sell advertising and marketing decreased approximately 100 basis points from prior year to 11.6% outsell.
Depreciation and amortization increased $338000 from the prior year period to $1.5 million principally related to capital investments for new and remodeled showrooms and infrastructure investment.
In the second quarter fiscal 2021 operating loss improved to $1.1 million compared to an operating loss of $4.9 million in the second quarter of last year driven by the sales increased an S. DNA leverage I just discussed.
In total we estimate approximately $5 million of expenses deferred in Q2 will shift into the back half.
Yeah.
Our net interest expense for the second quarter was $34000 related to unused line fees on a revolving line of credit.
Tax expense in the second quarter fiscal <unk> 21, and 20 was not material and really minimum state income tax liability.
Before we turn our attention to net income net income per share and even though please refer to the terminology and reconciliation between each of our adjusted metrics and their most directly comparable GAAP measurements in our earnings release issued earlier today.
Net loss was $1.1 million or a loss of eight cents per share in the second quarter fiscal 2021 compared to a net loss of $4.8 million or a loss of 33 cents per share in the second quarter last year.
We generated positive adjusted EBITDA of $2.2 million.
As compared to adjusted EBITDA loss of 3.3 million in the second quarter of last year with did just mentioned to expand shift into the second half the year contributing approximately $5 million <unk>.
Turning to our balance sheet, our liquidity remains strong as we ended the second quarter was $54.8 million in cash and cash equivalents and $9.9 million an availability on our revolving line of credit with no outstanding debt on the revolver.
Ending inventory increased 0.9% year over year. This is due to an increase in our stock inventory dollars of approximately 5% all set by a decrease in capitalized free dollars relating to <unk>.
Free cash flow defined as cash from operations less Capex was approximately $9.9 million and the 13 weeks ended August 2nd 2020, that's compared through use of approximately $16.8 million the prior year quarter.
A year over year improvement was driven principally by an improvement in cash from working capital and the shift a certain expenses from Q2 into Q3 as part of our who did mitigation apart.
In terms of our outlook given the continued uncertainty around coven 19 related disruption, we are providing a limited outlook for fiscal 2001 with some specific comments around Q3 human expense shifts that are taking place.
Jakone, Sean mentioned, we're coming off a strong liberty period, and we feel confident about our ability to drive year on year sales growth in the second half remain mindful of many unknowns.
Keep in mind, we are not assuming any contribution from Costco pop up shops in the second half the year. So you should update your models accordingly.
We are expecting a third quarter year over year gross margin declined approximately 200 basis points.
<unk> decreased principally relates to a timing shifts to China vendor rebates realized in Q3 last year that will be realized in Q4 this year.
Inventory carrying cost related to replenishment of our safety stock inventory and start up costs of the North East third party warehouse.
These impacts are partially offset by a decrease in promotional discounts.
And a decrease in product costs coming from our overseas vendors.
Q3 will also be impacted by the expenses that we deferred in the first half the year across SGN eight an advertising and marketing.
As a result, we expect to see sizable year over year operating expense increases and significant de leverage year over year in Q3 as compared to Q2 before realizing significant leverage any meaningful increase in adjusted EBITDA in our seasonally high volume fourth quarter.
Given the deferral of expenses from the first half of this fiscal year and strategic reinstatement of our infrastructure investments beginning in Q3, we believe our adjusted EBITDA loss for Q3 will be between.
10 million an $11 million.
With the shifts and adjusted EBITDA dollars between the first and second has a fiscal 2021. Just described we believe we will naturally positive adjusted EBITDA for this fiscal year.
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.
Expectation still reflect the capex will be in the 12 million to $14 million range with 15 to 18 planned new show them openings for this year.
So in conclusion, we are very enthusiastic about the second half of the year and confident in our ability to drive healthy levels the sales growth.
There is some choppiness of expenses across the quarters, but when looking out the second half in totality, we expect to drive a significant increase in adjusted EBITDA, reflecting strong top line growth improving gross margins versus second half last year and expense leveraging we learned a lot.
In the last couple of quarters any learnings on incorporated into our go forward plans as we continue to expand our brand and gained further market share of the very fragmented industry.
That we would now like to turn the call back to the operator, who can open it up for us.
Operator.
Thanks to the floor is now open for questions. If he would like to ask a question. Please press star one on your telephone keypad at this time I.
Confirmation total indicate your line isn't the question Q you May press star to if he would like to remove your question from the Q for participants using speaker equipment. It may be necessary to pick up your handsets before pressing the star keys. Once again that is star one to register questions at this time.
My first question, it's coming from Camilo Lyon upbeat <unk>. Please go ahead.
Thanks, Good morning, everyone, Congrats and they are very strong quarter here.
I wanted to focus on a your inventory position and some of the supply chain compensate you made Sean we've been hearing more and more of supply constraints from from us familiar competitors and wondered.
How do you feel about your <unk> inventory position today as it stands given the robust demand that you're seeing in what's your ability to continue meeting that accelerating demand and are you seeing any pressures within any parts of your supply chain.
Yeah. Thanks for the question Camilo and I'll I'll.
A couple of things turn into Jack.
We have no inventory concerns we use a.
Very carefully manage through the cobot crisis, making decisions for the business throughout the shape of ourselves really fits.
The business through the worst of what we've seen kids is the covered crisis to date.
And you know in terms of managing our marketing spend and as you can see from results.
Allowing the business to flourish you know through this time, but we look forward to a second house it where we can be aggressive and focused on driving sales and have no inventory concerns, but oh.
I'll, let Jack has about yeah. Thanks, Thanks, I think what we saw where it was two things going on so they're in a short term obviously with the.
Second quarter sort of initial at the beginning of the second or second quarter really beginning to slow down then a speed up in business a rapid speed up there was a little bit of whiplash in the supply chain. So what I would call. There were <unk> may have been some very short term pressures from a strategic point of view in terms of bill.
Building, our network are diversifying our network, adding warehouses et cetera, where exactly where we need to be so while there was a little whiplash due to covitz strategically were exactly where we need to be in terms of continuing to grow our capability to deliver a lot of product with a high level customer satisfaction.
Great and then if we can just focus on this pretty remarkable continued.
Online digital acceleration, maybe if you can just help us understand how that that sales growth progressed to the quarter.
And how your online to manage changed at all the trajectory and maybe through it throughout the quarter as those stores have real couldn't and here into the early start of Ah of Q3.
Yeah, it's hard to tell me, let's just say that overall, but in terms of a time frames because the country was.
I'd say operating and different times time frames and different levels of opening and what we're seeing a sort of microenvironments. We can tell you. This is.
And environments, where showrooms were completely shut down we saw extreme increases in E commerce.
However, and environments or trade areas, where showrooms start to open up again, we see still seems a very good increases in E. Commerce button radar total trade area a growth. So I think what we've learned so much about it is our customer will shop in multiple ways and if we can combine the way our teams.
Work between really being agnostic about what channel <unk>, but that the customer starting in but getting to them and a good place we're very successful.
So in a nutshell, what I can tell use this we saw probably.
Extreme accelerations, we obviously saw extreme accelerations and the E com business.
Probably something that would you know because many people have said cover it has advanced some areas of our thinking by two to three years I think we will go back to a more moderate a percentage of the business being E com, but I don't think will ever be back to where we were before and also by defining our business in a different way I'm not even sure Im a future what's gonna be an E com business versus say.
A trade area business.
Got it got it and then just finally should Donna if you could just help us understand.
Is that deferral of $5 million are going to be solely accounted for in the third quarter will that be some split of that between Q3 Q4.
Yeah, Hey, the majority of it it will be in the third quarter, but there is some ships going into the fourth quarter as well, but if you want to think about the majority is going in the third quarter.
Got it look around and yeah, principally around marketing.
Oh, Thanks, guys and a continued success.
Thanks to know [noise].
Thank you.
Our next question, it's coming from Brian Nagel of Oppenheimer. Please go ahead.
Hi, good morning.
Hi, Good luck guys my congratulations for more than a tough environment.
The question I have just and it's a bit of a follow up to two the prior question, but with regard to real estate you talked in your prepared comments about continue.
Opening <unk> did a nice clip.
Showrooms.
Given what you've seen.
With regard to do the flex high this significant flex higher in online sales and maybe even if you're seeing some of the performance of these these units are trademark trade trade areas as as you reopen your showrooms.
How's your.
Philosophy towards openings changed are you getting or you are you leverage are you a negotiating more with with landlords are on rents or even even shifted or where you would it be opening showrooms.
Or yeah, there's there's a lot packed into that and what I can say, we're in the middle of a very dramatic relooking at what we're calling now as opposed to thinking of it as a real estate strategy, it's a touch points strategy and the background behind that is that.
We've already and stage one just aggregated the need for inventory to be part of a retail operation, which obviously makes a super efficient and works and her shop in shops and everything else.
What we've really learned in the last 60 to 90 days is that we can start to also in many cases do the same separation of the need for touch points to actually generate a.
Traffic on their own because we can drive around traffic. So when we're in a condition like this it does two things one it allows us to look at real estate.
In a completely different way much more asset light much shorter arrangements and obviously it also gives us a very strong point of view to go back and renegotiate. So I think what you will see.
As an acceleration of touch points it significantly less capital than what we would have previously planned as we as we go out in the next couple of years, but a lot more to come on that.
Got it thanks, and then the second worst I have not related but we've discussed previously.
Additions to the to the product lineup.
Given our obviously very fluid like going on here, but any more comments I know when we should be thing, but the timing of that.
Yeah, we are Oh planning at this point a Q2 launch.
Next fiscal year, and we're very excited about it I don't know Sean if you have any additional comments.
Yeah, we've we've kept it pretty close to the best and we'll continue to do so.
But we look forward to it everything's moving everything's on track moving forward and we think it will be meaningful.
Thank you.
[noise]. Thank you.
Your next question is coming from a return of Canaccord Genuity. Please go ahead.
Hi, good morning, Thanks for taking my question.
Well I did very strongly but they sales this quarter I can you talk about your marketing strategy around labor day, this year and what do you see in in terms of course, the media sort of more recently and are there any changes to your broader advertising strategy heading into the holiday season. This year.
Okay, well I'll give you I'll give you what I know right now, but not too much into the future I think overall, we certainly expect to see total end of year spending on marketing consistent with what we've discussed earlier ending at around 12% to 13%. So any fluctuations you see in the short run.
And we'll be will be smoothed out I think what we can tell you about labor day is we've been we were extraordinarily pleased with our ability to.
Leverage marketing, we saw ROI is going into labor day, and through what I threw the demand cycle. So far as high as we've seen this year. So things are working very well. That's that's that's obviously part of the reason we feel comfortable about what Don as mentioned earlier. So ROI is continue to raise we're being very conservative.
Our expectations are actually built a lot more conservatively on ROI is because we are a little bit concerned about what happens.
With media effectiveness as you get into an election year. So we've got an election year, which were very concerned about as well as a potential new coach covered disruptions, but in terms of what we're seeing right now we're seeing higher ROI is and we're able to deliver the business on a higher quality basis, meaning overall, we're starting to see our ability to.
A cheap goals with a lower discounts and more to come on that as we continue a a series of test and learn.
Great. Thank you and then secondly have you seen any changes to your target demographic I think in terms of age of household income Oh in terms of how consumers may be engaged with your product.
In the short what I would say it's it's it's you know covert has created a lot of dynamics that are pretty interesting as everybody knows but I would say as we entered into the year, we're seeing an expanding of our customer base to be not only young customers, but more mature customers I think due this year what we.
Seen as an expansion through even more and more younger customers engaging and I think that has to do with the disruption of brick and mortar and us having to operate primarily as an online company for a number of months. So it'll be really interesting you know what we're all trying to figure out is what is the customer shape. What does the shape of the customer look like in the next couple of years, but I would say.
With that one thing to think about is one of the dynamics. We are really sort of I think the positive for US is as these millennials start to move in the suburbs, which we began believed this is a tail a long term tailwind and are making life changing decisions. This is very positive for the way. We're positioned so so were very positive about that at this.
<unk>.
That's very helpful. Thanks for the color.
Your next question is coming from Matt Koranda of Roth Capital Partners. Please go ahead.
Hey, guys. Thanks, just wanted to spend a little time, focusing on the the third quarter guidance. So revenue gross it sounds like got off to a good start and you guys mentioned a strong labor day.
But I'm just curious in terms of the revenue guide a for Threeq you.
What do we counting on for the rest of the quarter in terms of growth or recounting on sort of similar cadence to what you guys have experience quarter to date.
But the guidance that we gave was just overall quarter I'm not quite sure we're providing any type of cadence during the quarter and shot show that mentioned in his script that we what we are expecting going into Q3, a growth rate year over year similar to what we saw.
In Q2, but we're not discussing the cadence during the quarter.
Yeah, I mean, what we can say as we typically with our cadence you know our biggest volume events typically are around the furniture buying events around memorial day Labor day, there minor events as well. So what we can say is really if you look at labor day as basically through through today, 40% of the quarters and and we have pretty good comp.
Since.
You know obviously, our strategies will change for the second half because we don't have another major market share of that so what this does do is give us a high level of confidence going into the fourth quarter that are out our targeting is right. Our media plan is right and and that we're capturing customers away and we expected.
Okay. That's helpful and then on the gross margin guide I mean higher revenue, but it sounds like we're still facing some gross margin pressure or what the guidance for down 200, Bips you every year and I know you guys called out maybe a little bit of de leverage from sort of ramp up of the third party logistics facilities.
But what does what are the kind of the the other big items that youve put in that had when category that are offsetting sort of the product a cost savings that you guys have achieved so far.
Yeah, the probably the biggest there's two rate. So one we had mentioned that our vendor discount.
Which in the third quarter of last year was approximately $1.2 million, we had achieved the vendor discount levels by the end of Q3 as last year.
We're not expect we are expecting to receive discount of that amount if not more but the achievement of those vendor discount levels will be recognized this year in Q4, so that that's a shift.
The other big item relates to the infrastructure investments that we're making into the northeast where how.
Those would probably be those are the two largest item that are netting up again.
Reduced product discounts and reduced product costs from our overseas vendors.
Okay got it.
And then when I look at the sort of adjusted EBITDA guidance and what it implies for Opex.
I guess I'm getting to a number that's more in the $45 million range for overall opex and so sequentially. If I take the 5 million of deferred expense that sort of spilled over from Twoq, you that that might give me into the high thirtys, but what are some of the other items that I guess, you're expecting to spend more robustly on in Q3, the drug that even I guide.
Or the biggest one it's probably the marketing.
I had mentioned right. So we had a we actually I would say, we leveraged nicely on the marketing, but that was strategic in Q3, well start to see that investment going back and pretty heavily going I mean in kikuyu. They will start to see domestic going back heavily into in Q3. The other thing.
He is we reinstated we will be reinstating some pay cuts that we've already announced today it to the team.
We started the new higher process again to strategic us strategically help us with the volume of growth. Although many of the things that we had mentioned that in Q1 that were put on hold on as we manage through our.
Liquidity, what we thought were more when I should the Kobin 18 liquidity obstacle that we felt that we would be phase.
But we feel we're in a very strong position, we're happy with the performance of the business or our financial position. Our liquidity is strong. So we're going to start reinvesting in the items that we put on hold technology people as you know that the thered be threepl. The additional threepl had been put.
On hold you know now we're opening that up the marketing initiatives. So there's a host of things that we discussed earlier on in the year that we put on hold that we feel that we're in a very strong position that we can start reinvesting back into yeah, just to add some flavor to that I think Donna had since that thing to me.
Earlier, but if you think about the year the second quarter as long as such an anomaly if it doesn't even if it doesn't make sense to look at it alone. So if you add the second and third quarter two together.
We're really exactly where everybody expected us to be and what we decided as it is the team has not to take all that to the bank and reinvest because we've got a strategic plan. That's a lot bigger than maximizing a you know short term profit. So anything that we could reinvest we've done to get us back to the strategic plan, which is all about where we're gonna be.
Okay, and 12 months from now on 18 months from now we're very comfortable with our progress in terms of getting back to that plan as well as delivering the year.
Very helpful guys I'll jump back in queue. Thank you.
Thank you. Our next question is coming from Alex Fuhrman of Craig Hallum. Please go ahead.
Great. Thanks, very much for taking my question. It seems like you've had a lot of success. These last couple months with customers bundling the storage seat and the power hub. It really strong rates is that mostly been driven by new customers are you also had prior customers coming back to upgrade their their sachin old and just more broadly.
If you could comment on the rate of repeat purchasing you've seen over the last couple of years has that changed at all over the last six months. Thank you.
Yeah I think this is Jack I think that we've seen I think the storage see surprised that I think what surprises that most was the significant attachment rate on new customers. We certainly have a nice penetration and it certainly adding to our repeat rates, where there with our our current installed base, but I think the biggest surprise or the.
The most positive part is that new customer, it's really adding to ASV, it's adding two.
Pieces purchased as well so we're very happy with that.
And the second part of your question I'm, sorry, what was that again Craig.
Just the percentage of revenue or transaction from from repeat customers has that changed at all this year it.
It what I would say is we we can't really look at it in a quarter by quarter basis, because we had such high rapid new customer growth during the covert disruption.
That it would naturally show during that quarter, we just had a lot more new customers in terms of relative to repeat because or piece for sort of going on hesitation. What I can tell you is in a very large context of all of our cohorts year over year, we're seeing very consistent growth of our repeat rate between.
From customers year over year, so a new customer in 15, what their value became in 2020 was at a very consistent rate first year in second your repeat as it would be in a new customer that we acquired in 2019. So we're not seeing any change on a long term basis. We're just it's just too close then for us to tell you what we think it's happening.
And this year.
Great that's really helpful. Thank you.
Now what we are saying, you're just to make sure I'm being clear on that what we Archie when we acquire customers, we're acquiring them at a significantly higher ASV and we're expecting the new products that we've talked about as well as the products. We launch in the last six months to continue to add to that growth. So our new customers are.
More valuable on day, one than we previously said.
Thanks.
Thank you our next question, it's coming from Alex Arnold.
Oh the on capital. Please go ahead.
Hey, guys great work on the continued successful pivoting two quick things one it sounds like the thinking on Costco ramping back up in the back half is shifting a little so if we could get some perspective on how to think about contribution last year a drag this year it would be helpful and the other thing is if.
If you could quantify at all the positive comments around labor day, compartmentalize, it and give us and year over year views as to how that played out this year.
Okay, Yeah, so I'll start with Costco I think the first thing you know when we the cosco relationship and Cosco, it's been a great partner and obviously cosco as a company has a lot of.
Lot of good target customers that we would share and interest and I think the challenge with Costco really is the history of Cosco is that this is an agreement we signed three years ago prior to really having the kind of handle we have on today in terms of driving our own demand and.
The.
Primary reason of the relationship in the way we worked it out was because we wanted the awareness levels and demand that they can help us develop as time has gone on a weren't more control of our demand and want our partnerships to be profitable as well or more profitable and I think it's really.
The delay in Costco was our awareness the delay first of all was caused by coveted but it came at a time when we're renegotiating future contracts and given our ability to pivot so quickly and drive profit into other areas. We decided we need to re look at in terms of making it a win win situation for us and.
This does not have strategic issue with us it's really an agreement.
On how to operate the business that we need to work through with them. Its win win with both of US. So for example in terms of the best buy relationship in the Macys relationship. We see a those is the big opportunities as well as other op relationships in the future, where we have a win win relationship in terms of driving profitability and sharing and the growth.
[music].
And then.
Any quantification of the drag for the back half that we could tagged to that and also any quantification around just this labor day versus last.
Yeah, I think what we're saying I think what Donna.
Discussed earlier as we don't see any negative drag to the total company in the second half because of what we're seeing in terms of returns on our direct businesses being higher than initially expected in our ROI is being very strong. So this this year, we don't see any material drag on the business.
In terms of more insight on labor day, what I could just tell you is we're very pleased with the way the business progress not only on a topline, but our ability to manage discounts and and I'm very comfortable with with the the guidance that Oh has provided.
Great keep up the good work congratulations.
Thank you.
This time I'd like to turn the floor back over to Mr. Nelson for closing comments.
Yes, we want to thank you so much for joining us today, especially to our.
Incredibly capable in diverse love sex family of associates across the nation. Our appreciation goes out to you you continue to show grit and passion every day.
These individuals or the driving force it continue to make organization thrives that looks actually begin we believe that the couches a new kitchen table, it's our mission to see our products in the heart of every home on the planet.
We invite all the join our extended hashtag love sex family on social media and it Lebsack Dot Com <unk>.
Thanks, again, and we look forward to speaking with you next quarter.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect. Your lines at this time and have a wonderful day.
[music].