Q2 2021 Sleep Number Corp Earnings Call
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 will now turn the call over to Shelly for her comments.
Good afternoon, and welcome to our 2021 second quarter earnings call My sleep IQ score with 84 last night.
As a company with purpose sleep number is keenly focused on innovation and long term investments that improve the health and wellbeing of society through higher quality sleep.
Every night, our life changing 360, smart beds with sleep IQ technology deliver an effortless individualized sleep solution that benefits millions of smart sleepers.
As consumers continue to prioritize their health, we are driving exceptional demand for our sleep number 360 smart bed.
And even as consumers increase their travel and entertainment activity, we are deepening and broadening our brand relevance.
Our unprecedented demand growth combined with global supply chain disruption limited our Q2 deliveries.
Our mission driven team.
Team's relentless focus on our customers' experience has led to the acceleration of key initiatives.
Our capabilities increased our efficiency and contribute to superior stakeholder value creation.
As a result of exceeding our internal expectations. We are again, raising our full year 2021, EPS guidance, our new outlook of at least $7 and 25.
Compared with EPS of $4.60 per.
For full year 2020, excluding the 50 <unk> week and is nearly 3 times, our 2019 EPS of $2.70.
Our first half performance represents another sales and profit record demonstrating the power of our competitive advantages and benefits of <unk>.
Your vertically integrated business model.
Typically consumer demand for our smart beds in the first half of 2021 was up more than 40% versus 2019, reflecting an acceleration in the second quarter.
In fact, it's been transitioning to all smart beds 12 quarters ago, our average quarterly demand growth accelerated to 18% for.
Significantly outperforming the market and further increasing our market share.
Net sales for the first half grew 39% to more than $1 billion and were up 35% over the first half of 2019.
Net operating profit grew to a rate of more than 10% of net sales up 161% from 2021st half and 166% from 2019.
EBITDA was $148 million.
Up 88% versus the first half of 2020.
And EPS was $3.40 for <unk> for the first half compared with 93, a year ago and 95 in 2019.
We generated year to date cash from operations of $161 million up 86% and our trailing 12 month return on invested capital was a record 33% as we continued to realize tremendous value from our disciplined capital deployment.
We delivered these exceptional results, while absorbing the inflationary impact of our global supply chain net remains challenged by labor and material shortages, our ability to effectively manage the related challenges is a key benefit of our our vertically integrated.
Business model.
To better align inventory availability with our accelerated demand we extended customer delivery windows in late may to 4 to 6 weeks.
Working closely with partners across our supply and fulfillment chain, we have made significant progress in addressing temporary component shortages.
First available delivery dates are now 3 weeks.
And we expect robust delivery volume for the balance of the year.
Our conversion and customer net rates remained strong and steady.
We are clearly realizing the benefit of synergies across our purpose culture strategy and business model.
In our brand relevance and reach consumer demand and engagement development of new <unk>.
Sleep health innovations are mark sleep digital ecosystem.
And investments in key strategic initiatives.
Together these synergies are perpetuating sustainable profitable growth and creating substantial value for stakeholders.
It starts with emotional digital storey county, which is amplified by in house digital capabilities that tailor our message by immediate tight audience and platform in real time.
Our strategy is driving double digit increases in high quality digital traffic and engagement and we are converting this strong consumer interest.
Third level across all our touch points.
Trailing 12 month online and on sales are now 13% of total sales up from 7% 2 years ago.
Sales per store now average over $3.5 million on a trailing 12 month basis up 27% from 2 years ago.
Our sleep IQ health and wellness features which links quality sleep to day time will be increased engagement with our customers.
Our 360 smart bed monthly active usage rate is over 90%.
Up from 84% a year ago.
Here are 2 examples in our customers' voice of the sleep health benefits provided by our innovation.
Arthur from Columbus, Ohio have shared as an allergy sufferer I can share this data with my Doctor to show the effects of recent treatments on my sleep without having this technology in sleep data I would not have noticed important trends or been able to get at the root cause for my issue.
And bill from Denver, Colorado debt.
My favorites <unk> feature is the circadian rhythm tracker did help me adjust my bad time in a wait time routines for better sleep and daytime energy. This is also on my favorite feature.
This passionate engagement drives brand advocacy bolstered by our loyalty program known as inner circle rewards, which is resulting in referral and repeat sales of protein 50% of net sales.
This level of loyalty is a clear indicator of the relevance of our brand and sustainability of our growth.
It has been exciting to see the ongoing impact of this growth flywheel, we continuously invest in test and refine incremental initiatives to drive performance here.
Here are some highlights for the back half of 2021.
We are extending digital capabilities across our operations, including our supply chain.
The advancements strengthen fulfillment responsiveness reliability and data analytics, we are already seen customer experience and efficiency gains.
We're on track to benefit from approximately 50, net new sleep number stores, which will contribute about 5 points of growth in the back half.
We just introduced a 360 innovation limited edition smart bed with temperature balancing technology.
We're capturing the benefit of additional price increases across our entire line, which took effect last week.
And we're advancing our brand campaign and launching a new AD featuring Dallas Cowboys quarterback DAK Prescott during the NFL season opener against Tom Brady in the Tampa Bay Buccaneers.
The campaign will be supported by our most robust NFL media package to date.
On a final note we are paving the way into the future of sleep health as we extend sleep number's leadership and sleep science and research in the coming months, we will introduce a sleep health feature to more easily link sleep quality to an individual's overall health we continue to build.
Our sleep database, which now includes nearly 11 billion hours of sleep data.
This longitudinal data drinking our partnership with the world's leading sleep health researchers physicians and institutions.
The outcome is a long term data driven revolution.
Silence and health.
The insights we are garnering are not only improving slide. They also have the potential for meaningful positive impact on health of the population level last month, we presented the results of 2 new studies based on real World sleep number data that shows the potential model.
For identifying respiratory illness.
Research like this demonstrates the value of our data progresses, our understanding of sleep on health and inform the development of innovative new sleep solutions to further increase brand relevant customer loyalty and stakeholder value.
The highlights.
Share demonstrates the power and the cumulative benefit of our strategy and our vertically integrated business model. We are on pace for another year of exceptional performance in 2021 and are extremely well positioned for superior long term growth.
The driver behind all of this is our team's dedication to our mission of improving lives by individualizing sleep experiences their passion for our customers wellbeing is unwavering and unparalleled.
Now David will provide additional financial details on our second quarter performance and outlook for the remainder of 2021.
Thanks Shelly.
Our teams and suppliers have been working tirelessly to manage for consecutive quarters of accelerating unit demand, including escalated velocity in Q2.
They are expanding output and capacity, while navigating temporary components and labor constraints inflation and expedited logistics pressures.
Despite this Q2 performance broke top and bottom line second quarter Records.
Our teams have driven 3 consecutive years of double digit average demand growth by continually progressing our differentiated innovations digital marketing and experiential retail operations.
This momentum is carrying forward into the back half of cash of 2021.
We now expect to deliver at least $7.25 in 2020 EPS on at least 35% 2 year net sales growth.
Demand is temporarily exceeded supply.
Component shortages limited output from 2 third tier suppliers affecting our deliveries in June and July.
Covid driven labor shortages at a tier 1 supplier which hip.
Now been resolved delayed their installation of additional product production lines and will constrain our delivery upside through Q3.
Our teams and suppliers are working rapidly to more than doubled production output and deliver capacity to support continued market share gains.
Already in 2021, we expanded our home delivery workforce, 50% and invested significantly in skilled training, our delivery fleet and digital capabilities.
We have also advanced resilient supply partnerships, including increased support of second third and even fourth tier suppliers.
We source from geographically distributed plants and multiple suppliers wherever possible.
This modular strategy offers flexibility for greater to support capacity.
To get ahead of the extraordinary demand growth we are driving.
In addition to flexible sourcing.
Our fulfillment approach prioritizes proximity to customers for.
Stained double digit demand growth has led us to accelerate the execution of our outbound logistics network.
We have evolved plans to increase flexibility with a total of 8 to 10 Assembly distribution centers by next year up from 6 currently.
These will be supported by approximately 25 deliveries distribution centers up from 19 currently.
We are opening larger footprint facilities in key markets and investing in higher output assembly equipment technology and data analytics.
These actions narrow the use of less than truckload carriers to reduce waste damage and costs, while improving customer experience.
Longer term, we envision growing this network to as many as 16, Adcs and 30% to 35 Bdcs.
Now I'll provide a brief review of our Q2 financial results and expectations for 2021.
First remember that Q2 is normally our seasonally smallest quarter with lower sales and profit.
That was not the case for this year.
<unk> growth and operational performance have accelerated each of the last 4 quarters, resulting in record breaking Q2 results.
While we absorbed supply and labor constraints, inbound logistics, expediting costs and inflation on labor and materials and components.
Q2, net sales of $484 million were up 36% versus 2019 and up 70% versus COVID-19 affected 2020.
First half net sales of more than $1 billion grew 35% over the first half of 2019, including 28% 2 year unit growth and 4% ARU growth and growth from both comps and new stores.
We continue to expect for full year net sales growth versus 2019 of at least 35%.
Operating profit of nearly $30 million in Q2 and $106 million in the first half are both records.
First half operating margin of 10, 1% was up 500 basis points versus the first half of 2019.
Accelerated demand in digital based operating efficiencies across the vertical business more than offset $13 million of incremental Q2 input cost pressures.
We are activating nearly $100 million in annualized price increases across our products, while continuing to deliver value packs innovative sleep solutions for customers.
We continue to prioritize operating profit and EPS growth as we employed the benefits of our vertically integrated operating structure to overcome significant inflation pressures.
Despite the pressures on 2021 gross margin are stronger than expected growth and operating efficiencies are expected to drive full year operating profit margin expansion versus 2019 of more than 300 basis points.
Operational efficiencies in sales and marketing drove 470 basis points of 2 year leverage in the first half while we continue to lean into our near term growth drivers, including 20 basis points of deleverage and demand driving media.
Our innovation sales and marketing teams operating in lockstep to drive demand leveraging technology for speed and agility.
The outcome is illustrated by the $3.5 million TTM sales per comp store reached in Q2 up 27% in 2 years with 47% of stores exceeding $3 million.
We also leveraged our G&A costs, which includes increased investments in it infrastructure and growth enablers, while we continue to invest in innovation driving R&D.
In the first half 60 basis points of 2 year G&A leverage nearly offset 70 basis points of 2 year R&D growth.
R&D spend is up 78% since the first half of 2019, and we continue to expect 2021 R&D investments of $65 million.
Gross margin was 65% in Q2 and 61, 6% for the first half.
This compares favorably to the 61, 3% gross margin in the first half of 2019, while absorbing incremental cost headwinds.
We now expect more than $50 million of incremental cost pressures in 2021.
We have taken pricing actions and our teams are delivering digital and volume based efficiencies, while tenaciously acting on behalf of customers to ensure service levels.
First half 2021 EPS of $3.44.
It was more than 3.5 times. The 95 earned in the first half of 2019.
These record earnings were achieved while absorbing 120 basis points of 2 year income tax headwinds.
That pressure was offset through the methodical execution of our efficient capital strategy, which lowered our weighted average share count by nearly 17% versus the first half of 2019.
Deploying capital efficiently over the long term and across all our earnings drivers is delivering superior shareholder value creation, including at least $7.25 strength.
Of EPS in 2021.
While we continue to expect to deliver top and bottom line growth each quarter of 2021 versus 2019, Q3 deliveries will be limited by supply availability.
We expect supplier capacity gains to catch up with our robust demand to support high volume of deliveries in Q4.
For modeling purposes, we anticipate about 50% 2 year EPS growth in Q3, and exceptional net sales and earnings in the fourth quarter and full year.
Turning to our balance sheet and cash flows customer prepayments of $119 million reflects accelerated demand growth and larger backlogs.
In the first half we generated record cash from operations of $161 million.
Investing $32 million on capital projects and $267 million in sleep number stock.
We continue to expect approximately 650 stores by year end and greater sales growth contribution from new stores in the back half.
Our Q2 ending debt leverage was 2.2 times EBITDAR compared with our longer term target of 2.5 to 3 times.
At the end of Q$2.500 million remains of our authorization for future repurchases of our stock.
Investing in fleet number continues to be attractive for shareholder value creation.
Would be above expected performance and further guidance increase we expect to generate more than $300 million of cash from operations in 2021.
Our liquidity balance sheet and team's passion have us well positioned to deliver superior value creation for the balance of 2021 and beyond.
At this point operator, please open the line for questions.
As a reminder to ask a question Tony depressed Star 1 on your telephone to withdraw your question press the pound key.
Our first question comes from the line of Peter Peter.
Peter Keith of Piper Sandler.
Hi, good afternoon, everyone. Thanks for taking my questions.
I guess I'll just kick it off with some of the commentary you made around pricing and inflation pressure.
So Dave I believe you said on $100 million of pricing.
Pricing.
Which is about 4% to 5% on my maps, and then and then $50 million of inflation pressure in the back half of the year. So.
Is that a is that effectively awash when we're thinking about a half year basis, or where is that $50 billion on.
Inflation pressure.
Incremental to the price increases that you are taking.
Hi, Peter Thanks for the question of the $50 million incremental cost pressures that I highlighted started in Q2 and progress through the balance of the year relative to previous expectations.
And the <unk>.
And the $100 million is an annualized number including the price increases we just took last week.
So if I could follow up on a couple of moving pieces.
The price is going up a little bit more than that.
So on the input costs are about equal.
There is a timing.
Difference Peter so the as.
As we deliver out some of the.
The backlog in Q3, we're going to be absorbing some of that incremental costs before some of the pricing benefit.
It comes through the P&L. So we expect some cost pressure in Q3 that's included in.
The assumption for a 50% 2 year EPS growth that I highlighted for Q3.
But then you'll get those those pricing increases will then kick in more and then get delivered later in Q3 and the balance of the year.
Okay that makes sense.
Okay.
All in on an annualized basis for the pricing was more than offset.
Okay got you very good.
Another.
Financial modeling question, but.
You talked about the 500 basis points of EBIT margin improvement since 2019 in the first half of the year.
You have guided now for for 300.
Basis points for the full year.
Going back to 2019, so that implies.
A pretty notable drop off at the 2 year proven for the back half.
Is it inflation pressures on what's what's causing that sequential step down it seems a little bigger than I would've expected.
Right and if you look at the sequential improvement in Q or in the first half of 2019 vs.
The second half of 2019, Peter Therein lies your cancer, there's just a higher hurdle in the back half.
That we're lapping as we continue to drive operational efficiencies this year and deliver a full year's worth of.
<unk>.
Operating leverage we're also expecting more sales in the back half than we do in the first day.
Very good okay. Thank you very much.
You bet.
Your next question comes from the line of Bradley Thomas with Keybanc.
Hi, Good afternoon, Shelly and David This is Andrew on for Brad. Thanks, Thanks for taking our questions.
I wanted to start by talking about demand.
I know that your average quarterly demand growth over the last 12 months.
For about 18%, but.
But I was hoping you could give us a little more color on the quarters typically and for.
Perhaps on a multi month basis on how things have played out.
And if there are any nuances around memorial day or more recently around the July 4th weekend. Thank.
Thank you.
Sure Hi, Andrew well for clarification the.
18% average demand growth is over 12 quarters, so 3 years.
Ever since we transitioned to our 360 smart beds and so we felt it was important to share that number because it's been accelerating for the last 4 quarters and also it shows the sustainability and our ability to lap strong performance from the prior year.
And that's exactly what happened in the second quarter. So we had accelerated demand in the quarter overall and then we also demonstrated our ability to lap double digit growth as we got deeper into the second quarter and.
We are therefore really really pleased and excited about our opportunity here in the back half with very strong initiatives to be able to drive year over year performance again, this will be our fourth year.
Lapping the double digit demand here in the back half and we're very very excited about doing cell with the initiatives debt.
It outlines.
Got it understood.
And I'm going to shift back to.
Near term supply chain issues.
Are you guys facing on.
Could you give me for thanks for for the size of the backlog right now and given the extended delivery times have you seen any evidence of higher than usual cancellation.
Cancellations of orders from customers.
Well the easy answer to that last part is absolutely not all of our metrics were very metric driven organization.
Are very stable and steady.
Been.
Very pleased with the demand creation and consumers are demonstrating their willingness to wafer life changing benefits of our 360 smart beds.
As far as the backlog were going on.
Differ avoid talking about specific amounts.
We have been providing a lot of color as to the carryover of demand from 1 quarter to the next.
You need to know is that we are committed to delivering.
At least $7.25 of EPS this year in 2021 and Thats based on the assumption that we will deliver at least 35% 2 year growth in net sales.
And strong delivery for.
Sure.
We talked about strong deliveries in August and the balance of the year.
I understand that that's great day here.
My last question would be and.
Are these.
Supply chain challenges.
And packing that particular product line more more than others.
And it's for holiday impact.
Thanks.
No. There were 2 specific challenges that we had in Q2 with 2 third tier suppliers.
Those issues have been resolved.
And they impacted our deliveries in June and July and then I provided additional color about how we're thinking about the shape of the year and that our deliveries in Q3 overall will be.
On what limited by.
The delay on some additional production equipment that went in place to 1 of our tier 1 suppliers. So we're excited about all of our suppliers and our teams.
I have to give them a huge shadow because they've been working tirelessly to work through what is extraordinary demand growth.
And having to deal with.
Covid issues supply chain challenges logistics problems.
Shadow Congratulations you guys are killing it and I'm thrilled at the progress that we're making that gives us confidence that supports our upside.
Upsized guidance for the balance of the year.
Understood. Thank you that's all for me Thank you day.
Okay. Thank you Andrew.
Our next question comes from the line of Alessandra Jimenez from Raymond James.
Good afternoon to follow up on the minutes on for Bobby Griffin.
Thank you for taking our questions first I wanted to follow up on the backlog could you give us any color on how much the supply chain impacted the quarter in terms of scale and QQ.
Well as Shelly highlighted we were at 1 point at 4 to 6 weeks.
In terms of the first available data for our customer deliveries.
And now that's done.
123 weeks as we stand here today.
Those kinds of fluctuations are going to be normal as we go through the balance of the year.
We're expecting to continue to drive.
Strong very strong demand growth through the balance of the year and thats going to continue to inflate our backlogs and we expect even with our guidance to have strong backlogs all the way through the end of the year.
Okay. That's helpful. And then a follow up for me is in the second quarter E. Commerce represented about 12% of sales versus 14 in 1 Q did the step down on e-commerce penetration had any impact on profitability.
That's a great thing about our touch points is it's really.
We're happy to support our customers however, they want to shop and wherever they want to transact with us.
There is.
<unk>.
The percentage there for the proportion of our business through 1 touch point or another can change and it will fluctuate on a quarterly basis as we go through the year growth. We're very pleased it's substantially higher than what it's historically been Shelly highlighted in her prepared remarks that is now 13% year to date versus 2 years ago 7 per.
For scent at 13% on a trailing 12 month basis compared to 7.
From 2 years ago. So that gives you a good sustainable number.
Looking at the trailing 12 months and as I also highlight that we generated on average more than $3.5 million per door. We're so excited about the level of productivity that we're driving in our stores and online and we look at that in total.
It's 1 of the benefits of exclusive direct to consumer distribution.
And we are on track with nearly 30 doors.
Are now averaging over $6 million.
So yes. This is very profitable for us as we continue to put this level of revenue or volume through our asset.
Okay perfect that is very helpful. Thank you and best of luck on the second half.
Thank you.
Your next question comes from the line of a tool Mcelroy with UBS.
Good evening, Thanks, a lot for taking my questions.
Can you provide a little bit.
More color on the component shortfall like Nick pointed to the problems Stark for what components were impacted.
What's being done to get the get the lead times back from 4 to 6 weeks to <unk> and then on the go forward are you expecting.
Ill.
Thanks to progressively improve further from here on this is going to be more volatile on the near term.
Thanks for the question of the tool.
Had 2 specific supplier challenges that happened late in the quarter.
And Thats why the shortages impacted our deliveries in June and July.
<unk> have been resolved.
And.
And then I highlighted some challenges with some COVID-19 related labor.
Variability for 1 of our suppliers thats going on.
Constrained some of our deliveries in Q3.
When you're when you're driving the kinds of accelerated demand growth that we have been driving it's bound to strained your supply chain and that's what we've been managing through but as I said earlier, we are excited about the progress that we've been making to radically.
Spanned capacities in our delivery fulfillment.
Our capabilities.
So as I said, we're going to.
Beyond track starting in August with very strong deliveries through the balance of the year.
Okay.
And then as my follow up question.
Shouldnt you quoted from some very strong demand numbers on the release.
1 of your competitors are also reporting very strong growth for the double digit range.
This is all against the backdrop of.
1% or even less population's growth.
Are you worried that this level of unit expansion for for the overall industry and for your sales might be pulling forward some demand from future periods for which that principal drop off.
On a meaningful way once the environment normalizes.
Is that a risk that you're where you bought and b. If that is at risk when do you think that.
That plays up.
Well a total.
I'm going to start with pointing to.
The demand creation.
We at sleep number has created by moving to all smart beds.
We've delivered an average demand quarterly demand growth of 18% over the last 12 quarters 3 years of that growth. So that would be for you saw these industry trends and absolutely the last 4 quarters, we've accelerated our performance.
And we sell a very differentiated product.
Net is improving People's lives with proven quality sleep and this is why we are and have been focused on being the innovation leader and on.
Creating a product that truly improve 1 sleep and their overall health and wellness.
So we see the consumer trends that we anticipated years ago and those those trends include the consumer carrying more about their health and wellbeing and understanding how sleep is impacting their health.
And also at.
<unk> products and services that our digital like ours, and third gravitating to brand debt.
I have a perfect.
And our purpose of improving the health and wellbeing of society through higher quality sleep is a really important 1 at this time and making a difference and contributing in a meaningful way to society for <unk>.
Trends are sustainable we see them continuing to work in sleep number's favor as we move forward and then all of the initiatives that I talked about and this debt.
Digital flywheel that we created this ecosystem that we've created continuously perpetuate higher levels of engagement of our existing customers and that drives referral and repeat sales. That's for sleep number we have now nearly 50% of our sales.
And referral and repeat.
And at least 2 sustainability overall.
Okay.
Got it.
Thank you and good luck with the rest of the year.
Thank you Phil.
Your next question comes from the line of Seth Basham with Wedbush.
Thanks, a lot. Good afternoon. My question is around your quarterly per.
Option and deliberate capacity, assuming no component shortages.
What is that number these days.
Seth we're not going to get into.
Providing.
On a specific number surrounding our production for delivery.
We will say is debt.
We were impacted.
Somewhat here in Q2 in the month of June.
On this by a couple of weeks and.
And we expect to catch that up.
In the in the back half primarily in Q4.
Yes.
And I think the other add debt that we highlighted is the work that we've been doing the acceleration of our initiatives to.
And our capacity and an output and where we're on track for ahead of pace in that regard and.
Feel really.
Well positioned to be able to support our accelerating demand in the months and quarters and years to come.
Just I guess Scott at the route questions vessel.
Worried about our ability to keep up with extraordinary demand that we've got that that's not really the challenge is these are temporary constraints that we have overcome and we're doing things all the right things that you would expect us to be doing we have multiple suppliers on key components and we've been doubling capacity at both both sides to that.
We have plenty of capacity to <unk>.
Support extra.
Extraordinary demand creation as we go forward.
As it relates to that demand creation for the second half of 2021 are you expecting more or less year over year demand growth on 18% trend that you can.
Commented on for the last 3 years.
Well, we expect to continue to drive strong performance there are a lot of.
Elements that Shelly highlighted in her prepared remarks talking about the incremental activities here in the back half. We're just up against now for the year of double digit growth and so whether the rate growth at the same pace as what we've been talking about.
The first quarter.
Excuse me Q4.
That trend has been up 12% then it went to 14% in Q1, you can see the acceleration when we talk about all the way back to the back half of 2018. It's now have 18% that was pretty significant acceleration on a rate basis, but Q2 is 1 of the smaller dollar quarters and so on a percentage basis.
It's different so now Q3 is going to be 1 of our largest quarters in terms of dollars. So of course on a rate basis is going to be less.
Got it on my last question regarding the price increases of $100 million first of all have they been fully implemented at this point in time.
Yes, we did you remember that we did some last quarter about $20 million worth and then the incremental to get to the $100 million annualized we put in.
Last week.
Got it and do you expect on the elasticity of demand.
<unk> way on oil demand growth and part of the price increases.
Yes.
We do.
This is this is.
1 of those unique advantages of our model.
I mean, our selling process and discounts and financing and price increases.
We can we can navigate between all those those points and this is where our innovation and marketing and sales teams to work. So closely together could be able to optimize performance. So we do expect our price increases.
Contribute.
<unk> 3 points of growth in ARU in the back half.
If that's the case shall you expect for on demand destruction from price increases and you've been facing inflation on certain areas of the business for a number of months that why did you wait so long to take these price increases.
Yes, it's Scott with our business model, we're focused on obviously focused on growing operating profit and have been doing cell with about 500 basis points of operating profit growth here in the first half over the last 2 years.
We had some pricing here in the first half and this was the right time for us to take day as we head into the back half of $100 per.
Per model.
And.
We still have pricing elasticity and empower beyond and we also like to attach that to the value add debt debt.
Debt we introduced.
2 our lines overall.
For the customer.
Understood. Thank you and I would just add let me.
Seth I would just add on to that 1.
No.
We are focused on EPS growth and operating profit expansion and market share gains and so.
Trying to drive.
Peak pricing just to cover our gross margin rate is is not the game that we're trying to execute we're trying to create superior shareholder value for shareholders and our stakeholders and we think the best path to do that has continued to take share.
And drive operating profit and EPS growth.
If I understood it the combination of everything.
Where we're going after all of it.
And your next question on.
Your next question.
Your next question comes from the line of price Nagle with Bank of America.
Good evening, Thank you very much.
Just wanted to refocus on the Q2 margins.
Total GAAP its.
What's your admissions revenue sales.
Continuing on for <unk>.
I don't know margins looked a little light around 6% you have supply chain issues.
<unk>.
They were much higher I realize there's a differential between the 2 quarters in terms of overall volumes, but.
Still had.
Sales levels, well well above our historic levels. So.
I guess what are the real puts and takes there as it just got a cost.
On all the pricing.
How should we think about estimate for the full year in terms of rate of sales.
Yes, I think you highlighted it.
Curtis the sales are lighter in Q2.
And Thats seasonally normal. However, these were exceptionally high you remember keep in mind.
Usually don't make much money at all in Q2, and we had very strong.
Performance in the quarter.
Part of what Youre not seeing is we continue to drive.
On demand and it's somewhat tied up in our backlog at the end of the quarter.
As we service debt.
We've paid for some of that.
During Q2 and it gets delivered later in the year so.
That's an element of our of our model so looking at on a quarterly basis.
Looking at the rate on 1 quarter, that's a little bit of.
That can be very misleading looking at a longer period of time as it makes a lot more sense it standpoint.
10, 1% operating profit margin in the first half that's a 500 basis point improvement over 2 years ago on the first half.
It gets us well on our way toward at least 300 basis points of operating profit expansion versus 2019 for the full year or so.
We are continuing to carry for the digitally led operating efficiencies that we've been carrying ever since the back half of last year.
And then on the.
Sales and Thats, we wanted to begin.
So on results.
I think about the I'm sorry, courtesy.
Yes, the sales and marketing lines for the full year in terms of percentage of sales how should we think about that.
Yes, we're going to use all of other levers we're going to continue to lean into our growth drivers are near end growth growth drivers as I highlighted.
Our media.
Actually delever, well delivering significant leverage in our sales and marketing.
But for.
For the.
For the back half as we layer in more stores theres going to be some.
Some additional costs that come through on the retail line as we have depreciation and staffing associated with them, but yet we're going to it's going to be delivering higher.
The contribution to our sales growth overall by having those stores. So at the end of the day.
Focus really needs to be on a longer term basis.
At least 300 basis points of operating profit margin, while absorbing a ton of incremental headwinds.
And costs here in 2021 so.
We're really pleased with the teams on how theyre performing and excited that were.
And on pace to deliver at least 725 in EPS this year.
Okay. Thank you for.
For a quick follow up I may have.
Mr Atkins, but.
Could you say that the other price increases that you just kind of put through are not going to flow through to <unk> or is that just due to the flow orders or did I just miss.
This year thanks.
Yeah. Thanks for clarifying credit that's not what I meant.
I was just saying debt.
As those price increases that we just took last week.
It takes it takes 2 or 3 weeks or for weeks 5 weeks sometimes to get.
Those products delivered that's when that revenue will be recognized at the higher price.
On May 12.
I appreciate it for you mentioned Michael Thank you.
Okay you bet.
Okay.
And there are no more questions at this time.
Are there any closing remarks.
Yes. Thank you for joining us today, we look forward to discussing our third quarter 2021 performance with you in October sleep.
Sleep, well and dream Big.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Moving forward.
Thanks.
[music].
Okay.