Q2 2023 Sleep Number Corp Earnings Call
Welcome to sleep Number's Q2, 2023 earnings conference call all lines have been placed in a listen only mode until the question and answer session. Today's call is being recorded if anyone has objections. You may disconnect. At this time I would like to introduce Dave Schwantes, Vice President of Finance and Investor Relations.
Thank you Dave you may begin.
Yeah.
Good afternoon, and welcome to the Sleep number Corporation second quarter 2023 earnings Conference call. Thank you for joining us.
I'm, Dave Schwantes, Vice President of Finance and Investor Relations.
With me today are Shelly Ibach, our chair, President and CEO and Chris cruise, Mark our interim CFO and Chief Human Resources Officer.
This telephone conference is being recorded and will be available on our website at sleep number of Dot com.
Please refer to the details in our news release to access the replay.
Please also refer to our news release for a reconciliation of certain non-GAAP financial measures and supplemental financial information included in the news release or that may be discussed on this call.
The primary purpose of this call is to discuss the results of the fiscal period. Just ended however, our commentary and responses to your questions may include certain forward looking statements. These.
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.
We also want to refer you to our second quarter earnings presentation, which can be accessed on the investor relations page of our website.
I will now turn the call over to Shelly for her comments.
Good afternoon, and thank you for joining our second quarter 2023 earnings call My sleep IQ score was $85 last night.
I am pleased to share that today sleep number announced the appointment of Francis Lee as our company's executive Vice President and Chief Financial Officer effective August 14th.
<unk> brings significant leadership experience in finance and strategy at Fortune 500, consumer focused brands, including Nike in gap and most recently as CFO of Wise labs, and AI powered smart home innovator.
At Wise, Francis increased cash flow and profitability through a business model evolution from hardware to software with reoccurring revenue streams that emphasize customer lifetime value.
He has a proven track record in business planning operational transformation and capital structure. We look forward to benefiting from Francis is leadership in advancing our differentiated strategy and creating superior shareholder value.
During today's call I'll provide highlights of our second quarter performance in the context of current market conditions describe actions. We are prioritizing in 2023 to compete effectively drive operational efficiencies and generate cash and share how we have positioned our business.
For strong earnings growth and significant value creation as demand improved.
Sleep number and the mattress industry overall have been operating in a disrupted in challenging macro environment, which has resulted in.
Our historic contraction in demand for mattresses with six consecutive quarters at recessionary spend levels.
In this environment, our demand driving and efficiency actions delivered second quarter results that included net sales of $459 million with demand down mid single digits.
Over.
Our year over year demand improved seven percentage points sequentially compared with the first quarter, but was a few percentage points below our Q2 expectations of flat to down slightly.
As the quarter progressed year over year demand trends improved with combined may and June demand down low single digits.
Gross profit rate of 57, 6% was right in line with our expectations.
Our ongoing cost control actions drove a $22 million year over year reduction in operating expenses.
Earnings per share for the quarter were three.
Based on analyst Q2 surveys, we believed we outperformed the industry and gained market share in the quarter as.
As an additional reference point industry unit levels on a trailing 12 month basis through Q1 are 14% below 2019, representing 26 million industry units compared with more than 30 million units in 2019.
On this same basis sleep number units are down 1%, even with chip shortages that disproportionately impacted our company in 2021 and 2022.
Year to date, our demand has steadily improved and we expect continued improvement in the back half with mid single to low double digit demand growth year over year.
In 2023, we are focused on three priorities to deliver our financial commitments, taking market share by leveraging our brand building innovation and connected smart sleepers.
Restoring gross profit after the global supply chain disruptions and generating increased cash flows and reducing leverage.
Let me share a few examples of how we are delivering on these priorities.
Life, changing innovations and world class marketing continued to be important drivers of our topline.
Climate 360, smart bed, which launched in Q4 last year continues to generate strong performance at the high end of our line.
More than 80% of couples state one of them sleep too hot or too cold the.
The climate 360, smart bed with active heating and cooling technology provides individualized temperature control. So each sleeper can benefit from their ideal microclimate.
And our recent proof point that climate 360, sleepers can get up to 44 more minutes, a restful sleep per night from using the features in this temperature balancing smart bed affirms its value.
With the introduction of our next generation smart beds, all sleep number smart beds now have temperature benefits with opening price points under $1100.
These competitively advantaged smart beds offer an adaptive and effortless connected sleep health experience and the new technology platform positions us for expanded offerings in the future through digital products and services.
We are efficiently managing the transition to our new smart bed portfolio. Our teams have planned and executed for holistic demand unit and margin management in Q2, we introduced the <unk>, 7% and 10, and we will complete the set of the remaining 90.
<unk> of our Nextgen smart bed portfolio in all sleep number stores next week.
Well in advance of our biggest event of the year, the labor day selling period.
We are growing brand interest with our new <unk>.
Next sleep next level advertising campaign.
Since introducing the campaign in late April we have driven positive search interest in sleep number compared to mid single digit declines for other premium brands and double digit declines for the industry over the same period.
With the start of the NFL season, we will introduce a compelling advancement of this campaign, which tested at all time high.
And we are driving media efficiency and effectiveness through optimization tools and simplified digital experiences. These initiatives are resulting in high quality digital and store traffic, while generating media leverage.
Complementing these drivers of top line growth our initiatives that we expect to drive gross margin rate expansion by more than 150 basis points for the full year.
In addition to higher margin mix from our new smartphone introductions as we move through the back half sources of margin improvement across our operations include pricing easing of commodity costs steady and predictable supply and digital efficiency tools supporting workforce planning and <unk>.
Data management.
We expect these and additional initiatives to be positive drivers of gross margin the balance of the year and beyond.
With these demand and margin drivers, we expect to generate more than $100 million in cash from operations in 2023.
As we entered the third quarter year over year demand trends continue to improve.
Consumer sentiment is beginning to move in the right direction and our brand indicators are strong.
However, given the challenging economic environment with demand slightly behind our expectations for the first half we have narrowed our guidance range to $1 25 to $1 75 earnings per share for the full year.
Importantly, the earnings power of our strategy and business model and our significant value creation potential are as strong as ever.
Even as we have navigated a period of extended disruption we have continued to position our business for long term growth and market share gains.
On page 12 of the supporting deck posted to the Investor Relations page on our website, we highlight our expectations for the next few years, including accelerating top and bottom line growth as we execute our strategy of consumer innovation and operational advancements.
And as consumer sentiment improves in the industry recovers from depressed demand levels.
Specifically, we expect our differentiated innovation pipeline, including the climate 360, smart bed and next generation smart bed ecosystem with millions of highly engaged customers combined with our sleep next level brand building, an advanced digital capabilities capabilities to support.
Port high single digit sales growth.
We are intensely focused on expanding our gross margin rate with a goal to return it to 60% within a year in.
62% over the next couple of years.
Initiatives to drive margin expansion include <unk>.
The increased mix of higher margin products, including climate 360, and Nextgen Smart bed addition.
The addition of new high margin adjacent revenue streams from our innovation pipeline.
Opportunities to further leverage our retail and fulfillment networks through continued unit growth.
And relief in commodity and other cost pressures that we absorbed in our operations during the past few years.
These margin driving the efficiencies combined with ongoing productivity improvements are expected to return our EBITDA margins to a low double digit rate.
While our 2022 and 2023 financial performance reflects the sustained impact of external business and economic disruptions, we've effectively navigated the challenges, while strengthening our brand culture and competitive advantages by.
Hitting our strategic milestones and keeping the drivers of our business intact and healthy we are well positioned to accelerate performance and deliver superior returns to sleep number of shareholders for years to come.
Before I turn the call over to Chris I want to thank him for his exceptional leadership as interim CFO .
We appreciate his significant contributions to the business team and the CFO search.
Now Chris will provide additional financial details on our 2023 second quarter and first half performance and outlook for the balance of the year.
Thank you Shelly for the second quarter net sales of $459 million were 16% below last year.
With demand slightly below our expectations for the quarter, we leveraged our fulfillment network to deliver incremental smart beds from our existing backlog.
As a result, we delivered nearly 77000 smart bed units with an <unk> of just under $6000.
Our second quarter gross profit rate up 57, 6% was consistent with our expectations.
Focus spending controls resulted in operating expenses of $253 million in the quarter down $22 million versus the prior year.
We delivered second quarter EPS of <unk> <unk>.
As a reminder, a shortage of semiconductor chips in last year's first quarter resulted in more than $100 million of margin rich deliveries shifting into the second quarter of 2022.
This shift included our higher priced flex fit three adjustable bases and related smart beds.
Last year's second quarter net sales.
<unk> gross margin and operating profit all benefited from this higher margin backlog reduction.
This resulted in prior year second quarter EPS of $1 54 in what is traditionally our lowest sales and EPS quarter of the year.
Now I'll spend a few minutes covering our year to date financial results before turning to our full year outlook.
Year to date net sales declined 8% to $985 million with demand down high single digits year over year.
The first half of 2023 included approximately $50 million of net sales benefit from the servicing of excess backlog, which was similar to the benefit in the first half of the prior year.
Our year to date gross margin rate of 58, 3% was consistent with the prior year.
We offset deleverage from the net sales decline with pricing actions easing of commodities and ongoing operating efficiencies.
Importantly, our year to date gross profit rate is up nearly 300 basis points from the back half of last year as we continue to recover from the disruption of chip shortages and related operating inefficiencies.
Year to date, we've generated net operating profit of $37 million compared with 50 $454 million for the same period last year.
The year over year decline in gross margin dollars was partially offset by a $36 million reduction in operating expenses.
Here are specific actions, we have taken year to date to reduce operating expenses versus the prior year.
We've driven media efficiency leverage of 50 basis points for the first half of the year.
We adjusted consumer financing offers to mitigate increased costs associated with this higher interest rate environment.
We have slowed our store actions and are now planning net new store growth of 1% year over year, which is down about 10 stores versus our original plan for the year.
We reduced labor costs, as we optimize staffing levels.
And our G&A and R&D expenses are also down versus the prior year.
We generated 54 of EPS for the first six months of 2023 compared with $1 60 for the same period last year.
Our year to date results include a 46% headwind from $13 million more in interest expense than a year ago.
We generated $19 million of operating cash flow for the first six months of the year compared to $29 million for the same period last year.
Turning to liquidity and leverage we ended the quarter with $334 million of liquidity under our revolving credit facility and a leverage ratio of four seven times EBITDAR.
Hello, our amended five times covenant.
Given the uncertain macro environment, we partnered with our bank group to extend the five times EBITDAR covenant through our fiscal third quarter.
We continue to expect to end the year with a leverage ratio under four times EBITDAR.
We have updated our 2023 full year EPS outlook to a range of $1 25 to $1 75 per share, which narrowed the range by 25 versus our previous guidance.
Here are specific assumptions regarding our full year outlook.
For the full year, we expect net sales to be down low to mid single digits, which is approximately one to two points lower than our prior expectations.
This is reflective of lower demand in the first half of the year.
For the back half, we expect net sales down low single digits to up mid single digits on improving demand as we face easier comparisons and fully benefit from Nextgen smart bed introductions.
As a reminder year over year backlog changes represent a five to six point headwind in the back half of the year as we returned to normalized backlog levels at the end of the second quarter.
We continue to expect at least 150 basis points of gross margin rate expansion in 2023.
We expect more than $100 million in cash from operations in 2023 and positive free cash flows.
Our guidance includes 18th of headwind in the back half of the year from an expected $5 million increase in interest expense year over year.
We also want to provide additional clarity regarding third and fourth quarter performance expectations.
For the third quarter, we expect EPS to be slightly below last year's third quarter EPS of 2022.
Specifically, we are expecting demand to be up mid to high single digits compared to last year with net sales down low to mid single digits due to the impact of year over year backlog changes.
We anticipate an increase in backlog in this year's third quarter as we optimize for efficiency with our newly transformed fulfillment network, including staffing levels.
Also for the third quarter, we expect our gross margin rate of approximately 58%.
This includes transition costs associated with promotional closeout activity of our existing smart beds and launch costs related to setting all stores with next generation smart beds.
For the fourth quarter, we're expecting demand to be up mid single to low double digits with net sales up mid to high single digits.
We expect our Q4 gross margin rate to approach, 60% as our margin initiatives mature.
We expect to end the year with a normalized backlog.
I will now turn the call back to Shelly for a few closing comments prior to opening up the call for Q&A.
Yeah.
It may extremely grateful to our highly engaged team whose commitment to our purpose is apparent everyday in their innovative mindset dedication to our stakeholders and consistent execution of our strategy.
Our investments and achievement of strategic milestones along with major operational improvements a digitally connected customer.
And World class partnerships have transformed our company revolutionized the industry and positioned us for significant value creation in the future.
Now, Chris Dave and I will respond to your questions. Lisa Please open the line.
Absolutely and everyone. If you have a question. Please press star one on your telephone keypad. Once again that is star one if you have a question.
The first question from Bobby Griffin Raymond James.
Good afternoon, everybody. Thanks for taking my questions I guess first and Chris maybe or maybe I missed a few of the details there, but can we just spend a little time unpacking the acceleration in demand thats implied to kind of get to the guidance.
Things are still running negative.
We ended the second quarter and I know the comparisons get a little easier starting here in <unk> I believe they eased by 4% or so is that Neal is that the main function of what gives you guys the confidence.
Demand going back positive or is there some other embedded.
Something will more than double.
New product launches or whatnot or pricing or whatnot.
Can you kind of get to that positive demand.
Great. Thanks for the question Bobby I will comment on this first our expectations for demand in the third quarter are up mid to high single digits.
You've noted.
<unk>.
We're coming from.
Place of progression in demand.
We've had positive improving demand trends since the start of the year, although a bit slower than we had originally planned which put us a couple of points behind in demand.
Here coming out of second quarter, but through second quarter.
<unk>.
We believe we took market share we outperformed each each of the periods.
Demand steadily improved and we were down low single digits.
Here in May and June and that steady improvement has continued here into the third quarter July month to date were flat to prior year, which is where we expect it to be as we head into the balance.
Balance of the third quarter with expectations of mid to high single digit.
Yes compares as a factor.
Importantly, our initiatives innovation, all Nextgen smart bed implementation, along with our next level.
Sleep next level campaign are the big drivers of demand in our business then.
We like what we're seeing here early early on we see green shoots there is consumer.
Sentiment is moving the right direction, we have positive in search numbers for our brand we have positive traffic as we're heading into the time period is the biggest event of the year. So.
We like what we're seeing and and.
We had to.
Big progress Big demand trend progress here in the first half and we expect that to continue in the back half.
Okay.
For for the improvement that we saw quarter to date.
Just to help us kind of connect the dots with the promotional aspect in Q2 of this year relatively similar to <unk> of last year. So we can read into this improvement that we saw as real and fundamental or was there something different in terms of closeouts or promotional calendar that might have been impacting what we saw throughout the second quarter.
Into July .
Yes.
It's a great question and absolutely we continue to drive promotional activity I think one of the benefits of our vertical model is we can.
Just and make changes in pretty pretty real time, and certainly within the quarter.
Closeout is a great example of that we plan for our Closeouts in the second quarter and we delivered accelerated units at the low end of our line through our closeout activity, we did not.
Drive the top line.
As big as we had hoped we would hear in.
In that close out period.
The June timeframe framed so.
We saw the unit impact.
Very positive we did not get incremental demand lift from that so when you look at that and you look at where our performance in the step up of performance.
It's been progressive all year, we see it as real.
I think July is another good example of that and now we'll move into some higher ARU with our Nextgen smart beds and continue to drive our performance going forward.
Okay.
I appreciate the details I'll turn it over to somebody else best of luck in the back half here.
Thanks.
Up next we'll take a question from Brad Thomas Keybanc capital markets.
Hi, good afternoon, Thanks for taking my question.
I wanted to ask a little bit about the.
Synchrony relationship and what Youre seeing out of them I believe they have been public recently about saying that they kind of selectively done some tightening where are they.
Perhaps lowered the approval rate and lowered the amount that they are improving.
Curious.
How important they've been view here of late.
What youre seeing out of them just given their importance to your business. Thanks.
Yes. Thanks for the question, Brad Synchrony is certainly an important partner and our customers add sleep number.
Our are important to the synchrony portfolio.
As well so we've made adjustments in our our financing strategy.
Which have been very favorable for us, especially from an efficiency or margin.
Activity standpoint, and we took on these actions in Q2, we tested into them and we.
We like what.
What we're seeing.
Been able to mitigate a lot of cost increase related to interest.
The programs have been effective.
Our approval rates and sales conversion and financing are all in line with where we expect.
So the.
The specific answer to your question no we have not seen an impact based on the actions that you highlighted.
Got you, Okay, and then just to follow up on Bob's earlier comments, if you think about demand in the back half.
Can you just give us some updated thoughts on how youre thinking about the benefits.
The average transaction size.
<unk>.
And how you're thinking about promotions and if at all that might be different than what youre plans plans were three or six months ago.
Yeah.
Yeah.
I think that the.
Promotion defer until maybe start there in Q2, we pulled forward our closeout activity closer to the start of June to drive increased units and demand and we did drive increased units.
Not so much on the overall.
Top line, so that would be a good example of an adjustment right now as we head into the back half we've made some adjustments to our financing plans based on what we've learned along the way and we utilized our financing programs and discounts as a conversion tool.
So.
That's probably the area, where we've made the adjustments we are excited about our next gen smart bed line here with the whole new portfolio and climate 360, and having those important drivers of our top line along with the advancement of the <unk>.
Advertising and we also look at a number of leading indicators, we look at traffic sentiment.
We have our econometric model and our year over year and importantly, the 13 week trend.
We've continued to see progression positive progression on that 13 week trend and then we also look at our performance compared to 2019 and we.
We had a very robust almost about a 20% increase to 2019 in the first half we're not expecting as high above.
Increased to 2019 in the back half, which gives us some room to.
Outperform.
Great. Thank you Shawn.
Okay.
The next question is Peter Keith Piper Sandler.
Thank you good afternoon.
Shelley just wanted to dig into some more of those green shoots to get us comfortable with the demand outlook for the back half I guess with the new product line you have had the 70 I 10 in the marketplace now for a couple of weeks is the consumer reaction been positive on those newer models such that those specific models have moved up within your <unk>.
<unk> mix.
And thanks for the question Peter our frontline has been really excited about our new models. So they have performed very well.
Since the launch and we're we're just completing the set in all stores for all Nextgen smart beds, we're almost done.
A few left here over over the coming days and we're on track with our expectations and feel very confident about our ability.
To some degree.
The ease of fully transitioning to all one line.
In the marketplace as we head into the Labor day event. So we're excited about our promotional plans and feel they're right on track with where they need to be considering price sensitivity.
With some consumers yet the high value that our climate 360, <unk> gift at the top of our line.
So yes, we feel we feel bullish about where we are.
Okay. So I guess that's it.
Ben I think a standout demand for those initial.
Products in the market.
They have performed slightly ahead of our expectations while.
While we've been in close out.
Okay.
It's small at this time, because we haven't had a lot against it so.
The real.
The real demonstration is now.
Okay.
And then.
I wanted to just touch on.
The commodity costs, which have been a headwind for you in <unk> and now a future opportunity I think at the beginning of the year you were expecting about 15 to 20 million.
Lee for recovery.
What's what's going on now that we're at mid year has anything changed maybe is there a little bit more relief less relief give us update on how that's looking.
Yeah, Hey, Peter this is Dave.
I would say largely the commodity benefits that we expected for the year are coming in as planned we talked about that in the first quarter and I think as we look at the full year and getting to that 150 basis points of expansion.
It's still really the three drivers that we talked about at the beginning of the year, which is <unk>.
Pricing is one of them that we've taken it's the commodity relief that we've talked about and it's the mix benefits that we're getting from having climate 360 at the high end of our line.
A growing and important part of our mix. So I think if we look at those three drivers.
There's always puts and takes each year, but those three drivers are coming in as planned and I think we continue to see additional opportunities on the commodity side.
For the back half of the year and beyond as we just kind of work through unraveling.
Unraveling some of the pressures that we've taken on over the last couple of years.
Okay.
Thank you very much David I appreciate it yeah.
Yes, Thank you Peter.
Your next question comes from Atul Maheshwari UBS.
Thanks, a lot for taking my question Shelley I had a question about your media strategy. It sounds like media costs are down meaningfully.
Given your deleveraging on lower sales.
So could you run the risk of lowering the efficacy of the launch given historically sleep number and others in the industry has typically reach media spending that call ahead of important launches.
Thank you for your question <unk> media is such an important part of our demand driving formula and we do expect efficiency on our media compared to last year's environment.
Last year, we were in a much stronger position than we were a year ago a year ago. We did not have the supply we needed of chips and it impacted not only our delivery time frame. It also impacted our ability to offer.
<unk>, our full assortment and so we had tremendous limitations and media.
Media wasn't as efficient as you know.
Being in the situation we are today with strong.
Including a full new line of smart beds and climate 360. So we are driving greater efficiencies, while also driving traffic and much stronger search interest to our brand versus other brands in the industry. So we had <unk>.
50 basis points of leverage in the first half we do expect leverage in the back half and we also expect to fully support our next generation smart beds and lean into it part of what we utilize an econometric model, which helps us understand based.
On consumer sentiment and many other factors where to place that next dollar.
And how how many dollars to lean into it what that return is going to be.
So we're approaching it prudently given the environment, we're in and given our focus on taking share as well as expanding margin.
Got it.
Super helpful actually and just my follow up.
It sounds like.
2023 guidance is fourth quarter heavy so as things stand today, if we worked to understand the risk to this guidance.
The greater risk of <unk>.
Just on the top line or is there a greater risk of a miss on the gross margin.
Okay.
Well as as you think about the shape of Q3 and Q4 I'll start with both sales and margin. So we expect a net sales decline.
Third quarter in part due to the year over year backlog changes.
And gross margin impact of the onetime product portfolio transition cost. They are all hitting in the third quarter. So while we expect continued demand improvements, including the mid to high single digit growth in Q3, where we were a few points behind.
<unk> demand expectations in the second quarter, which resulted in a lower backlog heading into the third quarter.
And we're very focused on fulfillment efficiency.
And we're expecting to build a little backlog.
In Q3.
So it will be.
Benefit or building backlog from the low levels that were entering the quarter with.
So.
You look at the fourth quarter, we expect progressive demand improvement.
In Q3 up mid to high single digits, and then Q4 up mid single digits to low double digits and this is a continuation of what we've been seeing in demand.
And it also contemplates our initiatives as they continue to progress and how we layer on to those initiatives throughout the months of the back half and also the compares are getting increasingly.
Easier as we approach the fourth quarter.
And Ah tool just to add a little color on gross margin as a part of your question. So first half of the year. We did 58, 3% gross margin rate, which was right on top of what we had expected and importantly, it was almost 300 basis points improvement from the back half of last year. So.
As we head into the back half of this year, we're going up against a I'll call. It a relative a much challenged compare from the prior year and the initiatives that really help us achieve that 58 three in the first half of the year are intact for the back half of the year. So we're looking at a gross margin rate of 58% to 59%.
<unk> with.
With certainly recommend if people if people have a chance to go out and look at the supporting Jack we put on our website that covers how we're thinking about the back half versus the first half and as compared to the back half of last year and that kind of shows you.
The progression, we expect in the back half of the year and frankly, the fact that we arent expecting our gross margin rate in the back half of the year to be materially higher than the first half of the year with the initiatives intact and with what we think is going to be a stronger topline year over year as well.
Got it okay.
Helpful. If I could sneak in one last one.
Surely are let's say for <unk>, what has been the percentage of your sales in the historically happened on financing and is that percentage lower or higher today.
Yeah, it's about a 50% and it's steady.
Got it. Thank you good luck with the rest of the year.
Thank you.
We will now hear from Seth Basham Wedbush Securities.
Okay.
Thanks, a lot and good afternoon. My first question just around pricing on our new line can you remind us is there a price increase that youre, taking on any models that substantial relative to the previous model.
Okay.
Yes, so we did when we introduced the new M&A models. This year, we have taken a $100 of pricing on those new models.
And that went into effect I think in April of this year.
And if you think about pricing more broadly for the year, we are expecting around three to four points of benefit from pricing that would include the actions we took with the new line as well as the wrap around pricing from what we took last year. We took some actions in both particularly August and December of last year, which are providing additional ben.
<unk> as we as we get the full year benefit this year so yes.
100 Bucks on the on the top of the line and then and then the wraparound benefit from the rest of the actions we took last year.
You got it okay and.
The margin richness of the new products with.
With limited price increases is it.
A much higher margin rate that you should earn on those new products.
I would consider it to be relatively similar soft relative to the margin profile.
<unk>.
I would just say similar.
Okay.
Got it can you just remind us then the drivers behind the new line and what are the big changes in the features and functionality I think that there are some changes some internal components I thought it was supposed to be cost efficient what else's is different.
Yes, youre right and as I.
I would start with that we now with the next generation smart beds have temperature features across the entire line.
<unk> at the.
<unk>, which is just below $1100, so where we're really excited about having these features and until it's our frontline.
Especially based on <unk>.
Well climate 360 has performed and the traffic that climate 360, <unk> drives to our stores.
And then also there is increased comfort and support which has also been well received by our frontline and it's noticeable change and very exciting and then the technology platform.
With.
Much broader sensors that sets up our future additional revenue streams through digital products and services.
That's helpful.
And then you also you highlighted the.
A large percentage of common parts, which will help us with.
Especially with our New Assembly distribution center to be able to add more flexibility and in scale in the future as we ramp up unit.
Great and my last question for now is just on the promotional environment as you head into Labor day.
This new product line do you think youll have to be as promotional as you've been.
Around other major holiday selling periods three shot.
Well, we will certainly compete aggressively.
As we have in the past it won't be our closeout.
Our closeout pricing was more aggressive than you saw in Q2, but we have.
We have a lot of confidence in our promotional strategy and how we're applying that throughout the labor day period, especially based on like what we've learned in this environment and even this year in the past few months.
We apply it quickly to how how we're approaching them.
The time periods.
The duration.
How we're utilizing the the promotional dollars in financing for optimized results from both both the top and bottom line.
Thank you.
Okay.
Thank you I will take a follow up we'll take a follow up from Bobby Griffin Raymond James.
Hey, guys. Thanks, So let me get back in.
Good morning.
On the progression.
Do we expect <unk> to step up sequentially meaningfully in <unk> and that's part of how we.
Improvement as well and demand I'm, just trying to connect the dots between what unit demand and improve versus what dollar demands and approved because it still looks like a pretty strong step up even when you factor in the positive comparisons moving in your favor.
Yes, Hi, Bobby this is Dave again, so if you look at the first half of the year.
We had an <unk> of around 5900 bucks or a little over 5900 box and that was.
Approaching $6000 in Q2, which is the number I used on the last call as you live in the back half of the year, we're actually looking at ARU, that's likely going to be quite similar to the first half.
So around 5900 box, we do expect the area to be stronger in Q4 than Q3 Q3 is going to have the impact of the closeout activity that we had late in Q2 at the low end of the line in particular, which will put a little put a pressure on air you I'd call Q3 may be closer to 5800.
And then I call Q4 around that $6000.
For an area.
Okay, and that's that's a function of the pricing the new line and then offset by the Closeouts or whatnot is there any mix going on there are you attaching more items more beds or anything else like that.
I mean, it's hockey margin basis.
I'm, sorry, yes, yes.
Yes. So if you look at year over year, particularly in Q3 Q3 last year didn't have any climate 360 <unk>.
Q3. This year, we'll have a full quarter of climate $3 60 last year, we introduced climate $3 60 in October and we did have.
A fair amount of deliveries in the fourth quarter, but we do expect even more deliveries in the fourth quarter. This year with climate than we did last year, which will help the <unk> year over year.
And the other thing Youre going to get in both Q3 and Q4 is the benefit of the pricing actions. We took some of the pricing. We took last year was in August some was in December So really Q3 didn't get the full benefit of those August promotions or December .
From a pricing action. So we expect both pricing and some mix to help us in both Q3 and Q4 to get those numbers up. So if you do the math Bob I just gave it to you, but the back half of last year was $5200 per unit, which means.
We're looking at a number north of double digit <unk> growth for the back half of the year.
Yes, I appreciate the details thanks for letting me get the Bolivar.
Hmm.
Great. Thank you.
At this time there are no further questions I'll hand, the call back to management for any additional or closing remarks.
Thank you for joining us today, we look forward to discussing our third quarter 2023 performance with you in October .
<unk>, well and dream Big.
And once again that does conclude today's conference. Thank you all for your participation.
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