Casper Sleep Inc.
Q2 2020 Earnings Call Transcript

Published: 11 Aug 2020

Operator:

Good morning, and welcome to Casper's Second Quarter 2020 Earnings Conference Call. Today's call is being recorded, and we have allocated one hour for prepared remarks and Q&A. At this time, I'd like to turn the conference over to Jeff Grossman [ph], Investor Relations for Casper. Mr. Grossman you may begin.
Unidentified Company Representative:

Thank you, operator. I'd like to welcome everyone to Casper's second quarter 2020 earnings conference call. Before we begin, I'd like to remind everyone that this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including statements regarding management's plans, strategies, goals and objectives; our anticipated financial performance; and the expected impact of novel coronavirus on our business. These statements are neither promises nor guarantees, but involve known and unknown risks uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors discussed in our annual report on Form 10-K for the year ended December 31, 2019 as updated; by the risk factors section of our quarterly report on Form 10-Q for the quarter ended June 30, 2020; and our other filings with the Securities and Exchange Commission could cause actual results to differ materially from those indicated by the forward-looking statements made on this call. Any such forward-looking statements represent management's estimates as of the date of this call. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause our views to change. In addition, we may also reference certain of non-GAAP metrics which are reconciled to the nearest GAAP metric in the Company's earnings release which can be found on our Investor Relations website at ir.casper.com. On the call today is Philip Krim, Chief Executive Officer; Emilie Arel, President and Chief Commercial Officer. Philip will provide a brief update on the second quarter results and recent trends in the business; Emilie will provide an operational update, including the status of the retail reopening plans; and finally Stuart will provide detail around the financial performance in the quarter as well as some color around how the company is thinking about the second half of the year. Following prepared remarks, we'll open the call for question-and-answer session. I would now like to turn the call over to Casper's, Chief Executive Officer, Philip Krim.
Philip Krim:

Thank you, and good morning, everyone. Before I discuss our second quarter performance, I want to take a moment to acknowledge the challenging times. Against the backdrop of a global pandemic, we’re witnessing a historic moment of racial reckoning in our country and believe it is critical for Casper as a company to support our employees and communities in the fight against systemic and structural racism. Through our internal diversity equity and inclusion work, we’re committed to hiring and fostering the development of diverse talents and amplifying diverse perspectives. We know our current efforts are just a start and during a timing which the world faces more uncertainty than ever, we must examine the standard to which we hold ourselves accountable, speak up for those who are struggling or marginalized and take care of our collective health and wellbeing. I’m extremely grateful to our employees for their hard work, dedication and tireless efforts to continuously take care of our customers during this challenging time. Our number one priority remains the health and safety of our employees and our customers. And the Casper team has worked around the clock to keep up with unexpected demand as consumers emphasize a better night of sleep as key to their health and wellness now more than ever. Despite the challenging macro environment, I'm very pleased to say our second quarter results with record North American e-commerce revenue and significant progress towards profitability are well ahead of our expectations. We have quickly adapted our unique multichannel business to a difficult market to meet the needs of more consumers, while capturing market share. Globally, we delivered revenue of $110 million, a 16% increase over the second quarter of 2019; and an adjusted EBITDA loss of $11.4 million, a 50% improvement from the prior year. Excluding Europe, which we wound down in the second quarter, North American Q2 performance track even better at 18% revenue growth and approximately $8 million adjusted EBITDA loss. I am pleased with our strong top line performance where our retail partnership channel delivered 61% growth and our direct-to-consumer channel delivered 5% growth, despite the fact that our retail stores had only very modest sales due to closure and limited service offerings. As we announced yesterday, we are very excited to welcome Sam's Club, Ashley HomeStore, Denver Mattresses, and Mathis Brothers as new retail partners. We are now partnered with 5 of the top 10 national mattress retailers, and these additions expand our national footprint while providing geographic expansion into key regions across the West, Midwest and Southwest. Casper continues to be a desired brand partner for leading retailers and we look forward to additional growth in this channel in the future. Our strong performance in the quarter exceeded our expectations across the board and shows that we can continue to take market share. Furthermore, our brand products and multichannel distribution continue to work well, providing increased confidence in our ability to take advantage of the positive trends in consumer behavior and an industry that is experiencing an acceleration in demand coming out of the quarter. With strength in mattresses and pillows, we are well-positioned for the back half of 2020. With this quarter's performance, we are achieving improvements earlier than we expected as we deliver gross profit growth, gross profit margin expansion and continued leverage against our sales and marketing and G&A investment. These results reflect that our model is working and we expect to deliver continued progress on our growth and profitability goals. I'll now turn it over to Emilie to share an update on channel performance and retail reopening status.
Emilie Arel:

Thanks. As Philip mentioned, we are very pleased with our performance this quarter. Our direct-to-consumer channel performed well driven by record e-commerce results as our own retail stores were closed for almost the entirety of the quarter. Our e-commerce performance accelerated during the second half of March and that strength continued through the quarter as we moved into the summer selling season. Compared to last year, we saw significant increase in traffic as well as strong [technical difficulty]. We also saw growth in both our mattress and pillow category, particularly during the Memorial Day and 4th of July weekend. On the owned retail side, at the end of the quarter, 57 of our 59 owned retail stores were open. We have taken a measured approach to reopening with four phases. First, virtual, no contact appointments; then curbside pickup, one-on-one private appointments; and most recently limited walk-ins with queue management. Our stores are in varying phases of reopening based on the public health guidance and government regulations for each location. The health and safety of our customers and employees remains our number one priority. We continuously monitor developments related to COVID-19 in locations where we have retail stores, and have developed procedures to enable us to responsibly and efficiently open or close our stores and adjust our service offerings as needed in response to changing COVID-19 conditions. Moving on to retail partnerships. The robust growth in this channel is largely due to our key retail partners, including Costco, Target and Amazon remaining open during the pandemic and performing extremely well. In the latter part of the second quarter and into July, we've also started to see some of our specialties, our regional furniture partners reopening. We've been pleased with performance in Rooms To Go and plan again as their store fleet have began to reopen. In addition, we are very excited to have announced four new retail partners bringing our total to 21 retail partnerships today. The recent addition of Ashley HomeStore and Sam's Club, two of the top 10 national mattress retailers will significantly broaden our reach in the North American market. And the addition of Denver Mattress and Mathis Brothers will expand our regional footprint. These new partners will enable more consumers across the country to experience our suite products in person, but we expect they will begin to contribute modestly to our growth in the fourth quarter of this year. We will continue to expand retail partnerships as it is a key component of our multichannel strategy. We continue to be proud of the performance of our new mattress portfolio launched in March. As our owned retail and partner stores began to reopen, we are excited about the traction with our new model, The Nova. As Philip mentioned, we are also seeing fantastic performance on other products in our portfolio led by pillow sales, which increased over 50% from last year. While we continue to see significant demand for Casper products like many in the industry, we are seeing some broader base industry-wide supply chain and logistics constraints caused by COVID-19, leading to some near-term challenges on order fulfillment. We've an experienced team focused on managing our supply chain and logistics network and are actively qualifying and onboarding new suppliers, which we expect will help to significantly mitigate any inventory constraints leading into Q4. With that, I'll turn it over to Stuart to walk through a more detailed financial updates.
Stuart Brown:

Thank you, Emilie, and welcome, everyone. To echo earlier comments, we are very pleased with our performance in the second quarter, which demonstrates our ability to continue growing and taking market share, while improving gross margins and leveraging marketing and operating costs. Further, I will talk about our clear path to positive adjusted EBITDA as we wind down losses in Europe, ramp up retail sales and execute additional earnings growth initiatives already underway. Starting with second quarter results. Revenue grew 16% to $110.2 million driven by the record revenue in our e-commerce channel and the strength in our retail partnership channel. Direct-to-consumer revenue was $81 million in the quarter, a 5% increase from the prior year. The increase in direct-to-consumer revenue was mostly driven by e-commerce as our Casper retail stores have only very modest sales. Retail partnership revenue was $29.2 million in the quarter, a 61.1% increase from last year. Looking at channel mix, direct-to-consumer was 73.5% of total revenue in the quarter with retail partnerships increasing to 26.5% from 19.1% a year ago through the increase in new retail partners and strong growth, which Emilie discussed. With regards to Europe, we completed the planned wind down of operations by the end of June with reported second quarter revenue of $5 million supported by discounting to sell-through local inventory. Gross profit increased over 22% to $57.1 million, which resulted in a gross margin of 51.8%, a 280 basis point increase year-over-year. The pace of margin expansion was ahead of our expectations and was achieved despite the discounting in Europe and the increased mix of retail partnership revenue, which has lower margins than direct-to-consumer. As discussed last quarter, the change in our primary logistics provider late in Q1, meaningfully reduced transportation costs in the second quarter, contributing to the gross margin improvement. The positive performance of the new 2020 mattress collection, which Emilie discussed has also benefited gross margin. We expect gross profit to continue growing at a faster rate than revenue in the second half of the year and the number of supply chain, mix and other initiatives underway. Sales and marketing expense as a percentage of revenue was 30.1% in the second quarter, down from 41.8% a year ago, a quarter when we invested more heavily in marketing to support the launch of our hybrid mattresses. In the second quarter of 2020, we leveraged our digital expertise to capitalize on decreased advertising costs and drive efficiency of media spend, while also still delivering growth and taking share. Our general and administrative expenses for the quarter were $42 million, an increase of $8.8 million due mainly to new public company expenses such as stock options and insurance, as well as a cost associated with our larger retail presence, primarily rent. We recorded the restructuring charge in the quarter of $4.1 million relating to our previously announced closing of European operations and severance related to the reduction of our global corporate workforce by over 20%. Adjusted EBITDA in the second quarter was a loss of $11.4 million compared to a loss of $22.7 million last year. When you consider the closing of Europe, which had an adjusted EBITDA loss of about $3 million in the quarter, the benefits from retail reopening, the expansion of our retail partnerships and a number of initiatives underway to improve gross margin and leverage our operating costs, you can understand why we feel very comfortable reiterating our outlook to achieve positive adjusted EBITDA by the middle of next year. Turning quickly to the balance sheet. We ended the quarter with $98 million of cash, providing strong liquidity relative to our cash flow outlook and capital expenditure plans. Year-to-date, our capital expenditures of total about $11 million and our outlook for the year is unchanged with investments below $15 million. This contemplates our planned opening of 8 new stores and 2 relocations in the second half of the year for leases signed prior to the pandemic. With regards to debt maturities, we are in the process of refinancing our $25 million senior subordinated facility, which is due to expire December 1, following a 90-day extension signed subsequent to quarter end. Looking ahead, trying to predict sales for the second half of the year remains, of course, a challenge. COVID-19 continues to impact consumers and does retail in ways that are hard to predict. We continue to prioritize the safety of our customers and team members, as well as monitor the impact of COVID-19 on the supply chain across the industry. We currently believe our business will continue benefiting from stronger than expected e-commerce sales and that our retail partnership business will remain strong, but the sales and owned retail stores will be lower than originally expected. For modeling, remember that Europe contributed about $14 million of revenue in the back half of 2019, which should come out of the baseline. While we expect a fourth quarter revenue growth might be more challenged than we had expected at the start of the year, the second half adjusted EBITDA loss should be less than expected and improved further from our second quarter results. And now let me turn the call back over to Philip to wrap up before we open the line for Q&A.
Philip Krim:

Thanks, Stuart. As you've heard today, we're taking many proactive steps to grow our market share, while executing against our goal of achieving profitability. We've been focused on four key drivers to get us to profitability and we've made substantial progress during the quarter. First is continued growth. Despite our owned retail stores being closed, we reported a 16% improvement in revenue year-over-year, which demonstrates our ability to nimbly drive growth from our multichannel business to gain market share. our e-commerce channel remains strong, and we are continuing to expand our wholesale business with strong retail partners. The second is gross profit margin expansion. Gross margins grew by 280 basis points year-over-year, and we believe we can continue to make gains throughout 2020 and 2021. Third is sales and marketing leverage. We are benefiting from improved customer acquisition costs in our e-commerce segment, thanks to wider e-commerce adoption and lower media costs, while also rapidly expanding our wholesale channel, which is up 61% year-over-year and requires minimal incremental marketing spend. And fourth is G&A leverage. We have demonstrated a focused approach to capital allocation and investment decisions with the decisive actions we took at the beginning of the pandemic. We are well ahead of expectations on our path to profitability and are optimistic about our trajectory heading into the second half of the year. The third quarter, which is typically the industry's strongest seasonal quarter is already off to a great start. In closing, we are pleased with our strong performance in the second quarter and the significant progress we've made in spite of ongoing challenges in the market. We look forward to updating you on our progress on next quarters call. We'd like to now open it up to Q&A. Operator, I'll turn it back to you.
Operator:

[Operator Instructions] And our first question comes from the line of Peter Keith from Piper Sandler. Your line is open.
Peter Keith:

Hi. Good morning, everyone and congrats on those new retail partnerships. Philip, I was hoping you could talk about the pace of sales growth through the quarter. Number of industry players have seen notable acceleration from April to June and then continuation into July. If I'm just checking back to my notes, it looks like your April sales growth was up a little bit more than 15%, I think it was what you said and you finished the quarter at about 16%. But you've got several moving pieces. So hope you can kind of break that apart for us and help us understand the overall trend.
Philip Krim:

Sure. Good morning, Peter. Yes. So we saw consistent strength starting in about mid to late April through the rest of the quarter and good positivity going into Q3. What we saw though, was that our retail stores really didn't contribute much to the quarter overall. So they are obviously a big part of our business. And we're slow to reopen just given that we were emphasizing the safety and understanding the protocols on a regional basis for each of our retail stores. But the retail partnership business was strong throughout the quarter and e-commerce was strong throughout the quarter, really starting, I think, kind of in mid to late April and then showing growth -- consistent growth from there throughout the quarter and into Q3.
Peter Keith:

Okay. And how do you feel about your given to advertising with the back half of the year? It does seem like the industry is in a pretty good spot right now with consumers shifting spend towards the home. We do hear about broad based strength. Are you finding that advertising to be a bit more competitive? Do you want to accelerate the pace of spend into the back half? Any color there would be helpful.
Philip Krim:

Sure. So I think now it's a great time to be in the mattress industry, and we think that the macro trends that we see will continue meaning strong moving of homes out of urban areas, into suburban areas and just strong housing trends that will continue to make the mattress industry a very strong industry as far as we can see. That said, we do believe that our business is well positioned given the overall industry strength, and that includes the ability to continue to spend, to capture market share. So we've been spending more aggressively than we were throughout Q2 and I think we provided some intra-quarter commentary about how we were very conservative at the start of Q2. We started to spend more towards the end of the quarter, and we will continue that spending strength. I would say that the back half of the year, one of the cautions is just it's an election year. So that will provide some volatility to media rates. But overall we still see media rates below kind of historic trends and averages. And we see e-commerce adoption continuing to be strong. And so we think that if those two themes hold up, that it's going to be a good time for us to be spending on advertising, to drive overall growth for the business.
Peter Keith:

Okay. That's great. Thanks very much and good luck.
Philip Krim:

Thanks, Peter.
Operator:

Our next question comes from the line of Alex Walvis from Goldman Sachs. Your line is open.
Alexandra Walvis:

Good morning. Thanks so much for taking my question here. My first question is about the growth in the retail partnership trap channel. Very strong growth here in the quarter. Is there any way that you can break that down by, new partners and those that you've been with for a while. And then within that second bucket, which types of wholesale partners driving most of that growth where you’re seeing particular strength?
Philip Krim:

Sure. I'll turn it over to Emilie to talk a little bit more about what we're seeing within our retail partnership channel.
Emilie Arel:

Yes. Hi, good morning. As noted in my remarks, what we're really excited about is the majority of our partnership revenue in Q2 still came from partners who we've had strong partnerships with for a while, Target Costco, Amazon, and the like that were open during all the time during the pandemic. So we're really excited about the business there. As we noted and you saw in the press release yesterday, we're onboarding some new partners bringing our total to 21 retail partnerships. And so we see them contributing modestly to growth in Q4, but we do expect that we continue to see the balance of our retail partnership revenue come from our current partners in the near-term
Alexandra Walvis:

Great. And then my second question is a high level question about channel exposure of the business. The disruption that we've seen in the marketplace has led to acceleration in your e-commerce business and indeed e-commerce across the market. I wonder if you're thinking any differently about the optimal or terminal channel mix of the business in light of some of the things that you already mentioned on this call, like more attractive media rates to drive your online business and the increased restrictions of opening stores?
Philip Krim:

Yes, it's a great question, Alex. And when we enjoy talking about Casper quite a bit, I would say this accelerated what we believe was going to happen in the industry, which is basically the convergence of online and offline shopping. Instead of viewing them as kind of traditional channels or silos that were separate in shopping journeys which I think is how most of the industry traditionally thinks and operates, our multichannel approach exists because we believe that any high consideration purchase like a mattress and especially one that impacts your health and wellness, that consumers are increasingly going to leverage both online and offline shopping channels in order to drive the right decision. And so we believe that our model is the right model for the future, and that more and more consumers are going to leverage e-commerce and digital as part of their overall shopping experience, but that retail and offline is still hugely important given the consideration nature of this purchase. And so we just think they're going to become more and more intertwined, and that consumers are going to increasingly traverse online and offline often at the same time. That's how we built our business from the ground up and we think that's well positioned for the future of the consumer in this industry.
Alexandra Walvis:

Excellent. Thanks so much for all the color and all the best.
Philip Krim:

Thanks, Alex.
Operator:

Our next question comes from the line of Randy Konik from Jefferies. Your line is open.
Randy Konik:

Thanks. Good morning, everybody. Back to the retail partnerships, is there any kind of color on how many of the partners had significant closures? I think you mentioned Raymour & Flanigan during the quarter. The reason I'm asking is, it would suggest that the partners that were open saw significant sell-through improvement, and I'm just wanting to get some perspective from you on why do you think that occurred? Are you doing anything different with those partners in terms of for setup, for signage, anything like that? Just give us some perspective on things you're doing with your channel partners that are suggesting improved sell-through with those partners.
Philip Krim:

Sure. Emilie, do you want to tackle that one?
Emilie Arel:

Yes. Yes. Thanks, Randy, for your question. So you're right that our trial partner specifically Raymour & Flanigan just starting to open rooms to go, opening a little bit earlier. But for the trial partners the majority of them are closed for most of the quarter. And so we did see the lion share of our growth coming from partners like Target, Costco and Amazon. We did have some change in strategy. We expanded distribution of our pillow products within Target, which we're really excited about. But overall saw the strong gains that, Peter and others have talked about from the industry in home products, mattress and pillow, specifically across all three of those partners and saw incredible growth throughout the quarter, which we're super excited about as it continues into Q3.
Randy Konik:

Got it helpful. And then just [technical difficulty] the losses that were attributable to Europe, I think $3 million EBITDA in the second quarter. Can you just give us perspective of what the losses were in the back half of last year, just we can get a bearing on how we think about normalizing profitability going into the -- normalizing the business into the back half of the year for this year?
Stuart Brown:

Yes, I think -- again, the business was still growing last year, but was still generating EBITDA losses. What I think Randy is probably better to really use second quarter results as a run rate going forward in monitor EBITDA for that, just given the changes of the mix of the core business overall. So if you start with the second quarter and try to model forward and you adjust for the revenue, the $5 million revenue that so that we had in Q2 and then the $3 million EBITDA loss, you should be able to get there.
Randy Konik:

Got it. Thank you. And then the last question would be, you had really good marketing leverage or [technical difficulty] I think that kind of efficiency trend line is kind of the way to go into the back half of the year. And then [technical difficulty] look at the G&A [technical difficulty] next year, how do we -- how should we think about store opening plans, given the pandemic? Would they be slower than initially thought contemplated from the pack, like, meaning you have less store openings, than initially thought, the G&A pressure would be less combined with the marketing expenses going down helps you kind of really accelerate towards that path to profitability. I'm just curious on how you think about these different your moving buckets within the expense line.
Philip Krim:

Sure. So on the sales and marketing, we had commented that we believe we understand early in the pandemic because we were being very conservative in what we viewed the overall macro environment to be and we increase that spend kind of throughout the quarter. So I would say Q2 is not quite the run rate that I would take forward because we see good opportunities to continue to spend profitably, which is how we manage our marketing spend into as we see opportunistic ways to profitably acquire customers, we're going to continue to do that. On the store side, we've talked about our opening plans for 2020 and I haven't talked about our specifics into 2021. But we do believe we will continue to expand our store footprint and that's going to be a meaningful part of our overall business and the opportunity ahead of us. But we are also continuing to watch how stores reopen and the ramping of sales and what formats are performing to drive the overall store count and how we think about that going forward. So it's still very much in kind of learn mode with regard to how retail is performing. But no doubt that we'll continue to expand our stores over time and that's going to continue to be a key part of our overall strategy. And so that is part of the G&A growth. Beyond the store side, though, we have been keeping G&A expenses flat or declining in some instances with regard to headcount as we've talked about as well.
Randy Konik:

Very helpful. Thanks, guys.
Philip Krim:

Thanks, Randy.
Operator:

Our next question comes from the line of Michael Lasser from UBS. Your line is open.
Michael Lasser:

Good morning. Thanks a lot for taking my question. Phil, if we compare the results of your e-commerce sales or implied e-commerce sales, which we're backing into in the quarter versus the others in the industry, it appears that you lost market share during the quarter. Why do you think that was? Do you think it was a sales and marketing issue where you ramped up too late?
Philip Krim:

So I don't think you can look at each channel and decide market share because the businesses that you're comparing have very different business fundamentals. We saw a 61% growth in our retail partnership business and we saw that the retailers that stayed open and were able to drive traffic through their stores and through their .coms we're great partners to us. We have 60 doors that were closed throughout Q2, and so that drove different physics for our business. So I don't think we look at it as here's our e-commerce market share and here's our wholesale market share. Overall, we were up as we reported 16% globally, 18% in North America. I think that compares to some of our peers who were down 20% in North America or 10% in North America. So when we benchmark ourselves against most of the industry players, we feel pretty good. And when we look at industry data overall, we see that the industry contracted in Q2. And so overall, we think we took market share. And the way that we took market share is going to be different than some of our other companies -- competitors just given the physics of our business and the multichannel scale that we've achieved.
Michael Lasser:

With that being said, Phil, can you quantify the sales growth -- the strong sales growth that you've seen quarter-to-date so far?
Philip Krim:

So we're not going to break out the Q3 performance, but we see continued sales growth throughout Q3, and I've been pleased with how the quarter has started.
Michael Lasser:

My last question is, Phil, as you expand into more traditional mattress channels, how do you plan to maintain the authenticity and distinction of the Casper brand that you've worked hard to create?
Philip Krim:

It's a great question, Michael. And for us that's table stakes when we negotiate with a potential retail partner. First question we ask is how is our brand going to show up and how are we going to make sure that our brand comes through in the exact way that is important to us? And the good news is that the retail partners that we're talking to and working with, see the value of our brand, see the value and quality of our products and want to showcase that appropriately and drive the value for that. So it hasn't been a friction to joining with great partners who appreciate the value of brands in this space, and it's going to be a key driver for the business to continue to grow. And as you can see, we still have a ton of white space to capture. When you look at the addressable market size, those trial doors represent the largest part of the industry by far and we're really just starting to penetrate that segment within the overall industry. And we're seeing a lot of success with the partner doors, where we do bring trial experiences in the Casper branded way to their footprint. And so we're really excited about early signs there and think that there's huge growth potential ahead of us.
Michael Lasser:

Thank you and good luck.
Philip Krim:

Thanks, Michael.
Operator:

Our next question comes from the line of Bob Drbul. Your line is open.
Bob Drbul:

Hi. Couple of questions for me. On the e-commerce side, can you just talk a little bit about the trends of average order value versus orders? And can sort of can you split, maybe break into the cost of obtaining new customers and how you're thinking about that going forward?
Philip Krim:

Sure. Emilie, do you want to just talk about average order values and what we've seen within the different channels?
Emilie Arel:

Sure. What I think we're really excited about as you look at our new portfolio that we spoke about previously that launched in March is we see a nice upward trend in average order value, especially as we see more adoption into our Nova mattress, which is a new price point for us that sits in the middle of our Original and our Wave. And so we continue to test into what the right assortment is for our e-comm customer, for our partners and for our owned retail stores and are excited about the trend we're seeing in AOV and also an attachment rate with other products outside of mattress.
Bob Drbul:

Got it. And the other question I have is just on the wholesale with the new partnerships you announced yesterday. I think it was. Should we expect any additional partners this year, or is that going to be it for 2019? Just trying to understand that piece of it. And maybe if you could just talk about the pace of the rollout of the new guys, I think, versus I think one of the fastest ones you had with Costco previously? That would be helpful. Thanks.
Philip Krim:

Yes, I guess all we would say is there's still a lot of time on the clock for 2020, so more to come there. And then on the pace, we just try to work with our retail partners and make sure that we set ourselves up for long-term success. So we're not trying to optimize for any specific timelines. Some retailers can move more quickly than others and especially post or during the pandemic, you see a different pace of operations. But we are working with each partner to make sure that we represent our brand and products correctly and that we will in the right fashion to set ourselves up for long-term success, not hit any short-term metrics.
Bob Drbul:

Great. Thanks, Phil.
Philip Krim:

Thanks, Bob.
Operator:

Our next question comes from the line of Curtis Nagle from Bank of America. Your line is open.
Curtis Nagle:

Good morning. Thanks very much for taking my question. So, yes, I guess just first one on product mix. How did that trend in the quarter? Did it mix down? How did the launch of the Nova impact the Wave? And what were -- how did all those, I guess, dynamics work out in 2Q?
Philip Krim:

Sure. Emilie, do you want to talk about the product mix that we saw?
Emilie Arel:

Yes. Hi, Curtis. Good morning. So we talked about this a little bit on the last call, but with the launch of the new mattresses, we're just starting to see their performance in owned retail stores and partner stores, obviously, as it began to reopen across the country. And as I said in my commentary, what we're excited about is that we're seeing the mix and really the uptake from the original and to Nova, which is -- has -- is a great mattress. It's very comfortable. It also has great margins and as a new price point and a new bed for us. So we're really excited about that. And we're seeing that across all the channels where the Nova is represented. And then we also spoke about strong pillow sales, so up 50% year-over-year, and really seeing a lot of new customers and repeat customers grow into other categories outside of the mattress, which we're really excited about.
Curtis Nagle:

Okay, great. And then maybe just a related question. How are you guys are thinking about product mix for some of your new specialty bedding retail partners, which tend to sell at higher price points than some of your kind of original partners like Costco [technical difficulty] that going to look like when they launch?
Philip Krim:

Yes. So part of this goes back to the answer Philip gave a couple of questions ago, which is what's important to us that we establish a really strong brand connection with our partners and that we're showcasing our brand in the right way for us as Casper and the right way for the retail partner and the customer that shops in their location, whether it be e-comm or an in store environment. And so our assortment as they are now will continue to be varied by partners based on what their customer's looking for, what they're looking to fill in our assortment. So we really look at it as a one-by-one basis and work with our partners individually to find the best assortment for them and for us.
Curtis Nagle:

Okay. Thanks very much, gentlemen. I appreciate it.
Operator:

[Operator Instructions] Our next question comes from the line of Lauren Cassel from Morgan Stanley. Your line is open.
Lauren Cassel:

Great. Thanks so much. I guess just following up on a few of the earlier questions, understanding that the retail partnerships, were much better than expected and the store opened a little bit slower than you might've expected at the beginning of the quarter. What specifically would you attribute to sort of the e-commerce deceleration in the quarter? Was that your sort of original expectation? Just any additional color there would be really helpful. And then just on gross margin, really nice results there. Any way to quantify how much lower logistics costs benefited gross margin? And then would you expect to see roughly the same magnitude of benefits through the end of the year? Thanks.
Philip Krim:

Sure. Maybe, Emilie, do you want to tackle the first question just about e-commerce and overall sales mix between channels and then Stuart can you tackle the second question. Thanks a lot.
Emilie Arel:

Yes. Hi, Lauren. Good morning. As we indicated in the commentary, our stores were closed for the majority of the quarter, and we continue to see a ramp in owned retail stores and partner opening as it affects different geographies of the country differently. And we were very happy with our retail partnership growth. As I said, the majority of it really coming from partners who stayed open during the course of Q2 and the strong sales in both mattress and non mattress. As Philip said earlier, we're really taking a balanced approach to media spend, really leaning into the span where we see value and are driving profitable growth, but really ensuring we're continuing on our path to profitability and that is a focus for the business. So we are confident that the channels will continue to work together as Philip noted earlier and we all know. Consumers don't shop in one place. They really shop in cross channel and so our model of having our own retail stores, our partnerships and our e-comm and partnership e-comm business really seems to be working in this current environment.
Stuart Brown:

And on the gross margin change year-over-year, so the lower logistics costs mostly is a little bit to the fuel, but the most of it due to our new primary supplier -- logistics supplier is the biggest single item, but by far not the majority of the improvement, but was the biggest single item. There were a number of improvements flowing through from some product costs that we've been -- product team has been working on for a long time. We've touched on the margin improvement really driven by mix and the impact of the new products. So it's really a combination of things and you should continue to have expect most of that to continue to drive to flow through for the rest of the year initially really what drove the significant EBITDA performance in the quarter that we had.
Lauren Cassel:

Great. Thank you.
Operator:

And our next question comes from the line of Seth Basham from Wedbush. Your line is open.
Seth Basham:

Thanks a lot and good morning. My first question is just making sure I understand some of the trends in business restoring [ph]. You mentioned that you started more aggressively spending on advertising. I presume that's direct response advertising, but it doesn't seem like you've got a commensurate improvement in sales growth rates. Can you correct me if I'm wrong? ? And if not, can you help us understand what's going on there?
Philip Krim:

So, good morning, Seth. We have seen a consistently strong business through the second half of Q2, and we've seen that strength continue into Q3. And that's tied with about when we started to spend up on advertising and with the emphasis on response and performance advertising. So we think that overall the business has continued to perform consistent growth since we've increased that. And like we said, Q3 is off to a good start and Q2 overall, we felt was a good, consistent strength starting after mid to late April.
Seth Basham:

Got it. So for your direct consumer online business, you're not seeing any increases in customer acquisition costs?
Philip Krim:

They've been fairly consistent since kind of mid Q2 with some fluctuations around seasonality. So we've had really strong holiday periods with strength around, at first, Memorial Day weekend and then July 4th weekend. We're excited about Labor Day weekend and think we're well positioned there. So there's some fluctuations there, but that's kind of normal seasonality driven performance and customer acquisition cost fluctuations. Other than that, when you kind of zoom out a little bit more than that, then it feels very consistent.
Seth Basham:

Got it. And then the last question is just around the supply chain constraints that you mentioned. Can you give us an insight into how many sales you left on the table, whether or not you have a difference between your order growth and your sales growth for the quarter? And when you do expect some of this might normalize?
Philip Krim:

Yes, it's hard to quantify. We have shipping times outlined on our website and we talked about shipping times with our various retail partners. And delayed shipments, we know, can correspond to slightly lower conversion rates because some consumers need products immediately. So it's hard to get our hands around exactly what we're leaving on the table with just longer ship times. But that said, we're working diligently across the supply chain. We're standing up new suppliers. We think this is a key benefit of having a third-party manufacturing base that we have and business model that we have for our business, that we can respond quickly to this. And so we are looking to ameliorate the stress that the unexpected demand is having on our supply chain quickly.
Seth Basham:

Got it. Thank you very much and good luck.
Philip Krim:

Thank you, Seth.
Operator:

And we have no further questions in queue. I will turn the call back to the presenters for closing remarks.
Philip Krim:

Excellent. Thank you all for the time today and interest in Casper. We hope you and your family stay healthy and safe. Thank you everyone for the time. Bye-bye.
Operator:

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

Casper Sleep Inc. Q2 2020 Earnings Call Transcript

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Casper Sleep Inc.
Q2 2020 Earnings Call Transcript