Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ms. Aubrey Moore, Investor Relations.
Please go ahead, ma'am.
Thank you, operator. Good morning, everyone, and thank you for participating in today's call. Joining me in our Lexington headquarters are Scott Thompson, Chairman, President and CEO and Bhaskar Rao, Executive Vice President and Chief Financial Officer. After prepared remarks, we will open the call for Q and A. Forward looking statements that we make during this call are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that these forward looking statements, including the company's expectations regarding sales, earnings, net income and adjusted EBITDA and anticipated performance for 2020 and subsequent periods involve uncertainties. Actual results may differ due to a variety of factors that could adversely affect the company's business. The factors that could cause actual results to differ materially from those identified include economic, regulatory, competitive, operating and other factors discussed in the press release issued today. These factors are also discussed in the company's SEC filings, including, but not limited to, annual reports on the Form 10 ks and the company's quarterly reports on Form 10 Q under the headings Special Note Regarding Forward Looking Statements and or Risk Factors. Any forward looking statement speaks only as of the date on which it is made.
The company undertakes no obligation to update any forward looking statements. This morning's commentary will include non GAAP financial information. The press release contains reconciliations of this non GAAP financial information to the most directly comparable GAAP information, except as otherwise discussed in the press release as well as information regarding the methodology used in our constant currency presentations. We have posted the press release on the company's investor website at investor. Tempersili dot com and have also filed it with the SEC.
Our comments will supplement the detailed information provided in the press release. And now with that introduction, I will turn the call over to Scott.
Thank you, Aubrey. Good morning, and thank you for joining us on our 2022 quarter earnings call. Our thoughts continue to be with all the people around the world whose lives have been impacted by the global health crisis. I'll begin with providing an overview on how we've strengthened our competitive position. Then Bhaskar will review in detail our quarterly financial performance, discuss several second quarter highlights and review the balance sheet and liquidity.
Finally, I'll conclude with some thoughts about our long term business outlook. Our Q2 global operations were dramatically affected by COVID-nineteen. The Board of Directors and I are proud of the company's swift response to the unprecedented challenges that the worldwide health crisis has presented. We focused on the safety of our employees while working tirelessly to continue delivering on our commitments to our retailers and supplier partners. It was definitely a quarter of lows and highs, ending clearly on a high note.
Despite the remarkable amount of volatility and transformation within our industry, we are reporting a 2nd quarter net sales decrease of only 8%. In fact, U. S. Sales grew 2%. We're pleased to report adjusted EBITDA per our credit facility decreased only 3% compared to prior years.
Our leverage ratio improved to a record low of 2.8x adjusted EBITDA, down significantly from 3.7x as of June 30, 2019. And short term liquidity expanded to over $600,000,000 Now I want to spend some time discussing how we've strengthened our competitive position in the marketplace and how we see the opportunity to continue our momentum in future periods. Over the last 5 years, we've focused on finding problems and addressing them with an eye to creating long term value. This has kept us nimble and guided our decisions in making our investments in people, products and processes. These decisions created a solid foundation, which began to pay off in a big way last year.
We saw this trend accelerate into the Q1 of 2020 and set the company up well to deal with the unforeseen worldwide health crisis. I want to briefly touch some of the foundational elements that have improved our competitive position over the past 5 years. First, we've completed the largest launch of our all new innovative Tempur products in the U. S. In our history.
These products have done well in the marketplace. Our product quality was evident when Tempur Pedic was awarded number 1 in customer satisfaction for retail mattress segment in the J. D. Power's 2019 Mattress Satisfaction Report. 2nd, our multiyear investments in Sealy operations have resulted in high quality products and high levels of service for our customers, while also improving our profitability.
After a strong year of growth in 2019, we believe Sealy is now the largest bedding producer in the United States. 3rd, we expanded our relationship with new and existing third party retailers through multiple new supply agreements. Retailers have recognized the investments we have made in our products, brands, customer service and manufacturing operations, and we continue to receive inbound interest from retailers who want to lean more heavily into Tempur Sealy family of products and brands. In addition, our retail edge program has allowed us to provide cutting edge market insights and sales tools to our 3rd party retailers. The majority of this program is focused on expanding retailers' web based business and their understanding of customer trends.
The program is working well as our legacy based retailers have ramped up their online business, which provides us more share in the growing online market. 4th, our omnichannel focus resulted in rapid expansion in our direct channel, diversifying distribution and allowing product representation wherever customers want to shop. We've experienced tremendous success within the direct channel to date. By the end of 2019, our full year global direct channel sales had nearly doubled during a 2 year period. More recently, this quarter has seen online growth rates of over 125 percent and solid brick and mortar store performance once the stores were reopened.
Our U. S. Direct business is expected to be over $300,000,000 this year, ranking it in the top 10% of all U. S. Bedding retailers on a standalone basis.
Unlike many other DTC competitors, our direct to consumer business is highly profitable with decreasing customer acquisition cost and significant cash flow generation for the company. 5th, with targeted product, we've rapidly expanded our presence within alternative distribution channels, particularly with online retailers, on time only retailers. It is still very early in this rollout, but we are pleased with the momentum and the profits that we've generated. 6th, we've pivoted our media strategy in the U. S.
To include online channels as we follow customer trends. This change in our media mix allows us to optimize our strategies for consumers early and late in their shopping process, while continuing to drive high interest in our brands and products. 7th, we completed several opportunistic tuck in acquisition, including Sherwood Bedding and Sleep Outfitters, which are expected to have high return on invested capital and further our vertical integration. 8th, we strengthened our balance sheet and improved our cash flow, and Bhaskar will discuss our financial strength in more detail shortly. Finally, the 9th and most important component of our business, our committed, capable people who have strong shared values.
We have a culture to deliver for our customer all over the world and from that grow shareholder value. The foundation we have built over the last 5 years is rooted in adaptability and prudent capital allocation. This positions us well to address unforeseen disruptions in the market due to COVID-nineteen, which had a peak impact on our business in the early part of the second quarter. Our proactive response has maintained our optionality for our business in the fog of uncertainty. Early in the second quarter, we took material actions to adapt to an expected depressed long term sales outlook.
However, we were met with a sudden surge in demand beginning in May as consumers started to shop for bedding again all over the world. We worked quickly to ramp up our operations to support the robust sales environment, the strong demand for bedding in general, and our products specifically, has continued into the 3rd quarter unabated. 2nd quarter sales could have been stronger, but both we and our suppliers had reduced capacity early in the quarter in response to the falling demand, and our U. S. Sealy manufacturing operation was unable to keep up with the increased demand for our products as the quarter progressed.
The Tempur Pedic manufacturing process is less labor intense and has fewer components than the Sealy process and thus is not as impacted by the current issue. Our U. S. Order bank at the end of the second quarter was twice as large as compared to the prior year. We're still in the process of ramping our U.
S. Production capabilities to meet the heightened demand, and we expect to continue to experience capacity constraints on U. S. Sealy products through the Q3. We believe an important driver of the robust sales wave is the recent shift in consumer spending habits as consumers are focused on in home products versus travel and entertainment.
The duration and magnitude of this trend as well as the continued acceleration in sales we are seeing leads us to believe that our sales trends are not only due to pent up demand or government stimulus, but that we are likely experiencing a new favorable long term trend. We are well positioned to benefit from this new environment. Our research points to the fact that consumers have become omnichannel shoppers, and our powerful omnichannel platform is well positioned to capitalize on the current market as consumers can find our products wherever they wish to shop. Our research shows that 90% of consumers shop online at some point in their mattress buying process. You might find it also interesting that our research on consumers before the virus indicated that 3 out of 4 online buyers visit a brick and mortar store before buying a mattress online.
The point is that our customers are omnichannel buyers, and we are built to serve that kind of customer. We estimate about 25% of our U. S. Sales are purchased directly online through either our own e commerce or through existing third party retailers, which is up from the time before COVID-nineteen reached the U. S.
We also continue to work with our 3rd party retailers to improve their online presence through our retail edge program so that we can continue to help customers shop for our products, both online and offline. During the Q2, we saw a number of new customers on our own websites more than double versus prior year, but also seeing a healthy level of repeat sales. We believe our e commerce business is truly best in class with a high level of customer loyalty and engagement. One benefit of the current operating environment is more efficient spend for media. Total advertising spend was down 16%.
Our 2nd quarter net sales were only down 8%. We believe we are getting more for our money in advertising on a national level and expect leverage on advertising to continue into the Q3. Additionally, our digital customer acquisition cost continues to fall. Our direct team continues to optimize for profit and are capitalizing on the recently reduced digital advertising cost in the marketplace. This makes the 3rd quarter in a row of falling cost to acquire a customer, proving we're not buying volume or chasing unprofitable sales.
Our 2nd quarter adjusted EBITDA shows how strong our competitive position is within the industry. We are pleased with the quarter to achieve adjusted EBITDA per our credit facility of $110,000,000 As we've discussed before, we see our financial strength as a powerful competitive advantage in a thinly capitalized industry as it enhances our operating and strategic flexibility. The last 6 months have heightened the importance of this attribute. To this end, we are lowering our targeted leverage ratio for the 2nd time in the last 12 months. Our new revised ratio of net consolidatedness to adjusted EBITDA target is now 2x to 3x.
Reduction in our leverage target is not due to any market concerns. It is a strategic move to provide us with industry leading flexibility. You can clearly see from our recent performance that the company's business model and experienced executive team can handle economic volatility and still generate strong cash flow. We believe this lower leverage ratio will benefit our shareholders over the long term. Lastly, due to our strong adjusted EBITDA performance in the Q4 of 2019 and the first half of twenty twenty, it is now possible that by the end of the Q3 2020, we may achieve a trailing 4 quarter adjusted EBITDA in an amount equal to or greater than the $600,000,000 needed to trigger the threshold payout under our aspirational long term incentive comp plan.
As a reminder, the aspirational plan was put in place 5 years ago to motivate the company's approximately 150 top leaders to turn around the business in a difficult and changing industry. The threshold target of $600,000,000 represents a 44% improvement in trailing 4 quarter adjusted EBITDA from the time the plan was put in place. The current aspirational plan will terminate December 31, 2020, and we do not anticipate adopting a similar plan in the future. If the plan is triggered, the company would incur noncash stock compensation expense. In order to ensure that we have adequate time for the Q3 financials to undergo additional review, we plan to host our Q3 earnings call slightly later than usual.
And with that, I'll turn it over to Bhaskar to review our financials in more detail.
Thank you, Scott. Before going into the details, I would like to briefly expand on the trends we experienced through the quarter. We exited the Q1 with accelerating negative trends as COVID began impacting our North American market. In early April, the trends reached the worst at down 80% during a few days. We then saw sales trends improve throughout the remainder of the month, and we ended April down 55% as compared to the prior year.
Heading into May, we anticipated that the April trends would continue to modestly improve throughout the remainder of the quarter. However, business conditions improved quicker than we anticipated in the U. S. And by Memorial Day, we began to experience positive year over year trends in the U. S.
The reopening of brick and mortar stores, the acceleration of our e commerce business and the improving global trends drove the sequential improvements from April to May to June. The inability to foresee this rapid change of volume has caused some inefficiencies in labor and shipping costs, thus pressuring gross margin. We are still experiencing these costs as we ramp up. We have and we continue to spend whatever money we need to service our customers. Turning to the financial results.
Please note that we have adjusted $25,000,000 of charges during the quarter. These charges were in accordance with our senior secured credit facility and the subsequent financial details have been adjusted for these items. I want to call out that $8,000,000 of those charges were in operating margins from COVID costs associated with temporarily closed company owned retail stores and sales force retention costs. Of those $8,000,000 in charges, dollars 6,000,000 were in North America and $2,000,000 were in international. The impact on EPS for the Q2 was $0.11 per share.
Before going into the segment details, I would like to highlight a few items as compared to the prior year. Adjusted gross margin declined 280 basis points to 40.6%. Adjusted operating margin was 11.7%. Adjusted EBITDA for the credit facility decreased slightly to $110,000,000 and adjusted earnings per share was $0.79 Turning to North American results. North American net sales decreased 3% in the 2nd quarter.
On a reported basis, the North American wholesale channel decreased 6% and the direct channel increased 27%. The direct channel's growth was driven by robust web sales trends of up over 140% versus the prior year, partially offset by the headwinds in our owned retail doors as most were closed during the period. Since those stores have opened again, trends improved and we now are seeing same store sales positive year over year in July. North American adjusted gross profit margin declined 220 basis points to 38 point 6% as compared to the prior year. The decline was principally driven by product and brand mix, partially offset by decreased floor model expenses and lower commodity costs.
As anticipated, we experienced negative brand mix in the quarter as Sealy recovered more quickly than Tempur. During the Q2, some retailers redeemed essential and were able to remain open throughout the quarter. Those retailers have lower average selling price versus our fleet average, which benefited Sealy Trends, creating a temporary pressure on our average selling price and margin during the Q2. Tempur trends were negatively impacted as all of our Tempur retail stores were closed during part of the quarter and most retailers focused on volume, which emphasized Sealy over high priced Tempur products. While we expect these temporary headwinds to average selling price from product and brand mix to still be present in the Q3, we believe that they will lessen substantially as Tempur sales trends have improved and are running ahead of Sealy.
North American adjusted operating margin was 14.3 percent and excluding COVID-nineteen charges was 15.4%, an improvement of 150 basis points as compared to the prior year. This improvement was primarily driven by lower operating expenses as a result of cost actions during the quarter, partially offset by the decline in gross margin. These results include an incremental bad debt expense of $7,000,000 principally related to the bankruptcy of 1 department store in the U. S. During the quarter.
When you take this into consideration, you can see why we are especially pleased with our expense management practices over the past few months, which resulted in expanded operating margins by mitigating the unprecedented impacts of the pandemic on our business. Turning to international. Net sales decreased 30% on a reported basis. On a constant currency basis, international net sales decreased 27%. As a reminder, our international products are priced at the upper end of the luxury market.
In the U. S, we have products across a wider range of prices, which is very different than our international go to market approach. Given our concentration internationally in the luxury market, we expected and have seen slower recovery of sales trends. There was a wide variation of performance between different regions in the Q2. Our Asia business, which was first to be impacted by the pandemic and experienced large declines in February March, rebounded nicely and returned to growth during the Q2.
Outside of Asia, our international business was challenged due to the timing of the global pandemic, but conditions generally improved throughout the quarter. All major markets are now open for commerce and are experiencing varying degrees of improving sales trends. As compared to the prior year, our international adjusted gross margin declined 150 basis points to 53%. The decline was primarily due to fixed cost deleverage on lower unit volumes and decreased royalties, partially offset by favorable country mix. International adjusted operating margin was 14.6 percent and excluding COVID charges was 16.6%, a decline of 370 basis points as compared to the prior year.
This decline was primarily due to fixed cost deleverage on operating expenses, increased bad debt expense and the decline in gross margin. These declines were partially offset by the performance of the Asian joint venture. Turning to the company's global performance. Excluding COVID charges, adjusted operating income was $78,000,000 Adjusted EBITDA per the credit facility was $110,000,000 and adjusted EPS was $0.79 which clearly demonstrates the flexibility of our business model. The slight decrease in adjusted EBITDA per the credit facility was primarily due to fixed cost deleverage on lower unit volumes, partially offset by expense management, principally in other selling and marketing and lower floor model expenses.
Commodities were slightly better than expected for the Q2, and we expect favorable commodity costs to continue for at least the next few months. We believe that in the Q3, we will experience about $5,000,000 of benefit from commodities, including the impact of tariffs. The U. S. Government recently ruled in favor of extending the antidumping actions to an additional 7 countries, which were deemed as dumping products in the U.
S. We believe these activities could materially benefit demand for U. S.-made value priced mattresses. These actions are designed to limit the import of extremely low priced products, so we expect there could be a bit of a tailwind for the industry as it may raise the opening price points in the U. S.
Market and provide some benefit to our U. S. Sealy, Sherwood and Comfort Revolution businesses. Our supply chain has been impacted by the rapidly changing environment. Some materials in the production of bedding products are being used to used for making personal protective equipment as the U.
S. Government has mandated that domestic suppliers of the material redirect capacity for such use. We have taken certain steps, including pricing actions to partially mitigate the impacts as our supply remains constrained on these items. Now moving to the balance sheet and cash flow items. We generated 2nd quarter record operating cash flows from continuing operations of $155,000,000 and spent $23,000,000 on CapEx during the Q2.
Our record operating cash flow was driven by our focus on disciplined cash management. I would like to further discuss our liquidity. At the Q2, consolidated debt less cash was $1,600,000,000 As Scott pointed out, our leverage ratio under the credit facility was 2.8 times, down significantly from 3.7x at the end of the Q2 2019 and is within our new target range of 2x to 3x. As a reminder, we entered into a $200,000,000 3 64 day term loan in May, which increased our liquidity during a time of great uncertainty. We ended the quarter with over $600,000,000 of available liquidity, which included $147,000,000 of cash on our balance sheet and over $400,000,000 available under our revolving credit facility.
I want to touch briefly on our accounts receivable. Going into the quarter, we recognized some of our customers were under financial strain from mandated shutdowns, which could expose our AR. As of June 30, 2020, despite the substantial volatility in the market, our accounts receivable aging was consistent as compared to the prior year. This was an especially good sign to me that the broader U. S.
Betting market has held up much better than we had expected and the credit risk has returned to normalized levels. As we have discussed on previous earnings calls, our variable cost structure naturally flexes. During the quarter, we implemented further cost reductions with a focus on preserving cash and improving our liquidity position when we felt it was needed. These reductions were primarily in advertising, personnel, other staffing related items and variable compensation. As the business trends improved, the variable expenses increased in line with revenues.
And as we felt more confident in our outlook, we brought back most of the discretionary expenses as well. We now expect most of our income statement line items to have a similar rate to sales as they have historically. In short, we are playing offense, not defense, which changes our cost outlook. We are not in a position to issue full year 2020 adjusted EBITDA guidance today, but I would like to offer color on our near term expectations excluding any material unforeseen changes in the operating environment. Our trends for the Q3 to date have accelerated from the Q2 across all geographies and all brands.
Given the improving trends, we have an internal target for global net sales to be about 25% positive in the Q3 as compared to last year. This takes into consideration our capacity constraints and would imply that by the end of the 3rd quarter, adjusted EBITDA could possibly reach the aspirational plan's low end threshold of $600,000,000 on a trailing 4 quarter basis. This would be a remarkable result in the 3rd quarter as it would be a 25% year over year growth. As a refresher, the aspirational plan is tied to challenging performance targets. The plan is triggered when the company achieves between $600,000,000 $650,000,000 of adjusted EBITDA on a trailing 4 quarter basis through the end of 2020 as determined by the compensation committee of the Board.
If the threshold is triggered, then between $550,825,000 restricted stock units will vest, resulting in a non cash one time charge between $33,000,000 $50,000,000 and a dilution of 1% to 1.5% in the quarter the performance target is achieved. There will be a true up in the 4th quarter if the trailing 4 quarter adjusted EBITDA achieved is greater than in the 3rd quarter. Lastly, I'd like to flag a few items for modeling purposes. For the full year 2020, we currently expect D and A to be between $135,000,000 $140,000,000 total CapEx to be between $100,000,000 $110,000,000 which includes maintenance CapEx of $70,000,000 interest expense of $80,000,000 to $85,000,000 a tax rate between 28% 29% and a diluted share count of 53,000,000 shares. If we trigger the aspirational plan, we would expect D and A would be higher by at least $33,000,000 the tax rate would be unfavorably impacted as this non cash compensation charge would not be deductible and the share count would also increase.
With that, I'll turn the call back over to Scott.
Thank you, Bhaskar. Great job. Tempur Sealy is a market leading, vertically integrated, omnichannel, global company with solid fundamentals in a growing category. We believe we're well positioned to deliver above market performance as we focus and are passionate on our long term initiatives. Our 4 key long term corporate initiatives include: 1st, develop the highest quality bedding products in all the markets we serve 2, promote worldwide brands with compelling marketing 3, optimize our powerful omnichannel distribution platform and 4th, drive increased EBITDA.
These long term initiatives helped us weather one of the greatest challenges industry has ever faced and positioned the company not just to deal with the crisis, but to emerge even stronger on the other side. I would be remiss if I did not thank our world class workforce and outstanding third party retailers, suppliers, licensees and joint venture partners, all who have made Tempur Sealy resilient and successful. There are a few items in particular that give me confidence about the future. 1st, our go to market approach around the world is diversified and is proven to follow the customer wherever and however they want to shop. 2nd, our pivot into compressed products has been promising, realizing solid growth both with Tempur Cloud and Cocoon by Sealy.
These products have been highly successful, driving additional direct channel growth and generating interest in Tempur Sealy products within a new segment of consumers. We continue to invest in this growing portion of the market and have purchased over 25 compression machines for our network to assist us in providing the most convenient and highest quality product to the consumer. 3, Sealy has become the number one brand in the U. S, which speaks to market share gains, a high level of quality and value in the industry. Our new Sealy plant in Dallas, Texas is on track to open in the Q4 to help support further growth.
4th, our recent acquisitions have been very successful. On the manufacturing side, our acquisition of Sherwood Bedding Company has gone well and provides us a powerful entry into the private label and OEM market. The Sherwood team has plans to expand the manufacturing capabilities with a new Sherwood plant in the Northeast and to increase the square footage in an existing facility in Florida. Additionally, they have leveraged Tempur Seeley's strong retail relationships as well as Sherwood's strong product lineup to expand their balance of share for OEM products at existing distribution. On the retailer side, I want to highlight our acquisition of Sleep Outfitters from bankruptcy has been very successful as it seamlessly integrated their retail store base into our operations, and they are now contributing to our financial performance.
5, the recently increased Tempur Pedic U. S. Media spend is supporting the recovery of premium bedding in the U. S. Market and helping all retailers move ASP up.
And 6th lastly, our margins, cash flow, adjusted EBITDA during the period were above our expectations and compare favorably within and outside the industry. Over the last 5 years, we've made tremendous progress in strengthening the foundation of our company. With a strong foundation in place and a healthy tailwind of consumers eager to spend on their home, Tempur Sealy is now positioned to grow its sales and earnings for the years ahead. With that, operator, please open the call up for questions.
Our first question comes from the line of Curtis Nagle with Bank of America. Your line is open.
Good morning, guys. Thanks very much for taking my question. Yes, so I just wanted to quickly, I guess, touch on mix and gross margin in 3Q. So you'll have less capacity constraint in Tempur versus CLE. Obviously, sales are going to be extremely strong in the quarter, just pointing to that, more stores open, including your own.
So I guess why wouldn't we or why shouldn't we expect a pretty decent improvement in North America gross margin due to these
mix factors?
Kurt, we would expect gross margin expansion in the Q3. You hit it right on is that if you compare it to the Q1, we should see improvement and obviously on a year over year basis. Just reiterating some of those things you said is that we would anticipate product brand mix to dissipate as we get through the Q3 as well as we will have a bit of a commodity tailwind for us. And then some of that deleverage that we saw in the Q2, that should dissipate as well. So you're spot on.
Thank you. And our next question comes from the line of Bobby Griffin with Raymond James. Your line is open.
Good morning, everybody. Hope you're all doing well and staying safe. Congrats on managing through a difficult quarter. Scott, I have one of your favorite 2 part questions here. But I was just curious if you could span a little bit on as the business started to recover, what kind of did you see in the wholesale trends by account size in the U.
S? And then maybe compare and contrast that to kind of the trends in international wholesale? I know there's some investor worry about just the different size and the fragmented nature of the bedding industry with small businesses and stuff?
Yes. Thanks for your question. Let me see if I can kind of help you with that. In the U. S, in general, I would say the larger retailers came out of the box faster.
They were a little bit quicker to lean into online, a little bit more aggressive in our advertising. And so we saw the bigger retailers came out faster. And then probably, I'm going to say 30 to 45 days later, we saw what I'll call the all other in our terminology. It's like someone turned the switch on almost, started coming out of the box. And by the time you got to the end of the quarter and into July, I would tell you that both the larger retailers and the all other were about equal as far as the strength of which, that they came out of this particular trough.
Internationally, man, it is all over the board by country. I don't think there's anything from an international standpoint where there was any difference between the large retailers and the small retailers coming out of the box internationally. It is clearly by country and it all relates to the virus.
Thank you.
Our next question comes from the line of Atul Nathwari with UBS. Your line is open.
Good morning. Thanks and thanks a
lot for taking my question. Scott, at this point, what is giving you visibility with respect to sales over the balance of the Q3? I understand that July is very strong, but what's giving you the confidence that this would continue in August September? And then along those lines, is the continuation of July trends what's baked into your guidance of 25% sales growth? Or are you expecting trends to decelerate in August September and still hit the 25% mark?
Thank you.
Thank you for your question. Let me be, first of all, clear. As we sit here today, I mean this is a very broad based order trend that we're seeing. July to date, we're experiencing order growth in every country in the world we operate. So I mean, it's not just U.
S. Stimulus checks or something like that. We are seeing order growth in every country in July. I think that's one of the most important things that I would tell you that gives us confidence. Also, if we look outside of our category and we look at furniture home furnishings, look at home development, look at RV sales, I mean, there is clearly a huge wave of discretionary income that is moving between, I'll call it, travel and entertainment, for lack of a better way to say it, into other categories, and we're benefiting from that.
We've got an extremely large back order, which is unusual for us. So we've got the orders in house. We have literally turned down tens of 1,000,000 of dollars of orders because we're capacity constrained. And I don't think we've ever turned down orders in our history. So we're turning down some orders in the U.
S, primarily in the Sealy side of house. So when we look at things, we have pretty good visibility to the Q3 and in the I'm not going to call it guidance in the 25% to give you some perspective. Most of the risk in that number has to do with capacity constraints, not demand. Demand feels very strong everywhere we look. Now we don't have a long visibility because I think, obviously, that's going to be dependent on some of the health care issues worldwide.
But we've got, what I'd call very strong visibility in the 3rd quarter, which is why we felt comfortable giving you some perspective.
Atul, just to answer your second part of that question, what I would say is just as a reminder, we did start our new distribution in the back half of the third quarter, not going to necessarily parse up the quarter, but just be mindful that it did start in 3Q of 2019.
Thank you. And our next question is from the line of Peter Keith with Piper Sandler. Your line is open.
Hi, good morning, everyone. Congrats on the rapid recovery. I want to just maybe have a follow-up question to the last comments about capacity constraints and your current approach to advertising. And Scott, I think you had said you're playing more offense. Are you leaning into advertising as much as you want right now?
Or are you stopping it because of some of the supply constraints that you've talked about?
No. We're playing the long game. I mean, you can make an argument that we could pull back on temper advertising, make a little bit more money in the Q3 and do that kind of stuff. But look, we're advertising big time on Tempur and leaning into our media really for the foreseeable future. And what we're seeing over the last couple of months is the Tempur growth rate has come up significantly and now is actually growing faster than Sealy.
We think it's important for us to help lead the industry kind of out of this trough and help push ASP because that has a huge economic benefit for our retailers. And we kind of look at that as part of our responsibility as largest bedding company in the world.
Thank you. Our next question is from the line of Seth Basham with Wedbush Securities. Your line is open.
Thanks a lot and good morning and congrats on delivering a very strong quarter in the end. The question I have is just around mix. You mentioned leading the industry out from an ASP standpoint, but can you comment on within the Tempur brand, are you anticipating seeing ASPs move higher on a year over year basis and your mix be favorable to gross margins for the balance of the year?
Within the Tempur brand. Within the Tempur brand, I would expect we'd have positive product mix within the Tempur brand is what we're seeing, right, Bhaskar? Absolutely. So if
you think about what happened in the Q2 specifically is that retailers were coming back. Now as we sit here in the Q3, the vast majority, if not all of our retailers are back at the sales force in house. So when you think about it, the trained sales force is back and now versus a volume focus will be focused on higher priced products, specifically on the Tempur side. And that should help us ASP, not only within Tempur, but in Sealy as well.
Our next question comes from the line of Keith Hughes with SunTrust. Your line is open.
Thank you. As you look towards the Q3 with the 25% you discussed earlier, would you still expect North American sales to come in excess of that? Or is there going to be a catch up here with the international given the weak second quarter that we have?
Yes. We would expect North America to be stronger, but we'd also expect international to be positive. That's right, Scott.
Our next question is from Laura Champine with Loop Capital. Your line is open.
Thanks for taking the question. So it's really about what's happening industry wide. You mentioned some concerns around online? And will that potentially drive up the pricing of those components, which might offset some of the tailwinds that you see on COGS on the Tempur side?
Okay. Thank you for your question. Look, I think we're benefiting from 2 things. I think we're benefiting from our competitive position and being positioned correctly going into this. And then you're absolutely right.
We also have an industry tailwind that we're riding. When you go to the capacity constraints and we'll go down to the supplier issues, the supply chain is operating well, but I would have to say it's a little bit fragile. It wasn't built for quite this sales surge that the industry is going through. So there are some hiccups in the supply chain. Probably the biggest choke point in North America right now would be in the area of springs, and that's mainly pocketed springs.
Working very closely with our supply partner there. There has been some price increases that were passed on relative to the Springs here in the Q3.
I
think that takes care of it. We'll see. But it depends on what goes on in the future, but it's possible that there might be minor price increases in innerspring beds going forward.
Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Your line is open.
Hi, good morning and nice results here. I wanted to follow-up on the topic of e commerce. Scott, you gave us a lot of interesting tidbits here on the call this morning. I was hoping you could talk a little bit more about your learnings over
the last few
months and how your outlook for cloud and Cocoon have evolved given the strength that you've been seeing and how you think you might be able to further enhance the e commerce offering of the Tempur Pedic brand in particular? Thanks.
Great. Thank you. It's one of my favorite topics. First of all, the Tempur Cloud has been an absolute home run, works perfectly in high density cities, and it's an outstanding product. The Cocoon by Sealy, we had it for a number of years and it has just continued to accelerate in the marketplace and now it's become a significant bed in the box product in the marketplace.
I think I'm going to answer your question kind of 2 ways because you kind of focused on what I'll call the direct business. But another I mean, we're working very hard with our retailers. And during the shutdown, we're able to help them with their e commerce business. And the traditional retailer, okay, that everybody's been saying is going to get disrupted and everything, I will tell you that the traditional retailers did an outstanding job during the shutdown online. And we saw sales increases from the traditional retailers 4x what they were doing before the pandemic.
So a lot of the learnings really happened in the traditional retailers. And I think you'll see the traditional retailers now making the proper investments in people and processes to be more competitive online. And so we're thrilled with what we see from the traditional retailers, from an online standpoint, and we're glad to help them at times in that process. Of course, we continue to work on our ability. I think there's the business is going to continue to grow.
But I will also say one of the most interesting things that's happened since stores have opened, you would normally expect as the stores open for the online business to kind of do a little bit of give back as customers are in store. And to date, what we're seeing both in our direct business and maybe even more importantly in our retailers business, our 3rd party retailer business, is the online business is not coming down. It's holding as they open stores. And that was a little bit surprising, but it's an outstanding trend for the industry and proof to my earlier comment that this pandemic has forced the traditional retailers to get in the game. And they have been very surprised both on the volume, the profitability, and their ability to do business online if they were forced to.
And our next question is from Bob Drbul with Guggenheim. Your line is open.
Hi, good morning. I was just wondering if you could give us a little bit more color in terms of the commodity cost, input costs, how if you were opportunistic with some of your buys over the last few months and just sort of how you're positioned. I think you said there should be some benefit in the Q3, but just the duration of the input costs and commodity costs that you're positioned for the remainder of the year?
Absolutely, good question. So as we think about commodities, generally the way our contracts and our relationships work is we have anywhere between the 30 to 60 day lock as it relates to future purchases. So with that as a backdrop is I would anticipate in the Q3 somewhere between $4,000,000 to $5,000,000 of upside on a year over year basis.
Great. Thank you.
Our next question comes from the line of William Reuter with Bank of America. Your line is open.
Hi, this is Mary on for Bill. Thanks for taking my question. You previously implemented cost savings that were expected to generate $300,000,000 of savings. Are you still moving forward with those given your strong results? And had any of those actions been taken before demand really picked up?
Well, yes, I can give some of that. Some of those actions were taken and then immediately reversed. As I think you can probably tell from the prepared remarks, going into this, we thought we had a pretty tough road in front of us. We're very aggressive in getting our cost down. By the time we got our cost down, we realized, oops, we need our cost to get up.
We need people. We need advertising. And the majority in fair price, the majority of those cost reductions were almost immediately reversed. And now we are in the growth mode. We're probably in the market hiring somewhere close to 600 to 700 incremental people to staff new operations.
So probably that would be a different business plan than we found ourselves in. And when we did roll that out, we did say that those costs were, quite frankly, costs we didn't want to cut. And so actually, we're happy that we did that we've got to spend those spend that money, brought people back from furlough, and now are in active growth mode.
The only additional thing I would call out in the prepared material, we did indicate that suppliers or our customers are our number one priority. So in order to make sure that we get the supply where it needs to be is that we are investing from a cost standpoint to make sure that is satisfied.
And our last question comes from the line of Seth Basham with Wedbush Securities. Your line is open.
Hi. I was just hoping that you could touch a little bit more on capital allocation.
Obviously, you brought down your target leverage ratio,
But remind us what the restrictions are as it
relates to share repurchases and how you're thinking about share repurchases going forward here.
Sure. We have Board authorizations for a large amount of share repurchase. I don't remember the exact number, but we can look it up. But we did put a kind of a safety net loan in the 2nd quarter to put some additional liquidity into the company. It's a 3.64 loan.
And in that loan, we agreed not to buy stock back until we paid back that loan. Quite frankly, we're probably not going to need that loan. In fact, we're not going to need that loan, but it's still outstanding. So before we could buy stock back, we would need to pay off that, was it $304,000,000 $200,000,000 $200,000,000 $200,000,000 loan and then we would be back in the game if we chose to buy stock back.
Thank you. I'm not showing any further questions. So I'll now turn the call back over to Scott Thompson for closing remarks.
Thank you, operator. To the over 7,500 employees around the world, thank you for what you do every day to make the company successful. To our retail partners, thank you for your outstanding representation of our brands. To our shareholders and lenders, thank you for your confidence in Tempur Seeley's leadership team and the Board of Directors. That ends our call for today.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.