I would now like to introduce your host for today's conference call, Ms. Aubrey Morie Van Cien, 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 questions. Forward looking statements that we make during this call are made pursuant to the Safe Harbor provisions of the Private Securities and 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 2018 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. The company's quarterly reports on 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 obligations to update any forward looking statements. This morning's commentary will include non GAAP financial information. The press release contains reconciliations of these 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 presentation. We have posted the press release on the company's investor website at investor.
Temperssealy.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, it is my pleasure to turn the call over to Scott.
Thank you, Aubrey. Good morning, and thank you for joining us on our 2018 Q1 earnings call. A few minutes, Bhaskar will review our quarterly financial performance with you in detail. I would like to reflect on the progress the team has made in resetting the foundation of the company following the termination of our supply agreement with Mattress Firm approximately a year ago. I'm very proud of what's been accomplished as an organization in the face of an unexpected challenge.
While there's still more work to be done, I'd like to highlight 4 key items. First highlight is that we are making progress balancing our distribution model. Our primary focus will always be 3rd party retail distribution as the vast majority of consumers still prefer to try out mattresses in well run local stores before purchasing. However, with the termination of our supply agreement with Mattress Firm, our domestic doors declined by 3,500 locations, leaving us gaps in our retail network. We have worked to address this issue in 2 ways.
1st, we've bolstered our relationship with supportive retail partners, and those retailers are enjoying success with higher ASP and strong closing rates. 2nd, we've begun to fill some of the more significant gaps in our retail network by selectively opening our own stores. This quarter, we opened 16 new Tempur Pedic stores, bringing our total North American store count up to 29 at the end of the quarter. These stores are performing ahead of expectations. And based on our early analysis, we believe they are generating incremental sales and likely increasing Tempur Pedic's brand awareness in the local market, which should aid all retailers.
As I've mentioned before, each of these high touch customer focused stores are designed to have about the same economics to us as 20 Mattress Firm stores. Additionally, as certain consumers prefer to shop from home, we continue to be focused on enhancing our online business to enable us to be everywhere customers want to shop. As Bhaskar will highlight in a minute, the result of our efforts in North America drove a 29% growth rate in our direct to consumer business. Today, we have a more balanced distribution footprint in North America than we did 12 months ago, led by a diversified group of strong retail partners and support by a growing direct business. While I'm pleased with our initial progress on managing this balanced omnichannel approach, this transformation doesn't happen overnight and we still have a ways to go.
The second highlight is that we have meaningfully enhanced our product portfolio in North America, further elevating our brands in the marketplace. Our new Sealy Hybrid line has been successfully launched and very well received by our retail partners. It is performing above our expectations. In recent weeks, we have begun to roll out our entirely new Tempur Pedic bedding system, including Adapt and Pro Adapt mattresses, a refresh line of pillows and a whole new family of adjustable bases. As a reminder, the Adapt and Pro Adapt models represent the first phase of our all new Tempur mattress rollout, phase of our all new Tempur mattress rollout, with the new premium models set to be introduced in late 2018 or early 2019.
The new Tempur Pedic products have been well received by our retail partners, and to date, orders have been strong and in line with our expectation. The third highlight is the solid growth we have seen in our international business. International sales grew 17% and on a constant currency basis 8%. We realized growth on a constant currency basis in all three major geographic areas: Europe, Asia Pacific and Latin America. As a reminder, in 2017, we launched new Tempur Pedic products internationally.
Our growth this year has been driven by the success of the 2017 rollout. The 4th and final highlight I'd like to cover, the resilience of our gross margin. This quarter, our gross margins were meaningfully impacted as compared to Q1 last year by the operating deleverage associated with the termination of Mattress Firm Business, which was heavily weighted towards higher margin Tempur Pedic products. We also absorbed $12,000,000 of commodity cost inflation during the quarter as our price increase did not take effect until mid March. Despite these significant headwinds, our gross margins were consistent with the Q1 last year.
With the Mattress Firm comparison period behind us and our new Tempur Pedic product launching, we expect to drive EBITDA growth in future quarters. While it's been a challenging 12 months for the team, we have put our company on a stronger footing with a diversified third party retailer base, a rapidly growing direct to consumer business and enhanced product portfolio. We believe that supporting our strong portfolio of brands with significant advertising spend, properly servicing customers, launching innovative products, manufacturing them effectively and making them available where the consumers want to shop is a winning strategy and the path to creating meaningful shareholder value over the long term. With that, I'll turn the call over to Bhaskar to walk us through the Q1 financial results.
Thank you, Scott. Before going into details, a few key financial highlights from the Q1. Global net sales were $648,000,000 a decrease of $74,000,000 versus the prior year. Gross margin was consistent with the prior year at 41.3%. Operating margin was 8.3% of net sales.
And EBITDA was $83,000,000 Earnings per share for the quarter was $0.42 And lastly, I'm pleased to report there were no pro form a adjustments this quarter. Our leverage ratio was 4.3x. As we communicated on our last earnings call, we expected to be slightly over our target leverage ratio range of 3 to 4 times. Going forward, we expect to lower the ratio over time through earnings growth and debt pay down to be back within our target range during 2018. Then we expect to be in a position to consider other alternatives and allocations of capital, including the resumption of our share repurchase program.
My comments going forward on net sales will be excluding Mattress Firm from the prior year. I should also mention that we had a change in classification required by the new revenue recognition accounting standard that shifted royalty income to the revenue line, increasing net sales by $5,000,000 with the corresponding increase in expenses, resulting in no impact to EBITDA. This change in the accounting standard will impact our comparisons in each quarter this year. On a segment basis, sales in North America were consistent with the prior year, with Tempur increasing low single digits and Sealy being down low single digits. As we disclosed earlier, orders started out a little bit slow in January, but Presidents' Day weekend was solid.
Subsequently, the orders weakened. North America sales trends were unfavorably impacted by 3 factors. 1, a highly promotional environment in the quarter, including heavy discounting at Mattress Firm. It was our strategy not to follow short term follies to drive low profitability unit growth. This cost us some units in the quarter 2, continued weakness in certain department store accounts and 3, the planned transition of legacy products, including the sell off of adjustable basis with our retail partners.
As previously discussed, we expect a certain amount of noise during launches, and we believe this is this to be a temporary headwind as we start to ship new products. Our North American wholesale channel decreased 2% and the direct channel increased a robust 29% in the quarter. North American gross margin declined 90 basis points to 37.9% as compared to the prior year. This was driven by commodity cost inflation, fixed cost deleverage on lower unit volume and unfavorable brand mix. These headwinds were partially offset by improved channel mix, operational improvements and favorable product mix.
We expect the brand mix headwind to lessen starting in the second quarter as new Tempur products ship in North America. North American operating margins declined 330 basis points to 11.1% as compared to the prior year. This was driven by operating expense deleverage, including startup expenses associated with store openings and the change in gross margin. As a reminder, we opened 16 stores during the quarter, which have some start up expenses and have a bit of a ramp up period, both of which are short term headwinds to operating margin. Turning to our International segment.
On a reported basis, net sales increased a very robust 17%, and on a constant currency basis, sales increased a solid 8%. On a reported basis, the wholesale channel increased 18% and the direct channel increased 12%. As Scott mentioned, all geographies were up on a year over year basis. International gross margin was 51.5%, similar with the Q1 of 2017. International operating margin declined 260 basis points to 16.5%.
This was primarily due to a significant investment in advertising in Germany and Asia Pacific as well as the modest impact from the change in the accounting standard. Now turning back to the company's global performance. Operating income was $54,000,000 and included investments in advertising and expansion of our company owned stores around the world. I'm pleased to report after normalizing for the termination cost in the prior year as well as the change in the accounting reclassification mentioned earlier, our operating expenses were essentially flat. EBITDA was $83,000,000 down $38,000,000 from last year.
EBITDA was impacted by fixed cost deleverage, increased commodity cost and lapping the $9,500,000 one time payment by Mattress Firm in the prior year. This was partially offset by favorable channel mix and operational improvements. The tax rate was 30%, interest expense was $23,000,000 and EPS for the quarter was $0.42 Now moving on to the balance sheet and cash flow items. As planned, we used operating cash flow of $10,000,000 in the Q1. Cash cycle was unfavorable by 4 days versus the Q1 of 2017.
This was principally driven by higher inventory levels to support the launch of our new Tempur Pedic products in North America. The Q1 is normally our high watermark for debt during the year and at the end of the Q1, net debt was $1,800,000,000 Today, we reaffirmed our 2018 adjusted EBITDA guidance of $450,000,000 to $500,000,000 Before I turn the call back over to Scott, I wanted to flag a few items for modeling purposes. For the full year 2018, we currently expect D and A of $110,000,000 to $120,000,000 CapEx of $65,000,000 to $75,000,000 and interest expense of $90,000,000 to $95,000,000 We expect the tax rate to be between 26% 28% and a share count to be 55,000,000. And now I'll turn the call back over to Scott.
Thank you, Bhaskar. Great job. Now turning to our long term corporate initiatives. 1st, developing the most innovative bedding products in all the markets we serve. As I mentioned previously, in North America, we launched our new and improved Sealy Hybrid product and are currently launching our full lineup of new Tempur mattresses, pillows and bases.
We invested heavily in these new lines, both from an R and D standpoint and in terms of higher quality components to deliver true quality to the marketplace. The new CL Hybrid line has a substantially improved feel and aesthetics, which is resonating with both retailers and customers. This product launch is the 3rd and final piece of our North America Sealy master brand offering, which was introduced last year to simplify the selling process for retailers and to drive improved product quality and efficiency. The new Tempur Pedic product have just started launch in April and feature Tempur APR, advanced pressure relief technology, a breakthrough formulation that we've been working on for over 3 years. The new improved Tempur material delivers 2 times the pressure relief benefits of ordinary memory foam, while also unlocking a broader range of fields for the customer.
While the rollout is still ongoing, the initial response at retail where the new Tempur Pedic products have been floored has been outstanding. Many of our retail partners consider it to be the best Tempur Pedic product in the company's history. The second long term initiative is to invest significant marketing dollars to promote our worldwide brands. Our direct advertising spend was up worldwide as we support our brands and retailers. This year in North America, we have phased the weighting of our advertising spend towards the latter part of the year in order to drive customers into the market.
At the same time, our new Tempur Pedic products will be widely available. We expect for the full year, total direct advertising spend will be up versus 2017, demonstrating our commitment for the long term. 3rd long term initiative, to optimize worldwide distribution to make sure our products are properly represented in all channels. We're letting customers choose where they want to shop and are not trying to influence which channel they choose. That means our products need to be available through every distribution channel.
As we mentioned earlier on the call, we are making progress advancing our 3rd party retail relationships, but are also focused on offering a premium shopping experience through our company owned stores as well as growing our online presence. This omnichannel strategy will create a company that is better positioned to succeed in the future. We'll be more diverse and be better able to control our brand story and have a closer relationship with our customers. Our last initiative is to drive increased EBITDA. With the anniversary of Mattress Firm termination and a full suite of new exciting products, we expect to begin to report increasing EBITDA going forward.
With iconic brands, some of the most innovative products in the mattress industry and a talented worldwide workforce, Tempur Sealy is well positioned to improve customers' lives and create significant shareholder value. Operator, will you please open the call up for questions?
Our first question comes from Bobby Griffin with Raymond James.
Good morning, Bobby. One moment.
And congrats on getting through the last challenging year over year comparison quarter.
Thank you.
I was just curious, can you maybe clear up some of the comments about the progression that you mentioned during the quarter? January started off soft, Presidents Day was better and then it kind of tailed off after that. Is that how the quarter ended? Or is that or how should we think about how it played through after Presidents Day?
Yes. Kind of ground everybody. As we said on the year end call, and I think it's consistent with what other industry participants have said, January was soft. Then we went into Presidents Day weekend, and it was solid. And we said that on the earnings call at year end.
And then it tailed off. And you heard me talk about before, we hit these kind of air pockets on sales, and it was slow. Then towards look towards the end of the quarter or really more into April, things have picked up. And I think that's also consistent with what I've heard from some other industry participants. So I don't know some of it was probably promotional activity in the marketplace.
Some of it was clearly some weather, which we always hate to call out that we had Q1. But in the Q2, the order bank looks very solid going into the Q2.
Thank you. Our next question comes from Bob Drbul with Guggenheim Securities.
Hi, good morning. I guess just on the distribution plans, ex Mattress Firm with those guys being out of the equation, you talked about the department store channel. You've had some issues with one of those or 2 of those. Can you just talk about the relationship that you have today with various department stores? And just in terms of like trying to replace the door count at the Mattress Firm, where the opportunities lie for
Sure. There's a couple of questions in there, but let me see if I can kind of address them. I mean, first of all, just relationship wise, very strong relationship with the department stores. They're very important to us. They're very good customers.
And from a relationship standpoint, I would say that in all the department stores, we have a very good relationship. What we're feeling and what you're pointing out in the numbers is some of the department stores are having some traffic issues and some sales issues and they're closing some stores and they're dealing with their reality. And that has created some pressure on our numbers. So that's not a relationship issue. That's just what I'll call it we'll call that a brick and mortar retail issue.
Your second question that was embedded in there is, what are we doing to replace those doors? We do have some people who are setting up some new distribution. We call them greenfielders. They're opening up some new stores. We're obviously opening up some of our own Tempur Pedic stores, but we're looking and we're doing some online direct to customer through the online.
But we're also working with the other brick and mortar retailers to increase velocity of our slots as we look to see where those customers who are migrating from, we'll call it, closed department stores, where that business is going. Consistent with our strategy is we're really following the customer and making sure our product is properly presented everywhere the customer wants to shop.
Thank you. Our next question comes from Peter Kie with Piper Jaffray.
Hi, thanks. Good morning, everyone. Just a 2 part question on some of the product launches. So last quarter, you had mentioned you thought there'd be a $10,000,000 EBITDA shift out of Q1 into Q2. Wondering if you can frame up what that actually turned out to be?
And then secondly, there is some chatter on the Tempur DAP just having some very minor slight delays that could cause some flooring issues going into Memorial Day. Could you give us some color around that dynamic?
Sure. You were able to squeeze 2 questions into a 1 question call. I'm going to let Bobsker do the numbers, but let me talk about our launches. We had 2 launches. We obviously had the Sealy launch, the hybrid launch.
That was completed within the Q1. It's gone very well. And the Sealy hybrid is performing over our expectation. The other launch is the Tempur launch. And as I called out at the end of the Q3, if my memory serves me, that the Tempur launch was going to be large, complex, and that it would be kind of difficult from a modeling standpoint for a little while as we try to work through replacing all of the Tempur product in North America.
Again, one of the more complicated launches. Where I would give our Sealy launch an A and it is complete at this point. On Tempur, I'd probably give us a B. As you mentioned, there was a little bit there's a little bit of chatter out there. And we had a supplier capacity issue down in Tempur and that did slow the launch somewhat and disrupted a little bit.
But I call it minor and just to kind of frame it, where we had originally planned to probably be 80% to 85% floored by Memorial Day, I think we'll be more like 70% floored by Memorial Day. So we are it's probably going to cost us a little bit of sales activity in the Q2. But I think the important thing to really focus on in the launch is the quality of the product, which is very good. The response from the retailers who have it, it's been outstanding and more importantly customers who've bought it. But yes, there's a little bit of indigestion.
But to be frankly honest, probably from our perspective, not unexpected. And that's why I called out in the Q3 how big and how complicated this launch would be. So overall, I'm going to give us a beat on the Tempur launch. And Bhaskar, you want to go on the question on the 10,000,000 that was talked about earlier?
Absolutely. Just building off the launch discussion, anytime you have a significant launch, there is going to be a certain amount of noise that happens from a quarter and into another quarter. So what we experienced in the Q1 is we did experience the impact associated with the transition. Now as I step back from it is we will not understand the full impact until I get out of the Q2. However, that said from a magnitude standpoint, it's not going to be any larger than what I previously communicated was $10,000,000 of EBITDA out of Q1 into Q2.
Thank you. Our next question comes from Laura Champagne with Loop Capital Markets.
Good morning. Just wanted to ask about what's happening in the retail channel. It looks like Macy's pulled Tempur out of their lineup. Is that a negative impact for the rest of the year? And if so, could you help us quantify that?
No. First of all, you're accurate in your comment is that they are not selling Tempur at Macy's currently. They did not sell very much Tempur, to be frankly honest. And that would be immaterial and insignificant to the company. And what they're replacing those slots with are more productive SKUs, which will include some
Operator? Our
next question comes from Brad Thomas with KeyBanc Capital Markets.
Thank you.
Yes. Hi. Good morning. Can you guys hear me?
Yes.
Sorry. Yes, you guys died out a bit, I think, on the last question there.
Excuse me, did I get an answer in on that question or did I go silent?
You went silent about halfway through it. So maybe you want to answer that question first.
Yes, let me answer that question first so that we don't lose that question. The question related to Macy's and Tempur. Macy's has moved away from Tempur. They didn't sell much Tempur historically. In fact, it's relatively insignificant for them and for us.
And in looking at the productivity of their slots, they're going to move in another direction, which will include some Sealy beds. So we're very supportive of what they're doing in that area. And again, I don't think it's material one way or the other to Tempur Sealy.
Great. Thanks, Scott. And so my question was just on the Tempur and the Sealy brands. If you could just give us a little bit more color about how each of those performed in 1Q and how you were thinking about the trajectory of those brands as we moved into 2Q and the back half of the year?
Sure. Obviously, there was a lot of noise in the Q1 between we still had Mattress Firm numbers out there. We had highly promotional environment, driven by kind of a wounded retailer. Quite frankly, probably our media mix, we probably leaned a little heavy into digital in the Q1. We spent all the money, but we probably leaned a little heavy into digital and probably need to lean a little bit more on television.
So there's a lot of stuff. And of course, we got a launch going on. But just in general, the Sealy Hybrid has been probably one of the best products Sealy has ever launched, and we feel good about the Sealy brand overall. As we've talked about in the past, there is pressure on the Sealy brand at the below $1,000 We continue to feel that, and we're moving price point up and working at the high end, and we're so far working very successfully in that area. Just to touch briefly because we're kind of focused on North America and my comments are on North America.
I do have to give a call out to the international group. 8% growth constant currency is a big number, but I wanted to point out, if you take our Asian joint venture, which is primarily Sealy product and you are asking about brand. And if you were to consolidate our Asian joint venture, which again is mainly Sealy product, our international growth rate on the revenue line would be 12%. And so if I look kind of answer your question more broadly worldwide, geez, that's strong. And so we feel very good there.
On the Tempur side of the house, again, obviously, internationally, we're benefiting from the 2nd year launch of the new Tempur product internationally, and I called out the international numbers just a second ago. We came off a 19% growth rate in the 4th quarter. And then in the Q1, look, it's a little slow. We were a little light on the revenue at wholesale. But again, in the promotional environment we're talking about and with the merchant with the mix changing and the floors changing, it's pretty hard to get much of a read there.
So I think in general, we feel very good, but I expect going forward from probably the Q2 on that Tempur will be more of the story, because we've made significant investment in new product. And I would expect for the next couple of years that Tempur is going to be probably the big story between the two brands. But I think Sealy is going to be solid.
Thank you. Our next question comes from Carla Casella with JPMorgan.
Hi. Some of my questions have already been answered, but can you just talk about you mentioned the gross margins in the U. S. And the puts and takes in terms of the increased cost. Can you just give a sense for how much of the gross cost increases are coming from transportation versus materials or any kind of parameters, what percentage of your COGS are transportation or steel or any of the key materials?
Sure. I'll let Bhaskar kind of go through that in detail. But look, we are real happy with the gross margin performance considering the headwinds that we had in the quarter. And you mentioned a couple of them, transportation for sure and commodities. And we had to eat those costs before our price increase really came in to help offset them.
But Bhaskar, you want to help or kind of
Sure, sure. So as we think about commodities, as we called out, we experienced commodity cost inflation in the quarter and that we did put pressure on the gross margin line, both from a Tempur Sealy and as well as international. We called out approximately $12,000,000 impact in the quarter from commodities. And as we think about the rest of the year, if I were to digress for a moment, is that the industry typically has been very successful at passing along commodity cost increases in the form of price with a bit of a lag. As we now turning back, as we talked about commodities for the full year going into the year, we quantified it in and around 30,000,000 dollars And as we sit here today, we have seen commodity cost inflation, and we're thinking about it more in the $45,000,000 range.
So we've seen a bit of an increase. But now turning back to what I led off with is that as we always do when we face these type of conditions, we are evaluating price.
Yes. I'll just kind of add on a little bit there. What we're seeing right now in commodities and really in all the areas, I think it's very likely that the industry is going to need another price increase before the end of the year.
Thank you. Our next question comes from John Pfau with Stifel.
Good morning. And I guess, Scott, maybe following up on that inflation question. So you've seen an escalation, I guess, of $15,000,000 in now the input inflation forecast. I guess and I think if I'm not mistaken, Sealy raised prices in March and with the launch of Tempur, there's the plan to capture margin or pricing, I guess, through that. So, clarification, if I understand that right, how has the Sealy price increase gone?
SSB is not doing well from what we hear. I'm just curious how easy or difficult. I know pricing is never easy, but it's going to be prospectively as well as what you've seen so far year to date. Thank you.
Sure. First of all, let me confirm, what you said is basically accurate that Sealy took pricing on a like for like basis. And in Tempur, there's some embedded pricing in the new launch product, which is not inconsistent with normal strategy. You asked about how did the Sealy pricing go. Look, it went very well.
We got pricing everywhere. And you're right, it's never easy. But as you remember, we ate quite a bit of commodity costs before we went to the retailers and pushed a price increase through. And our position is, look, when commodity prices come through, we will try to offset them with efficiencies. But there's at some point, we need to pass them through.
Others in the industry, from a component standpoint, also pass through price increases. And so I think that went fine. As far as you mentioned a competitor and how their price increase went, I'm not familiar with how their pricing went or what their pricing strategy is or what their issues are. So can't really comment on that. But from our standpoint, pricing went in very well.
And relatively speaking, I would say probably not easy, but very well. The other thing I'd point out on this the commodity issue is that although we're not thrilled about having it and having to deal with it, I will tell you that I think Tempur Sealy, based on our size and our expertise in this area and our contracts with our suppliers, we are in the best position probably in the industry to deal with it. And so from a competitive analysis standpoint, I think we're actually we're in better position than certainly bed in the box companies and certainly smaller manufacturers because of the nature of our critical mass.
The one thing I would like to highlight is specifically on the Sealy side, the price increase went into effect later in the quarter. So we'd expect to see a better a bigger benefit of price as we progress through the year.
Thank you. Our next question comes from Seth Basham with Wedbush Securities.
Thanks a lot and good morning. Good morning.
My question is on the sales outlook. I know you don't provide specific guidance as it relates to sales. In North America this quarter ex Mattress Firm, you're flattish. How should we think about your ability to drive volume and drive top line for the balance of the year?
Yes. I mean, first of all, I mean, just as background information, one of the reasons we don't give sales guidance is because it's very volatile. And I've kind of walked people through that at times that sales can be up or down literally 25% to 30% in a given week. So it's difficult from that standpoint. And then it's a little inconsistent with our strategy, which is to manage contribution profit.
If you just want to generate top line, it really is not that difficult. It's just called discounting and promotion. And that's not consistent with our strategy. So we have a tendency to focus on the net contribution as opposed to the top line. Having said that, okay, and kind of hedged those words, when I look across the world, clearly, the international group is performing well with new products that was launched last year.
The worldwide economy feels generally pretty good. There's a country here or there that we're watching closely. But in general, worldwide, the consumer feels pretty good. We've got a hot product in Sealy with the hybrid. We've got some pressure below $1,000 which we've talked about.
And then we've got the main asset in North America with new Tempur product coming, and we would expect that it will overperform last year's Tempur product. So we'd expect that to be some sales growth. But having said all that again, in the framework of our strategy, which is, we're not going to go out and buy business. And in a highly promotional environment, at times, we might lose some units, if people want to do, what I'll call, irrational pricing. So I can't really tell you more because I really don't know what some people's pricing policies are going to be going forward.
And that's primarily pointed at a large retailer who's been very promotional, this year.
Thank you. Our next question comes from Curtis Nagle with Bank of America Merrill Lynch.
Great. Thanks very much for taking the question. Just wanted to follow-up a little more on North America gross margin. So, I think I see it. Going forward, as you'd mentioned, you're going to have pricing offsetting commodities.
You should have leverage or unit leverage with firm no longer in the comparisons. The launches of the hybrid, Tempur, pillows, all that stuff that should be accretive. And then a direct business, which at least on a store basis is much larger and by your comments is extremely profitable. I guess why couldn't or why shouldn't this lead to significantly better gross margins through the year and beyond?
Okay. Let me help on one of those and I'll let Bhaskar clean it up for me. As I listen to your list, I ticked them off, yes, I agree, I agree, I agree, except for 1. Remember on the Tempur brand, we're launching the low end first, okay? And so to the extent that the low end one is successful, there's going to be a merchandising natural merchandising mix pull down because the new product, because we're launching the low end would have a lower margin.
Then as we've talked about before, there should be some cannibalization from the higher end Tempur product into the lower end product until we get what we call the Tier 3 and new Breeze out, so that you've got the full suite of products on the floor. Those will be coming late Q4, early Q1. So you're going to have a little bit of merchandising mix pressure in the Tempur brand as we because of the pacing of the rollout.
Do you
think it's possible to do that? No, I will
those are the right items. Only other item I would like to highlight is from a brand mix standpoint, Tempur versus Sealy. We would expect that Tempur grows faster than Sealy and therefore get some positivity across the North American gross margin profile.
And you'd have a little bit of lag time possibly on price adjustments and commodity hits.
That's correct.
So other than that, what he said would be positive to margin. Correct.
Our next question comes from Keith Hughes with SunTrust.
Thank you. Lasse, you gave some good commentary on raw materials moving forward. I just want to clarify the $45,000,000 Is that a price cost mix number? And what quarter do you think where you stand today that will sort of peak out as a negative for you?
I think if I understood the question, you're asking kind of what is the $45,000,000 And correct me if I'm wrong, Bhaskar, I believe that's the negative impact on this year's EBITDA. Correct. That was a modest. And it's not a net number. That's a gross number before any pricing adjustments, right?
Correct.
Correct. And as we pointed out, it's about a $50,000,000 increase. As we originally thought about it, what we would expect is that we would see the peak in the Q1 and it would tail off thereafter. However, where we're sitting at today is that we would expect the peak to happen sometime during the summer and then flatten out thereafter.
Thank you.
Our next question comes from Carlo Casella with JPMorgan. One moment. Your line is now open, Carla.
Sorry about that. I just had a question on the inventory levels in the channel and given retailers closing stores, are you have you worked through that or could we see some additional bad debt expense or adjustments to inventories as the department store inventories work their way down?
Yes. I'll let Bhaskar help me with it. But I'm not expecting any significant bad debt relative to retailers worldwide as I sit here right now. And retailers who are closing stores generally would not have any significant inventory to work through. The inventory that we do have to work through though are the old floor models of Tempur in what I'd call kind of the natural launch issue is they've got to sell off some of their floor models.
And you usually have some delay in what are new Tempur sales as retailers are having to naturally sell off the old product line. That'd be the only inventory issue that I can see near term. Anything else possible?
I would agree. I mean, generally, we do a good job at managing our exposure as it relates to credit risk. I don't see anything out there that I'm overly concerned about. And just reiterating your point on inventory at our retailers. So nothing more to add there.
Our next question comes from Michael Lasser with UBS.
Good morning. This is Atul Maysuri filling in for Michael Lasser. Thanks a lot for taking my questions. So your new store openings accelerated significantly this quarter. I'm just wondering what's going to be the likely cadence for the rest of the year?
And more longer term, where do you see your store count evolving over the next few years?
Great. Thank you for the question. You're right. Probably the new our stores probably we opened a few more than we probably expected to this quarter, but the team has done a good job of finding the proper locations. To kind of ground everybody, the plan was to open about 40 stores this year, pause, look and make sure that the stores are performing as expected.
And when I say performing as expected, that's, of course, based on sales and EBITDA. But it's also a detailed look to see where those sales are coming from and seeing how impactful the stores are to our other customers. And we've carefully selected the sites and carefully devised the business plan for those sales to be incremental and not cannibalize other retailers. And I think the 2 things I'm excited about is, 1, the stores that are open. And I think we are probably we probably have 30, 31 stores open today as I sit here.
The stores are performing on an EBITDA and sales basis above our pro form a. But also, I mean, just as importantly is that when you go through and look at the sales of other retailers in the areas where we sold stores, quite frankly, they have performed better than in markets where we have not had the stores. So that is giving us some more confidence that these sales are incremental and not cannibalizing, and that's something we'll continue to watch. Having said all of that, probably the 40 store pause, as I've talked about in the past, that pause will probably be pretty short because we're not seeing any issues relative to personnel, finding good locations, cannibalization or anything else. So we'll probably be north of our 40 store opening by the end of the year, and then we'll continue to look at it.
But again, I don't think this particular channel is a huge number of stores. What we're looking for is some iconic stores that will drive brand awareness and give us some footprints into markets that we're not performing as well as we would like to. And so I think maybe by the end of the year, maybe the number is 50 stores and maybe we do maybe another 25 or something next year. But those are very soft numbers, again, dependent on the performance of the stores, both from an EBITDA standpoint and where we believe the sales are coming from.
The only incremental thing I'd like to highlight there is, as you pointed out, we did open 16 stores during the quarter, and we did incur approximately $2,000,000 of startup expenses associated with that. And I would characterize that startup as just the get up and go type of cost and also the ramp associated with sales before they get up to full speed. I would anticipate that impact to be we'll see a bit of that in the Q2, but then thereafter, it will normalize itself out.
Good call out, Bhaskar.
Ladies and gentlemen, that does conclude the Q and A portion of today's conference. I'd like to turn the call back over to Scott for closing remarks.
Thank you, operator. To the almost 7,000 employees worldwide, 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 Sealy Management and its Board of Directors. Operator, that ends the call for the day.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.