Good day, everyone, and welcome to the Tempur Pedic Second Quarter 2010 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Barry Hytinen. Please go ahead, sir.
Thanks, Elizabeth, and thank you, everyone, for participating in today's call. Joining me in our Lexington headquarters are Mark Sarvary, President and CEO and Dale Williams, CFO. 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 forward looking statements, including the company's expectations regarding sales and earnings, 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, competitive, operating and other factors discussed in the press release issued today. These factors are also discussed in the company's SEC filings, including the company's Annual Report on Form 10 ks under the headings Special Note Regarding Forward Looking Statements and 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.
The press release, which contains a reconciliation of non GAAP financial measures to the most directly comparable GAAP measure, is posted on the company's website attemporpedic.com and filed with the SEC. And now with that introduction, it is my pleasure to turn the call over to Mark.
Thanks, Barry, and good evening, everybody. Thanks for joining us tonight. Today, I'll provide a brief overview of our performance in the second quarter, an update on some of our strategic focus areas and a commentary on our outlook. Dale will then provide a detailed review of the Q2 financial results and will discuss our revised guidance. We're very pleased with the continued substantial growth in our North American business and we're also pleased with the improved performance of our international business, particularly on a local currency basis.
Sales were up 42% from last year and earnings per share were up 109%. Our focus on improving gross margins and operating costs also continues to be effective. Fixed cost leverage and our productivity program helped increase gross margin by over 200 basis points year over year to 48.7%. And we were able to increase our operating margin by 480 basis points year over year to 20.5%. These results build on our Q1 results.
And so, overall, we've had a strong first half of the year. As a result of this better than expected first half and continued good indications for the second half, we are raising our guidance for the full year and Dale will go into the details. We are doing this in an environment that is still quite unpredictable and we hear from many of our retailers that consumer traffic is still not back to normal. But we believe that seasonality is returning and that our share gains in the first half will be sustained in the second half. Now, I'll provide an update on some of our strategic focus areas for 2010 beyond.
Firstly, I'm very pleased with the progress we've made this quarter to ensure there is a Tempur mattress and pillow that appeals to everyone. As we've discussed before, our Softer line of mattresses, the Cloud collection, was designed to broaden our appeal. The Cloud Supreme continues to sell quite well and we expanded the rollout of the Tempur Cloud, the entry level price point mattress in the Softer collection. In the Q3, we will begin distribution of our high end soft mattress, the Tempur Cloud Luxe, and we're very pleased with the incremental floor space and sales from this collection. Internationally, we recently completed consumer research to size the market for a softer Tempur line in Europe.
While those markets generally skew firmer than the U. S, our research suggests a significant opportunity exists. We're commercializing a line of softer mattresses for sale in Europe and anticipate the initial rollout will begin early next year. The second strategic focus area that I want to discuss is our commitment to ensuring that everyone knows that they would sleep better on a Tempur mattress and pillow. This quarter, we increased our total advertising investment 53 percent to nearly $24,000,000 driven by the ramping of our Ask Me marketing campaign in the U.
S. This campaign focuses on one of the brand's greatest assets, the extremely positive referrals we get from existing owners. We also continue to work with many of our retail partners to incorporate our marketing message directly into their ad campaign. The Ask Me campaign has had an exceptional return on investment. Perhaps the best example of this is the sales performance of our former products.
Seasonally, our industry is normally down from Q1 to Q2. So, while we hope the cloud line would grow sequentially from the Q1 based on distribution gains, we did not expect this from our more established models. Yet many of our firmer mattress models experienced substantial growth on a sequential basis, which we attribute largely to our allocation of resources to sales and marketing initiatives and especially the Ask Me campaign. Following these compelling results, we will expand our investment in marketing during the second half, which we anticipate will help fuel our growth in the new year. Our 3rd strategic area is our commitment to ensure Tempa is available to everyone.
In both North America and internationally, the continued rollout of our new cloud and Sensation lines expanded our square footage at retail considerably. We're very pleased with distribution gains made by our entry level cloud mattress during the Q2. In addition, we made solid progress in Canada, where we are in the early stage of our market development plans. Since the beginning of the year, we've nearly doubled the number of doors we sell through in this key market. Over the ensuing quarters, we will focus our efforts on growing brand awareness and driving market share.
We see considerable growth opportunities in Canada over the next several years. Aligned with several of our strategic initiatives, including our commitment to ensure Tempa continues to deliver the best sleep, we utilize consumer research and testing. Recent examples of this have included the development of a collection and the Ask Me advertising. In the second half, we will be conducting a significant amount of strategic research in Europe and Asia. While the nature of this work will be kept confidential for competitive reasons, we want our investors to know this program is underway.
We believe the program will help us better understand consumer preferences in these markets and we expect it will have a meaningful impact on our long term growth plan. We will continue to invest in initiatives that will drive growth over the long term. So, in summary, we had a good quarter and we are expecting that we will have a good year. And before I hand over to Dale, I want to make a brief comment on some potential equity transactions by our executive officers. While plans can change, some of our officers intend to monetize a portion of their equity for estate and tax planning.
For example, I intend to enter into a plan that would sell up to 10% of my vested holdings on an annual basis, assuming some minimum stock price level. By its nature, this sort of financial planning is personal, but we do not intend to address
it further. With that, I'll now hand over to Dale. Thanks, Mark. I'll focus my commentary on the financials and our 20 10 guidance. In total, 2nd quarter net sales were $263,000,000 an increase of 42% over the same period last year.
Foreign exchange rates turned unfavorable during the quarter, such that on a constant currency basis, net sales increased 44%. North American sales were up 59% and international sales were up 10%. On a constant currency basis, our international sales were up 14%. By channel, in North American retail, net sales were $173,000,000 an increase of 64%. Our North American direct channel was up $7,000,000 or 72%.
Let me pause here and note a minor change to our channel reporting. Following the acquisition of our Canadian distributor on April 1, we are now reporting Canadian sales in the North American retail channel. Previously, sales to the Canadian distributor were reported in the 3rd party channel. In addition, since Canada represented the vast majority of all sales through that channel, we will no longer be reporting North American 3rd party. This change does not impact our international third party sales.
Internationally, retail sales were up 8% to $54,000,000 On a product basis, mattresses were up 44%, driven by a 42% increase in units. North American mattress sales increased 58% on a 61% increase in units. The 2% decline in average price reflects the impact of deeply discounted floor models related to our product rollout. As we projected on our last call, on a sequential basis, average price was up about 6% following the pricing actions we took in May coupled with fewer floor models. In the international segment, mattress sales increased 10%.
On a constant currency basis, international mattress sales were up 15%. International mattress units increased 14%. In total, pillows were up 16%, driven by a 15% increase in units. North American pillow sales increased 27% on a unit growth of 28%. International pillow sales were up 7% on a 4% increase in volume.
Sales of our other product line, which includes items that are normally sold along with a mattress, were up 53% in total and 77% in North America. This product line grew faster than mattresses driven largely by the pricing action we took last year when we upgraded our foundation and improved attach rates of our adjustable beds. Gross margin for the quarter was 48.7 percent, up 2 10 basis points year on year, but down 50 points sequentially. On a year over year basis, the gross margin improved principally related to increased production volumes to support higher sales, resulting in fixed cost leverage. And our ongoing productivity program generated improved efficiencies in manufacturing and distribution.
Partially offsetting these benefits were unfavorable geographic mix, new product introductions and higher commodity costs. On a sequential basis, our gross margin was down modestly, primarily related to geographic segment mix. As we have discussed before, our International segment is more profitable on a gross margin basis than our North American segment. Our 2nd quarter operating profit was $54,000,000 an increase of 85%. With significant sales growth, we drove over 480 basis points of operating expense leverage.
This is despite having ramped advertising spend as a percentage of revenue up 60 basis points. Our operating expenses were up modestly on a sequential basis, largely due to the absorption of our new Canadian subsidiary. Interest expense was $3,800,000 down $700,000 year on year. Our tax rate was 33%, up modestly from prior year, largely related to the growth in the U. S.
Net income was $33,500,000 up from $16,900,000 Given our improved profitability, EPS was $0.46 up from $0.22 last year. Now I'll turn to the balance sheet for a brief review. Our accounts receivable balance was up reflecting higher sales levels. However, DSOs were down 6 days from the Q2 of last year. Inventories were up $14,000,000 year on year consistent with our positive outlook for sales, yet down approximately 4 days from last year and last quarter.
We generated $45,000,000 of operating cash flow during the quarter and capital expenditures were $4,000,000 Our funded debt to adjusted EBITDA ratio was 1.88x, far below our debt covenant of 3x. Now I'd like to make a few comments about our share repurchase program. Through open market purchases, we bought back 3,000,000 shares during the quarter, fully utilizing the $100,000,000 repurchase authorization we announced in April. With Q1 activity, this brings our year to date buyback to 6,700,000 shares for a total spend of $200,000,000 We continue to view the share repurchase program as an excellent means to return value to stockholders over the long term. So we're pleased to announce our Board of Directors has authorized the repurchase of another $100,000,000 of the company's common stock pursuant to the program described in our press release.
We are currently targeting the net to EBITDA ratio to be between 1.5x and 2x. Now I would like to address our updated guidance for full year 2010. While our business continues to perform well, the macro environment continues to be uncertain. So we believe it is prudent to continue to use a relatively broad range with modest expectations for seasonality. We currently expect net sales to range from $1,060,000,000 to $1,100,000,000 And we currently expect EPS to range from $1.85 to $2 per diluted share.
We expect our gross margin to be up in excess of 200 basis points for the full year, driven by fixed cost leverage and our ongoing productivity plan, partially offset by geographic segment mix and a conservative outlook for rising commodity costs. As Mark mentioned, we think our advertising is proving to be very beneficial to sales and brand awareness. So we continue to plan for advertising spend to be slightly above 9% of sales for the full year. In addition, our projections include the strategic research Mark referenced. We expect interest expense for the full year to be $14,500,000 which includes the impact of our $100,000,000 repurchase in the 2nd quarter.
We anticipate the full year tax rate to be approximately 33%, up slightly from our prior projection, primarily related to the increased projections from our U. S. Business. We're using a share count of 73,500,000 shares for the full year. As noted in our press release, our guidance and these expectations are based on information available at the time of the release and are subject to changing conditions, many of which are outside the company's control.
This concludes our prepared remarks. And at this point, operator, we would like to open the call to questions.
Thank you. Ladies and gentlemen, the question and answer session will be conducted electronically. Our first question today will come from Chad Bolen with Raymond James.
Good afternoon, Mark, Dale and Barry. Hey, Chad. Hey, Chad.
A couple of quick questions. Dale, you discussed the sequential decline in gross margin, which I think was a little bit below your expectations on the prior call. And I think you attributed it primarily to geographic mix. Could you kind of maybe walk through some of the other puts and takes sequentially? Were there any incremental commodity price increases I think, relative to the one you had late in the quarter?
What other buckets were there sequentially? And then as we look ahead to the Q3, how should we think about some of those puts and takes?
Sure. As you know, gross margin has a lot of puts and takes. We had on the positive side ongoing productivity initiatives, a little bit less floor models. Mid quarter, we had a price increase. So we had a lot of positive things impacting gross margin.
On the negative side, we did get the price increase in commodities in late March. We didn't see additional price increases in the 2nd quarter, but basically the March increase was reflected in the Q2 outcome. So with all the puts and takes, the one the primary factor that easily explains the decline was the change in geographic mix. In the Q1, the U. S.
Business or the North American business was 66% of the total. In the 2nd quarter, it was 73%. We have said disclosed and told everybody that our international business has a higher gross margin than our domestic business. But I think one positive is, as we look at our U. S.
Business, we saw this business continue to improve its gross margin in the Q2, such that the U. S. Gross margin is now just marginally below the company average and the international business and this is if you adjust for royalty, which doesn't affect the overall company. And the international business is a little bit above the company average. In the Q2, the international business gross margin was down a little bit, but the Q2 is a trough period for international business.
2nd quarter is always the worst quarter. So you have lower volume impact on the business. And obviously, FX turned very negative, which compounded the geographic mix in the Q2. From an outlook standpoint, as I said earlier, we expect for the full year for margins to be up at least 200 basis points, which would indicate improving gross margin trends for the rest of the year. Some of the key drivers there are getting a full impact of the price increase we took in the middle of the second quarter with continued growth, getting more fixed cost leverage, continuing to see the productivity initiatives deliver.
Even though the U. S. Business will continue to perform well since the Q2 is historically the trough quarter for our international business, we'll see the international business improve from a geographic mix standpoint. FX, who knows, but it looks at least right now like FX may have troughed in the second quarter, so that may slightly help in the back half in terms of the sequential basis, the geographic mix. But we do also expect on the negative side to continue to get in the back half of the year some commodity price increases.
But all those things combined mostly on the positive side of the ledger indicate that we expect margins to be better.
Great. That's very helpful, Dale. Thank you. And you did also acknowledge some uncertainty with regard to the macro outlook. Obviously, a lot of the data points that we've seen recently have come in below expectations, particularly with regard to either housing activity or confidence or things like that.
Can you give us it doesn't sound like it, but can you give us a sense of maybe how business progressed through the quarter? And did you see anything that would indicate a slowdown as the quarter went on? Or any feedback regarding July 4 holiday or what you've seen in Q3 to date? Or have things just been relatively steady for you guys?
Well, throughout the Q2, our business was pretty steady. Obviously, there's always a little bit of even within the seasonality of the year, there's a little bit of seasonality within the quarter. But taking that into consideration, the business performed very well throughout the quarter in the second quarter. And here on July 20, we're seeing the business continue to perform within our expectations that we use to set this guidance.
Okay. And 2 more quickies, if I could. With you guys now not at the upper end of the leverage target of 1.5 to 2 times, but getting a little bit closer to it. Should we think about the buyback going forward as maybe more cash flow or free cash flow driven in the next couple of quarters as opposed to maybe adding incremental debt? And then the other unrelated question, for what was Mexico the other piece of what was in the domestic third party?
And I guess where did that go? I think you said it doesn't affect international third party. Where do we see that going forward?
Yes. Let me answer those in reverse order. Mexico was the other piece of the 3rd party business in what used to be domestic. Mexico is de minimis, but really doesn't affect and it also is now being reported in retail because it is a retail business, but it really was a de minimis level compared to the U. S.
And Canada even. On the buyback question, yes, I mean, our target is to be 1.5 to 2 times debt to EBITDA levered at 1.88 here this quarter. I think a good assumption would be that on a go forward basis, more than likely the repurchase will be more along cash flow lines, at least for the time being, but that's still to be determined and we'll view that and determine exactly what our strategy is on that as time goes on. Great.
Well, thanks guys for taking my questions. Congratulations on another great quarter and good luck to
you for the rest of this year.
Thank you. Thank you.
Our next question will come from Mark Rupee with Longbow Research.
Hey, guys, great quarter. Dale, as it relates to the productivity plan, I know it's 4 years, it was 700 basis points was the target and the inherent oil assumption, I believe, was 150 a barrel. Given that we're a few years into that, any update on that? Just trying to get a sense as we approach 50%, that was the original objective to get back to. I have to assume where oil is today that an above 50% gross margin would be very achievable.
Just curious to see what your thoughts are on that?
Yes. I'll give part of the answer and then I'll let Mark give part his view on it also. Yes, certainly, when we set the 50% target, we were sitting here as a business at about 43% in change in terms of gross margin. And so we were targeting for the productivity initiatives to deliver 700 basis point improvement without oil contributing. Obviously, the commodity prices are much lower than they were in 2,008.
That's partly why we're approaching 50% much faster than we thought we would. But from a long term outlook standpoint, where we the 50% target was a long term target, we do expect commodity prices to go up over time. So another 2, 3 years out, maybe commodity prices are back where they were in 2,008. Does that mean that in the interim, it's possible that we could go over 50%? Yes, that's a scenario that is possible.
But as that approaches and what we had said all along was if we got above 50%, we would look strategically at what the right answer was. We haven't changed that position, but it is something that we will continue to evaluate and determine strategically what we should do. Should we allow it to continue to go up? Or is there a time to say that's going to reinvest the excess into the business? Mark, you want to add anything?
Yes. I mean, I think that is the key. The thing is from time to time, depending on what oil prices are in a given quarter, we could bounce around above and below. But in the long term, for our long term planning, we've used 50% as our target because we believe it's an appropriately good level. But if we find ourselves systematically being able to be above it, we will reinvest that in whatever way is the best way.
And you can from the most obvious way is improving what we offer the consumer for the same price. And there are obviously, there are other things we can do. But that's our plan and the way that we've built our strategic plan as we look forward over the next 5 years is based on the idea that we'll take time to get to 50% and then we'll hold it at that level. Okay, perfect.
As it relates to the Cloud Luxe, how should we kind of view that launch here? Is it a different buyer than the Supreme and the entry level cloud in your perspective?
I mean, I think that the answer of course is yes and that it's a significantly more expensive mattress and that is a major segmentation ban. But it is part also of the whole soft mattress concept, which is what cloud is, which was appealing to the other 50% of the population who don't who prefer a soft mattress versus a firm one. And I would say that from the beginning, we've described these 3 mattresses as good, better, best and this one is the best. As we first initially estimated, we thought that we'd get essentially 2 extra slots per store when this was fully rolled out. We think that could be a little bit conservative right now.
But that's what we were aiming for, thinking about it as a that the average store would have 2 of these items. So and clearly, that would mean that they're different users. So I do think it's clearly it brings in additional users, otherwise it wouldn't justify its place on the floor. Clearly there is a degree of cannibalization of any 2 products. But when you only have when you had no products that were softer, now you have 3, there is a degree of trade off between them.
Okay, perfect. And then as it relates to the sensation, I know there's been talk at least in the past about possibly bringing that product to the U. S. I know you've got a lot on your plate right now with taking cloud internationally as well. But is there any kind of window where you'd like let's wait here, let's see how the cloud rolls out and not kind of throw it on the heels of the cloud success?
Or would you potentially capitalize and bring the sensation here sooner rather than later?
Well, we don't want to talk about obviously, we can't talk about launches before we've committed to until the time is right. But the thing I will say, which is you can tell from my comments is that we are very we're being we are trying to be quite thoughtful about leveraging the learnings and the developments we have in each part of the world and every other part of the world. So that's why we are testing versions of the cloud, as I said, in Europe right now. And you can imagine that things that are being developed in Europe might well be tested in other places in the world too. And that is and not just that, I think we're going to increasingly coordinate development as we go forward, so that we're making products that have as broad of an applicability as possible.
So there's nothing to announce at the moment. But the principle of what you're implying is very is right down is exactly what we are doing. Okay, perfect. Good luck, guys. Thanks.
Thank you.
We'll now hear from Brad Thomas with KeyBanc Capital Markets.
Thanks. Good afternoon and let me add my congratulations as well. Mark, just wanted to follow-up on your comments about how you noted that the former models had posted, I believe you said, substantial growth during the quarter. Could you just share a little bit more color about what it was that you saw, how you try and back out whatever cannibalization that you think you may have generated from the cloud rollout? And what is it that gives you conviction that it's perhaps advertising campaign rather than just the cloud really being a totally different product or the overall market perhaps being stronger?
Yeah. Well, as I said in the comments, as I'm sure you know, in the mattress industry, in general, the Q2 in the U. S. Is smaller than the Q1. And we had anticipated that that would be the case for our base business, but we had anticipated that the cloud because it was new and because of the rollout that we would have the cloud we had expected in our plan that the cloud would grow sequentially quarter on quarter because of this newness and the rollout.
But we had expected that as normal, the rest of the business would have a small diminution in the Q2. And as I said, cloud did grow, but so did the rest of the business. If you look at the and it's hard to do it exactly, but if you look at the data for the industry as a whole and you compare the Q2 with the Q1, you can see that overall the industry was at best flattish quarter to quarter. So the fact that our non cloud business was up indicates that it was benefiting from more than simply seasonality or simply industry the industry environment. So that is it is good news.
And I mean, from a cannibalization point of view, clearly, there is a degree of cannibalization, but we are quite pleased with how low, relatively speaking, the cannibalization is.
Yeah, this is Dale. Let me just add a point there. Mark said, if you look at the Q1 versus the Q2 from an industry standpoint, obviously, that's using ASPA data and the Q2, you only have 2 months. So if you look at the 1st couple of months of Q1 compared to the 1st couple of months of Q2, the Q2 is showing kind of normal seasonality where the 1st 2 months of Q2 are slightly down from the 1st 2 months of Q1 for the ISPA sample. But our business did very well in the Q2.
So we didn't see the normal seasonal pattern in our overall business or in our core business, which we expected to see.
Okay, great. And then just to follow-up on some of the questions about margins from sort of big picture standpoint. Last fall, I believe you outlined a longer term goal of 25 percent for operating margin for your operating margin. With I guess 9 months later, how should we think about that opportunity given the success that we've had in the cloud line, some of the updates in terms of productivity improvements and perhaps as you think about some of the mix headwinds as well?
Well, let me answer that first and then Dale will too. I mean, those numbers, the 50 and the 25 are our long term plan. They were made that we communicated them about a year ago and they remain our long term plan. That is the plan. The model as you know, our plan is based on the belief and the conviction frankly that we have a lot of potential growth because we have a lot of we have a product that is preferred by the consumer, but has a relatively low market share and so both in the U.
S. And internationally. And so our plan is predicated on the four elements of our plan to capitalize on that and to grow our business. And we believe that the key numeric metrics around which we hang it is the 50% growth and the 25% operating margin. And implied in that, for example, is the fact that we're going to spend 9% on advertising, which is baked into the plan, which builds toward what we believe is the optimal amount of spending.
And so the whole thing from a quarter to quarter or year to year because of things from price of oil to rollouts, you're going to see fluctuations. But the idea is that those two numbers are what we're working to for the foreseeable future.
Ken, I would just add that here we are 3 quarters after we rolled out that plan and we're feeling very confident in our ability to achieve it.
Okay. And then if I could just ask one last question on the on door count. Maybe if you could just give us an update of where you are in North America and international. And then, Mark, I know you talked about Canada. I don't know if we could talk too much about the door trends during the quarter overseas, but maybe you could just give us an update where you are.
I know you added Dreams in the U. K. Last quarter. It seems like there's still a great deal of opportunity there.
There is a good deal of opportunity. You're correct that the addition of Dreams was a very important part of the growth in the U. K, in Europe overall. And there are other customers that we expect to be announcing soon. Dale has got the precise numbers here, so I'll let him give them to you.
Yes. Domestically, we're right about 6,500, so up approximately another 50. I will add that in Canada, we have 400 doors now and that's not a number that we've reported before and we won't continue to report on an ongoing basis, but we'll fold that into a North American number and adjust our targets accordingly. But as Mark mentioned earlier, we have significantly expanded our distribution in Canada this year and are very pleased with that position. And now we just need to keep driving the increase in brand awareness and consumer knowledge of the product up there.
Internationally, about right about 5,150, which is up another 30 doors or so, principally from completing the rollout in the UK. But we do see significant opportunity, both as the year progresses internationally as well as long term internationally to drive substantial door growth.
Great. I'll turn it over to others, but congratulations again on a great quarter.
Thanks, Brad.
We'll now hear from John Bau with Stifel Nicolaus.
Thank you. Good afternoon. Congratulations. Hi, John. Hi, John.
Just quickly, Europe, we're reading so much about Europe. Could you give any color on any trends there positively, negatively?
Yeah, but I have to charge you for the advice. Look, we had pretty good growth in the Q2, 14% in our international business and Europe was consistent with the European growth. But there is the sovereign debt crisis happened in the middle of it as did the ash cloud and so on. So, there's a lot of confounding things going on in Europe. But frankly, as we look forward if you look at the detail from the quarter, there are some countries that have done quite well, some that have done quite poorly and some that we thought would do well have done badly and vice versa.
And it's sort of it is a mishmash and it seems to be quite it's still a high degree of uncertainty. So quite honestly, as we look forward, that is going to be one of the things that we will be sensitive to because it's not easy to predict. It hasn't the business, let's face it, we're up. We're up quite nicely. But it's just that it is if you look at it from country to country, there's a very high degree of variability.
And so we have a certain degree of concern about how this is going to shake out because the sovereign debt crisis is not over yet.
Okay. And then any help with how influential on the unit number? It was 61% in the 2nd quarter. It was a similar number, slightly better in the Q1 U. S.
Mattress units. And I know you've got some sample sales in there. Any help on extracting that? Or maybe for the whole year 'ten, what do you suspect sample sales of cloud will be influencing that unit number of mattress sales in the U. S?
Well,
the floor models were down in the Q2 versus the Q1. In the Q1, I think we had about 4,500 or so 4,500 to 5,000, I don't remember the exact number. Floor models in the Q1, we had in the neighborhood of 3,000 floor models in the 2nd quarter. So 3,000 is kind of demand floor models is de minimis compared to 61% growth in units. And because we did have floor models last year, not 3,000, but we there's a certain number of floor models that happen on a continuous basis with new stores or change outs or whatever.
As we go on through the rest of the year, we'll continue to roll out the cloud, the entry level cloud. It's continuing a nice progression. Kind of early in the year, we thought maybe we could get it completely out by the end of the second quarter, but we're not there yet. So we'll continue rolling out the cloud. And we'll start rolling out the Luxe.
Now we had said last quarter that we thought the Luxe would be out around August 1. However, as things have gone on, we did have some product shortages in the second quarter. So we made the decision to delay the Lux until after Labor Day, because the reason why we had product shortages was, as Mark mentioned and we've talked a lot about, we expected a seasonal decline in the core business, but the core business saw substantial growth from sequentially. So we weren't really geared up for that. And so given some customer issues that we created for our retailers out there, we wanted to make sure that we were adequately producing and adequately inventoried for Labor Day.
So rather than throwing a significant rollout of Deluxe into the Labor Day mix, we're going to wait and roll it out post Labor Day. Now we also expect that Deluxe versus our earlier thought, Deluxe we think will be get even broader, more distribution than what we originally thought. And part of that is because we've made a strategic decision to discontinue the celebrity. Celebrity is something that we've been looking at for a while. We brought out the Allura year and a half, 2 years ago as an upgraded celebrity.
We kept the celebrity out there though, because it continued to perform pretty well, but the Allure continues to significantly outperform the celebrity. It's a much higher price point. And as we're bringing out the Luxe, we're going to discontinue the celebrity and that opens up even more floor space for the Luxe. So we think net net, it's a significant win for us.
What was the price point again on Celebrity?
Same price as the Luxe. Okay.
And that's helpful. So post Labor Day means what October in time for?
It will be September, but we'll wait till after the Labor Day crunch.
Okay. And then just refresh me again on the magnitude and the timing of the price increases in May and I guess a different way to answer the question, what the price influence on Q3 and Q4 will be year over year?
Well, the Advantage retail price went up $100 in May and that a lot of that went to the retailers on the Advantage. We decided we needed to improve the margin on the Advantage for the retailers. On the cloud, that price was increased before we started shipping it. So that price really went up in February. We increased the price on the Luxe, and we haven't shipped it yet.
So it won't start in reality versus what we were planning. Obviously, we expect the cloud to do better, but that's built into our latest guidance. The big one was the Cloud Supreme. That price went up 15% in May. And so that's been a benefit to us.
I won't get into trying to articulate what that price increase does from an overall business standpoint because that will provide a back end to how the Supreme is doing. But the Supreme is doing extraordinarily well. And so pricing is a positive impact. As we said a quarter ago, it will be a positive impact on the back half of the year and we continue to expect it to be a positive impact for the balance of the year and into next year.
Dale, are there any price changes on the international product line? And that's my last question. Thanks.
We had some price changes on the international line, modest pricing changes, those typically go into effect at the beginning of the year and it varies by market. And again, they tend to be selective price increases, not across the board anywhere. So it's fairly minimal impact, but modest price increases on a couple of products internationally in certain markets.
Thank you.
Our next question will come from Joe Altobello with Oppenheimer.
Thanks. Good afternoon, guys. Just a few questions.
First, I
think when you launched the Supreme, the vast majority of your retailers took that as an incremental slot. And I guess you sort of answered this question a little bit with regard to the celebrity, but as you launch the Luxe and the base cloud SKU, is that still going to be the case where the retailers that take that will have to take that as an incremental SKU or I'm sorry, an incremental slot?
The Cloud Supreme was to all intents and purpose incremental wherever it went. The cloud is largely incremental. It's not quite as much, but largely incremental disproportionately. As I said a little few minutes ago, I said that we had hoped overall to get 2 net of 2 by the time we had the full rollout of the Cloud Deluxe and the sorry, the Cloud Supreme and Deluxe. With this decision to swap out the celebrity for the Luxe, we're essentially replacing a price point with another product of the same price point appealing to a different consumer and not overlapping with the Allura.
So it provides a justification to retailers to have a broader range. So we, as I said, expect to end up with a little more than 2 cloud slots per store as a result of this celebrity.
We expect because of the celebrity decision that Deluxe will get broader distribution
than what the celebrity had.
Okay, got it. Fair enough. And then secondly, you mentioned earlier, I think it was Mark on the call about maintaining a lot of the market share gains you guys have made over the past, call it, 6 or 9 months or so. In that regard, have you seen any changes with regard to competitors? I mean, obviously, your results have been much better than anybody else's.
So I was curious if you've seen a change on their part. Are they increasing the competitive spending? Are they increasing the innovation cycle, just the new products that are coming out the back half of this year?
I mean, obviously, we're in a very competitive market with very tough and good competitors and they continue to be aggressive as they always are. In terms of specifics, I think it's probably better to ask them.
Okay. But in terms of your business, you've not seen anything or any change from them of late?
The competitors have products that they're rolling out. We'll see if there's anything new that we're not haven't seen yet at Vegas in a couple of weeks. But it's a tough competitive industry and people aren't sitting still. But by the same token, we're not either. We're continuing to drive forward and we're continuing to take share.
Okay, great. And then just one last one in terms of the strategic research you guys do in the second half this year. It doesn't sound like it's going to be all that much, but could you quantify the incremental spend on the SG and A line we should see?
Yes, it will be about $3,000,000 approximately incremental spend and we're covering a variety of markets. We did this similar kind of strategic research in the U. S. A year and a half ago, and it kind of led to the cloud and the Ask Me campaign. And so we're trying to step up the level of research and doing kind of a special research project in Europe and Asia to cover some of the major markets.
And that spend will be kind of balanced over the back half of the year.
Got it. Okay, perfect. Thanks.
We'll now hear from Keith Hughes with SunTrust.
Thank you. Two questions. Number 1, based on your comments on the market research in Asia and Europe, in 2011, will we expect more product introductions there than in the United States?
Go ahead,
Mark. Well, that would definitely be jumping the gun. We haven't done the research yet. But I think the thing about it is the way to think about it is this, is I've said this before and you've heard me say it, but it sounds trite, but our key we recognize or we believe we have great conviction that we have great potential for growth. But the four elements that drive our ability to achieve that growth is to, number 1, make sure that there's a mattress and pillow for everyone and make sure that there's that everybody knows about it.
Those are the first two of our strategic imperatives. And the fact is that the European and Asian consumers have different preferences than the American ones do. And as you all know very well, it's not the same in Japan as it is in China or Germany as it is in England. And so, understanding the consumer better is critical. And understanding how to communicate effectively with to maximize the effectiveness of our communication is also very important.
So, it may be that the upshot of this will be new products and so on, but it may be other things too. It's the appropriate time. We did it a year and a half ago here in the U. S. And I think it's the appropriate time to do it over there.
What the outcome will be, we'll see. We've said this many times though is that roughly speaking, we have 12 mattresses in the U. S. And in any given country in the rest of world, they have access to roughly that number. We don't see the need to have 30 or 50 or even 25 products.
We could see the need to have some expansion. It's the degree to which each product is optimized for meeting the needs of a different set of the consumers and therefore is going to maximize the effectiveness on the floor for the retailers in each country. And it's that that we're striving towards.
Okay. Dale, can you give us the ending share count in the quarter?
Yes, I don't have that handy. It will be in the Q. Obviously, the average for the quarter was $73,000,000 $1.52 but I don't have it at my fingertips for where it ended.
That's fine. I can get out of the Q. Just along the same lines is the how much in option should we expect per year from you that would go into the share count?
I think a ballpark figure to think about is about $1,000,000
Per year? All right. Thank you.
Our next question will come from Jack Murphy with William Blair.
Thanks. Just a couple of follow-up questions. Mark, I think you talked about international saying that it performed well given the conditions. But just to kind of clarify, relative to your internal expectations, it sounds like U. S, North America did better than you would expect at the beginning of the quarter, international did worse.
Is it fair to characterize it like that?
Yes. I think that is. We hadn't anticipated the obviously, the crisis in Greece and everywhere else that happened and we hadn't anticipated the cloud, both of which did have some effect on the business as a whole. But even taking those things aside, the European and the which is the bulk of our business overseas market is has been troubled throughout the quarter. So yes, that is true.
Right. And then within the European business, how is the sensation held up relative to the remaining products in the portfolio?
It's done quite well. It is a very different product to the cloud, but like the cloud, it appeals to a different audience. The people who like the Sensation generally are different than the ones who like regular Tempur Pedic. They're seen as 2 different they are 2 different consumer groups.
Right. And the relative runway for that product since rollout, is it is there still ways to go in terms of, let's say, extraordinary rates of growth?
I think that I don't want to get into the detail. We try to avoid specific details on specific products. But let me characterize it like this. It is without question a successful launch and it has worked well in several different countries around the world. It is so definitely would fall into the category of a successful product addition.
It is not hitting the ball out of the park in the same way that the cloud has, but you're not going to get very many clouds. So I think it's done very well. It's a good new product introduction, which is relatively low cannibalistic versus general product introductions.
Okay, great. Thank you very much.
We'll go next to Bob Drbul with Barclays Capital.
Good afternoon. This is Jessica Shone on for Bob. I just wanted to ask you a question kind of a follow-up to the overall macro environment. On your last call, you said that the overall mattress market was probably on track for 7% to 8% growth this year. And do you have any update on that outlook?
Or I think it's still a reasonable expectation? And then on traffic, you said it was still not quite back to normal, but last quarter, we had been seeing some stabilization. Would you still say it's consistent with the Q1? Or have you seen some change in that?
Yes. On the outlook for the year, I think the best gauge right now is what have we seen at least from a sample basis. ISP sample represents now about 70% of the industry. Through May, the industry is showing an 11% year to date improvement. So at this stage, short of any new information, I would expect the industry to do somewhere in that 10%, 11% range.
I don't know that there's going to be a dramatic turnaround. We may change our mind in a few weeks when we see the June data. But with the data being delayed, we don't see a full 2Q yet. But somewhere in that high single to low double digit seems to make sense given May year to date for the sample anyway is up 11.
Okay, great. And then was there any sequential change in traffic that you noted from the 1st to second quarter or is it pretty much the same?
It's the same. I don't have access to statistical data from our retailers. What I have is just what I hear from them. And