Welcome to Sleep Number's Q1 2020 earnings conference call. All lines have been placed in a listen-only mode until the question and answer session. Today's call is being recorded. If anyone has any objections, you may disconnect at this time. I would like to introduce Dave Schwantes, Vice President of Finance and Investor Relations. Thank you. You may begin.
Good afternoon, welcome to the Sleep Number Corporation first quarter 2020 earnings conference call. Thank you for joining us. I am Dave Schwantes, Vice President of Finance and Investor Relations. With me today are Shelly Ibach, our President and CEO, and David Callen, our Chief Financial Officer. The three of us are in our Minneapolis offices for the call today but are social distancing as we sit apart in our conference room. This telephone conference is being recorded and will be available on our website at sleepnumber.com. Please refer to the details in our news release to access the replay. Please also refer to our news release for a reconciliation of certain non-GAAP financial measures and supplemental financial information included in the news release or that may be discussed on this call.
The primary purpose of this call is to discuss the results of the fiscal period just ended. However, our commentary and responses to your questions may include certain forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties outlined in our earnings news release and discussed in some detail in our annual report on Form 10-K and other periodic filings with the SEC. The company's actual future results may vary materially. I will now turn the call over to Shelly for her comments.
Good afternoon and welcome to our 2020 first quarter earnings call. My SleepIQ score was 83 last night. In just a few short weeks, our lives, businesses, and economy have radically changed, and we are all navigating an unfamiliar environment. The COVID-19 pandemic is a human and economic crisis unlike anything our world has ever experienced. Our hearts go out to the healthcare workers, our team, customers, partners, and all the families and businesses who have been hurt by this virus. As a purpose-driven company, we have focused our energy and resources on keeping our team members safe, serving our customers, and ensuring our business continuity. We have closely adhered to the guidelines provided by the CDC and national and local governments. As a result, our headquarters, labs, customer service, and store teams began working remotely mid-March, and by March 31st, 80% of our stores were closed.
Our teams have quickly implemented innovative alternative solutions to serve our customers and support our operations. As we announced two weeks ago, we have taken swift actions to preserve our financial flexibility, increase liquidity, and control expenses. In mid-March, we drew down the remaining $262 million available under our revolving credit facility and added $75 million in cash through a term loan on April third. We began executing more than $150 million of expense reductions and have decreased capital deployment plans by more than $100 million. We made the difficult decision to furlough or reduce hours for approximately 70% of our team members, and we reduced board, senior leadership, and company-wide comp and benefits through variable incentive programs and other actions. These near-term measures are necessary to effectively manage through the current environment.
In parallel, we remain intently focused on retaining our sleep leadership position, market share gains, and superior shareholder value creation as this crisis abates and the economy recovers. Our significant competitive advantages enabled exceptional first quarter results and extended the double-digit demand growth trend of our prior six consecutive quarters through the second week of March. Disciplined execution of our differentiated consumer innovation strategy produced record first quarter results, despite the severe adverse impact caused by COVID-19 on demand in the back half of March. Q1 results included 11% net sales growth to $473 million, with a 7% comp gain and five points from new stores. 61% growth in net operating profit to 11% of net sales, 70% growth in earnings per share to $1.36, and 54% growth in free cash flows to $75 million.
During the quarter, units grew 10%, and average revenue per unit rose 2%, driving a 240 basis point increase in gross margin rate to nearly 64%. These results reflect accelerating consumer demand for the health and wellness benefits provided by our revolutionary 360 smart beds. In addition to improved operating efficiencies, we drove strong premium mix across good, better, and best, with growth in the attachment of our smart bases with partner snore and foot warming features. Our ability to drive growth from both ARU and units over time is a key outcome of our strategy. Importantly, these consistent top-decile results are the real underlying potential for our business and the performance we expect to return to after this unprecedented crisis. The near-term challenges caused by the pandemic are substantial.
The strength of our business and balance sheet and the measures we have taken in recent weeks, combined with our highly engaged and resilient team, give me great confidence in our ability to rebound with strength. Here are a few highlights which demonstrate our agility and innovative mindset to ensure business continuity under the current circumstances. With closed stores and a significant media reduction, we refocused our April marketing efforts to target our loyal insiders and brand advocates. We often highlight how important our referral and repeat business is, which represents more than 45% of our overall sales. Our ability to quickly lean into these lifelong relationships in this time of uncertainty is a powerful advantage and performance driver. We implemented numerous digital CRM solutions to enable customers to easily engage and transact with us while retaining the value of our relationship-based selling model.
Our new digital capabilities include a blended operating model of team members selling from home via phone and chat, open stores, and online. As a result of our actions, the composition of our sales in April include approximately 25% of our sales coming from closed stores, another 25% from open stores, and 50% of our sales from online, live chat, and phone, with online sales up 250% over the prior year. We also implemented customer self-service digital solutions, including service requests, rescheduling, and a contact list delivery solution. Results include sustaining levels of service with approximately 80% of our markets open for home delivery and record-high customer satisfaction scores. As a result of these pivots, our sales orders per day have steadily improved in April.
During the last two weeks of March, as government mandates closed 80% of our stores, our sales orders also abruptly declined almost 80% to the prior year. With the actions we've taken, our sales have improved to down approximately 50% in April. We rapidly modified our manufacturing, operations, and supply chain to reflect our lower near-term sales outlook. In addition, we are working with our suppliers on plans for acceleration in an ambiguous timeframe. These actions demonstrate the agility, real-time visibility, and controls inherent in our vertically integrated business model, as well as the seasoned leadership, irrepressible resilience, and purpose-driven commitment of our team. As the pandemic redefines how we all live, shop, and work, these further advancements in our digital capabilities and technology will be part of how we operate in the future.
I couldn't be more proud of our Sleep Number team during this difficult time, and I am deeply grateful for their tenacity and ingenuity. Every day, I see evidence that they are making a difference for each other, our customers, our company, and our community. Our Irmo, South Carolina, manufacturing plant, for example, is supporting the South Carolina Hospital Association by refurbishing nearly 200,000 N95 masks, fulfilling a much-needed supply for healthcare workers. Sleep Number has forged a strong, positive connection between proven quality sleep and overall wellness. The current environment has heightened individuals' concerns about their immunity and emotional and mental resilience. It is more important than ever for society to benefit from the proven quality sleep that our life-changing 360 smart beds provide.
Near term, we plan to advance our exclusive 360 smart bed software features to provide all of our SleepIQ customers with personalized wellness reporting, circadian rhythm, and heart rate variability insights, delivering a deeper understanding of the link between sleep and overall health and wellness. We also moved our new 360 smart bed launch from second to third quarter, when in-store operations and media spend are expected to be recovering from current low levels. Though we were prepared to launch in April, our business model responsiveness is allowing us to postpone the introduction without adverse impact to inventory, marketing, or training. We expect this kind of agility, combined with our mission-driven culture, to enable us to quickly rescale our store, manufacturing, and logistics operations. We are excited for the launch of this new line to be an important part of our rebound.
Given the uncertainty around the impact and duration of COVID-19, we withdrew our 2020 guidance. We expect the existing government-mandated closures to continue to place meaningful pressure on sales through May, and to a lesser extent, into June, followed by a gradual recovery in the back half of the year. As we have more clarity, we will continue to share updates on our outlook. We are doing everything in our power, financially, strategically, and operationally, to effectively navigate through this crisis, continue to keep our team and customers safe, and help our communities achieve higher quality sleep. We are extremely grateful to our valued partners and suppliers for their support, which has been instrumental in ensuring our business continuity. Consumer demand for our life-changing 360 smart beds was exceptional going into the pandemic, and we expect it to be exceptional after this crisis.
Our digital traffic remains at double-digit increases over the prior year. Our brand metrics remain at all-time highs, and we will use this dislocation to accelerate our mission and strategic opportunity around health and wellness. Now David Callen will provide additional financial details on our first quarter and our actions to navigate in this challenging environment.
Thank you Shelly. I'd like to add my best wishes for the health and safety of your loved ones through this unprecedented challenge. The depth of this crisis and the duration of the recovery are unknowable. That makes business planning and financial forecasting in this environment extremely complex. We've pressure-tested our liquidity forecast with a variety of inputs, including some severe what-if scenarios. One example was to model our liquidity if sales were just 20% of the prior year for the balance of 2020. That model indicated our current liquidity would take us deep into the fourth quarter. Now an 80% sales decline is not realistic, since it's materially worse than our actual experience. However, it does illustrate the sufficiency of our liquidity and the variety of inputs we've considered to effectively manage the business in a highly uncertain environment.
While we are not providing guidance today, we are sharing one set of possible outcomes we used to inform our cost and capital deployment decisions. With nearly all states under some form of stay-at-home order, we expect the most COVID-19 impact on consumers and businesses here in the second quarter. Therefore, we modeled Q2 sales at about half of the prior year. Remember that Q2 is our seasonally low sales and cash generation quarter. While no one knows what government mandates may still be in effect, we assume consumer confidence and business conditions will improve through the back half of the year. One of our models assumes a Q3 sales decline versus the prior year of about half the Q2 decline. With the benefit of the extra week, we modeled Q4 sales to be about flat with the prior year.
Based on these quarterly models and our cost and capital deployment cuts, our net debt would peak at the end of Q2, with a leverage ratio still below our 4.5 times EBITDA covenant. They also indicate free cash consumption of more than $50 million in the first half this year, and generation of more than $50 million in the back half. What's important to understand is that we are actively managing all the levers in our control to balance near-term financial risks with our commitment to sustain our advantaged strategy. Our orientation for long-term performance embraces an approach now that enables us to rebound from this challenge with pace. This bias informed the actions we've taken to date. Our priority, along with the safety of our teams and customers, is capital preservation.
The meaningful and abrupt decline in daily sales in mid-March prompted the immediate suspension of our share repurchases. We also drew down the revolver and kicked off the accordion expansion process. These actions were taken out of caution rather than need, as our modeling indicates we'll repay the $75 million loan unused at the end of its 364-day term. The realities of COVID-19 are dynamic. Each week, we learn more. The actions we've taken to date are based on the modeling I've outlined today. Our approach is to preserve maximum flexibility to rebound quickly should business conditions improve faster. Alternatively, if conditions worsen, other actions are certainly available and will be pursued as needed. Having control of our vertically integrated business model enables us to be nimble. We will continue to act with pace.
Other actions across our business to preserve liquidity and profits include real-time adjustments to our component flow to properly balance our inventory, enabled by our close, ongoing partnerships with suppliers. Deferral or negotiated concessions from important marketing partners, rent deferrals for stores and operating locations impacted by COVID-19 mandatory closures, plus advantaged accounting treatment for those deferrals. Decisions to close approximately 25 stores on month-to-month leases with high probability for sales, transfers, and of the profits associated. Labor and sales tax recoveries under the CARES Act, and continued evaluation of other liquidity sources, including the remaining accordion availability of $75 million and other liquidity markets, though we expect to meet our liquidity needs in 2020 from operating cash flow and existing credit facilities.
The fundamentals of our business and our balance sheet are strong as a result of years of prioritized investment and our decisive actions in recent weeks. We continue to execute for the long term as we allocate capital. Given the current environment, we are preserving flexibility by prioritizing projects with more immediate benefits to profits. For example, our store investments generally have a two-year payback, so we have delayed about half of the planned 2020 store actions. On the other hand, the cost-benefit assessment of our new $3.5 million assembly distribution center in Los Angeles indicated we should proceed as planned. We expect lower total costs of operations when this ADC replaces the existing hub in early May. The business disruption from COVID-19 pandemic and our related actions to date will delay, but not derail, the significant value-creating prospects of our business.
Our continuously improving initiatives across the business that delivered compelling value creation in 2019 did so again in the first quarter of 2020. The financial performance in the first quarter highlights the strength of the business. Our net sales of $473 million grew 11%, including 7% comp and 5 points from new stores. Units were up 10% and ARU grew 2%. Average trailing twelve-month sales per store of $2.9 million grew 7%, with 32% of our stores generating more than $3 million per store. Online and phone sales in Q1 grew 21% over the prior year. Our Q1 gross margin improved 240 basis points over the prior year's first quarter, with favorable mix and operating efficiencies more than offsetting delivery labor inflation.
We also drove a 350 basis point increase in our net operating profit rate to 11% of net sales, while spending to support our near and long-term growth drivers, including a 25% year-over-year increase in our R&D spending. These investments, plus approximately $3 million in net COVID-19 payroll costs, were partially offset by approximately $6 million, lower broad participation, cash incentives compensation. Sales up 11% in the quarter and operating profit up 61%, our earnings per diluted share grew 70% to $1.36, while absorbing approximately $0.11 of income tax headwind year-over-year. The utility of our infrastructure drove a 37% increase in trailing twelve-month cash from operations, a 19.1% ROIC, and a Q1 ending leverage ratio of 2.6 times EBITDA.
We ended the quarter with $239 million of cash on our balance sheet and added another $75 million through our new facility, funded on April 3rd. These metrics convey the health of our business ahead of COVID-19. They also provide insights of how we'll overcome the challenge ahead. Sleep Number innovations improve health and wellness while being highly attainable, with a value-packed starting price of $999 for our C2 360 smart bed. We expect demand to grow significantly as we are able to reopen stores and consumer confidence improves. We also expect investors to again be rewarded over time. Cheryl, at this point, please open the line for clarifying questions.
Certainly. To ask a question, please press star one on your telephone keypad. The first question comes from John Baugh of Stifel. Please go ahead. Your line is open.
Thank you. Good afternoon, and congrats on a great first quarter, and kudos to management sharing in the economic pain. I'm gonna jump right in. Could you talk Shelly, to any states, maybe Florida, that have recently "opened", and what exactly is happening with your stores if anything, in those states, or what you anticipate near term in states that open?
Sure, John. You know, as we look at the stores that have reopened or are open, there is variation, depending on the state. It really speaks to what is transpiring locally, whether it's in a county or a state. You see that variation, you know, across the country. Some markets opened with significant, you know, I say significant, you know, we have low transaction, low traffic with high ARU. Customers, you know, coming in the store, you know, kind of close to a regular type environment. You have other states where we've reopened, and the customers coming in are all based on our reach out with customers to bring them in. It's different by state.
You know, I think it's interesting because normally, under a normal situation, our business is quite consistent across the country. We don't see big swings in traffic. Sometimes you have some weather impact, but it's very short term. Generally, it's pretty consistent, and we're seeing this a little different. What I really like about what we've learned and executed over these last four weeks is our team's ability to rise above their circumstances and utilize innovative solutions to continue to drive performance. You know, it is so impressive, John. It speaks to our mission-driven culture and the tenacity that our team has to figure out a way. We're not, you know, sitting here in a situation where we're opening stores and then dependent on our marketing, driving, and traffic.
Because of our relationship-based, selling model and the lead strategy that we have and the ongoing relationships with our insiders, which represent such a significant portion of our business, gives us the ability to drive performance. You know, I'm really, really pleased with what we've been able to accomplish over the last four weeks in, you know, unbelievable circumstances.
Yeah, it's unprecedented for sure. I'm just curious how your customers that either come in from your prompting or maybe come in off the street, what their comfort level is in laying on a bed and how you're addressing that anxiety, or whether, you know, because your selling function included typically getting on a bed if you were a new customer and finding your Sleep Number. I'm curious as to how you're navigating that.
Well John, we strictly follow CDC guidelines, have since the beginning, on social distancing, on hygiene and sanitation. Our stores are low traffic, low occupancy. We have and offer private appointments. We have many ways to work with our customers. We're, you know, obviously, you know, very clean and, you know, cautious, and we have separate hours for elderly and vulnerable populations as needed. From the beginning, you know, we have, you know, kept the prioritization of keeping our team members safe and our customers, and contributing to our communities and ensuring our business continuity, and have, you know, consistently, you know, hourly, been able to, you know, pivot and find the best way forward.
We have, you know, back to my earlier response, there's some markets where customers are behaving very normally, and then other markets where they are more apprehensive. Yet, you know, with the way we conduct our business, and our small store environments with, you know, the only customer in the store, it quickly, you know, mitigates any type of concern. Yeah, you know, our team's so professional, and, you know, they have, you know, had so much experience already. It's been going quite well.
All right. My last question is just clarity, maybe for David. Could you walk us through again the April comments? It was down 80, it was down 50, walk us through precisely your orders and versus shipments. I wasn't quite clear. Thank you.
John, you're asking for clarity around Q1 performance?
April, the month of April, there was commentary about orders falling off 80% and then 50%.
Sure.
I wasn't clear on precisely how April has tracked so far.
Sure. Well, I'm actually gonna start with Q1 because I think it just helps understand the performance intervals. You know, so we came into Q1 with momentum, you know, into our, you know, seventh quarter of double-digit demand, and we had a sales growth of up 17% quarter to date through the second week of March. Then we were hit with the, you know, the results of the COVID-19 pandemic, and our sales abruptly declined. By the end of March, by March 31st, we had 80% of our stores closed and our sales were down nearly 80% at that time as well. Every week through April, we've been able to improve.
You know, we look at, you know, right now, our average revenue per day, as well as, you know, the week and different trend lines, you know, three days, 10 days, seven days, and we've been able to steadily improve our performance with all of the different digital capabilities and new selling model that we've been able to create. We've had consistent improvement, and now we're looking at April as being down approximately 50%.
Great. Thank you for that, and congrats on the tough environment. Very good luck. Good job.
Thank you, John.
Your next question is from Brad Thomas of KeyBanc Capital. Please go ahead. Your line is open.
Hi, thanks for taking my question and for all the color. I just want to follow up on John's last question and talk a little bit about the sales in April. You gave some details on this, you know, on prepared remarks Shelly, but of the sales that you converted in April, could you talk a little bit about how much of that dollar value came from maybe an internet purchase, and how much of that came from a customer that didn't even go into a store? I'm just trying to understand the strength of your business for customers that may not even go into a store, and how much of that business could be retained, you know, if the consumer wants to stay away from stores for some time.
Brad, you know, when you look at the composition of sales in April, I'll start here. 25% came from stores that are closed, so that means Sleep Professionals selling from their home, either over the phone or via chat, so no customer interaction at all. 25% was generated from stores that are open, and that's a mix of, you know, phone calls and follow-up and customers coming into the store. 50% of the total sales from online chat and phone through our, you know, more traditional, channel method.
Great. That's, that's very helpful. To move over to the, maybe the cost side of the equation here, you know, you talked about maybe a scenario model and of 2Q and revenues potentially being down in the 50% range. Can you give us a sense of maybe what operating income might look like if this is where revenues might play out for 2Q and help us think about, you know, the cost side of the equation here and the run rate on costs?
Yeah Brad, I am not gonna provide guidance. We pulled our guidance for a reason. This is a very unusual circumstance that we're all working our way through and trying to predict what will happen and when is a bit futile. Now, what we've provided you is some of the modeling that we've used to help us make decisions. We certainly need to make decisions in this environment, and we've done that. However, you can bet that we are gonna be working hard to deliver the best possible results that we can, and we'll continue to update you and the rest of the group as we progress through the year.
Okay, fair enough. Thank you all so much, good luck.
Thanks, Brad.
Your next question is from Bobby Griffin of Raymond James. Please go ahead. Your line is open.
Good afternoon, everybody. Thanks for taking my questions and congrats really on a great first quarter.
Thanks.
I guess the first question I wanna talk about, Dave, is maybe on, or Dave or Shelley sorry, on the way back up in the recovery, can you talk about what's your kind of look for to open up stores? Is it a market-by-market basis, store by store? If some demand comes back slower than others, do you have the ability to keep some stores dark while that demand's not quite ready yet in that market?
Bobby, we follow our local and national government mandates for reopening stores. That is our approach, following the CDC guidelines and the government mandates, we are reopening as such. We have, with our unique selling model and process as a vertically integrated company, you know, we're able to generate business, and we've demonstrated that in every single situation to date. I'll give you the example of last week. We reopened 44 stores last week, these 44 stores were in a variety of different states with different community environments. Each and every store was able to generate, you know, a decent demand for their business. It came in different ways. Some markets had traffic, some did not.
This is where we're able to utilize and really focus on our insiders right now, our brand advocates, as well as the significant digital traffic we have to be able to build that relationship and convert sales.
Good. That's helpful, and I appreciate that example. Secondly, can you talk about from the consumer financing side of your business, the Synchrony financing program is an important program. It's been very successful. Completely different type of slowdown than the last recession, but what exactly are you hearing from them in terms of consumer credit availability, or what are you seeing in terms of consumer credit availability within your program?
Well Bobby, counterparty risk is certainly something that we keep very close to as well and have been tightly connected with Synchrony and their management team. We connect with them on a regular basis, their business is very different, obviously, from the last recession. Back in 2008, 2009, they were part of a bigger company that was cash-constrained, versus today, they are highly cash capitalized. So they have significant deposits on accounts, and their balance sheet is very strong. They have, you know, continued to reiterate to me that, you know, they're in it with us, they love our customer base. You know, we tend to skew a little higher income and a little bit older and they love our customer base.
You know, their only business is, as a publicly traded company as well, is generating, you know, business through, you know, their credit operations. They're in it with us and they've committed that that's gonna continue.
Thank you, Dave. Thank you, Shelly. Very helpful. Best of luck in the second quarter.
Thanks, Bobby.
Thank you, Bobby.
Your next question is from Peter Keith of Piper Sandler. Please go ahead. Your line is open.
Hey, guys, good afternoon. Yeah, really nice Q1, guys, that was shaped up to be quite a strong quarter, finished quite strong. I'd even say expectations for down 50% in April's much better than we were expecting. You know, Shelly, I wanted to ask you just about the advertising and how you're approaching that in terms of pulling back on the advertising spend. Is there any delay effect where, you know, maybe the heavy advertising in March is helping April, you know, pullback in April could impact May or June? How do you think about that kind of a ripple effect over a couple of weeks or couple of months?
Yeah. Thank you, Peter. We responded immediately in March, right away when we saw the decline in sales. That takes us back to, you know, the middle of March. You know, so, you know, could we have some hangover here in April, you know, from, you know, from the customer having the awareness? You know possibly, but at the same time, you know, we're not completely dark. I mean we certainly pulled back significantly on our media spend and thinking about it more on the same level as our sales increase. It's a good way for you to consider, you know, how deep we've cut.
At the same time, we continue to see double-digit digital traffic, which we're very encouraged by, along with our net over the prior year, along with incredible, you know, satisfaction and brand metrics. It does speak to, you know, the extraordinary demand we've been seeing. We just lapped our sixth quarter here of double-digit growth, or this is the third quarter of lapping double-digit sales growth from, you know, from the prior year in the first quarter. It speaks to the strength and the demand of the 360 smart beds.
I just wanna understand maybe the mix of sales and you know attach rate with adjustable bases. It sounded like your orders are kind of running down 50 and you'd expect sales in April to be running down 50, so maybe really no change to the mix. Could you confirm that for us, just in terms of, you know, ARU and attach rate?
Yeah. We're, you know, we have mix change, definitely. You know, when you look at the composition of our sales with 50% coming from online, phone, and chat, you know, that's very different than our normal composition. Our selling process and in-store experience, you know, has, you know, superior ARU as you know, and that speaks, you know, highly to the experience in the store, but also that interaction with our team members. There will be change in mix. You know what's a big advantage of our strategy, Peter, is the fact that we can drive growth from both ARU and units. You know, ideally, we're always driving it from both.
We certainly do on an annual basis, you can see in a quarter like Q1, when we have growth in the quarter, it's quite explosive, and, you know, we're really pleased with our 64% growth margin and in Q1 as well. During this time, certainly during April, you're going to see fluctuation in ARU, your in our mix and it's going to impact margin as well. We're probably not going to be attaching at the same rate as we were before. At the same time, we'll probably mix down because of the online sales.
You know, I think it's important to remember that, you know, these are short term. This is in the short term. There's going to be the fluctuation. The great thing is that we can still drive performance, you know, from both. We're going to be, you know, trying lots of different tactics. You know, we quickly pivoted and changed our strategy for April to drive sales, to focus more on insiders, where we don't have to spend the level of marketing. We're really pleased with what we've been able to do, you know, with our advantaged model and competitive advantages.
Okay, that's great. Certainly, I think down 50 is much better than we would have expected at this point. Lastly, for me, is just on the deliveries. Because people have to have a Sleep Number agent come into their home to assemble the beds, has there been any pushback on that? You know, maybe customers are hesitant or delaying some of the shipments, just kind of understanding how that could carry forward in the coming months.
Peter, we've been able to continue to deliver in about 80% of the markets. At one point, this was down to around 75%, and now it's 80%. You know, clearly follow the CDC guidelines and all the, you know, sanitary and precautionary approaches here. You know, at the same time, people want their bed. They may be in a situation where they don't have a bed or in many situations people are recognizing the importance of their sleep right now for their overall health and wellness, and they want this bed that delivers proven quality sleep.
In addition, we also added a capability of rescheduling online. That gives customers the ability, especially with marketplace changes, to be able to create a reschedule. That's very efficient and effective for both the customer and for us.
Okay, that's very helpful. Thanks a lot, guys, and good luck.
Thanks, Peter.
Your next question is from Atul Maheshwari of UBS. Please go ahead. Your line is open.
Good evening, thanks a lot for taking my questions. When you did the stress test on sales being down 80% for the full year, what fixed cost did you assume in that analysis? There's obviously rent for your stores and for your manufacturing or distribution facilities, and then you have the corporate center costs. What other fixed costs did you assume, and are you able to size or quantify these costs for us in any way? Thank you.
Well, at our level, all of our costs are variable and - or just about. So we are in that model, it's a very unusual one to model out because it's, you know, that's not a normal business operating situation, obviously. It required significant reductions in our cost structure across the business. However, you know, the intent was to be relatively conservative in our assumptions so that we could see what the, you know, the, how we would flatten our liquidity burn in a way that would, you know, support the business as long as possible. It's just one of the many scenarios that we ran. I provided that as an illustration. I wouldn't suggest that you know, use it in your, in your modeling of how we what we expect from the business this year.
Nonetheless, you know, the cash commentary I talked about regarding our free cash usage in the first half versus the free cash generation in the back half, you know, are more illustrative of what we're, you know, directionally talking about, you know, as a more reasonable set of parameters for what we're seeing so far.
Understood. Thank you. That's very helpful. And just as my follow-up, in the past, what percentage of your sales involved delivery and assembly of products at customers' homes? Then along those lines, on your contactless delivery initiative, can you just provide a little bit more color on how you're going about it? So for example, are you providing some sort of an online tutorial to consumer, to your shoppers so that they can assemble the beds themselves? Just any color here would be very helpful. Thank you.
With our smart beds, all of our beds are home delivered. That's a change that transpired when we moved to all smart beds seven quarters ago. Regarding the contactless delivery, we're in early stages of it. We've just been, you know, testing it here in the last couple weeks, but it's essentially assembling the bed for the customer and delivering it complete, you know, in their garage or adjacent. No, we do not have, "Here's how you assemble it" online. It is a specific response to a customer who wants this type of delivery. It's very small in the percentage, but importantly, we have a solution.
Understood. Thank you, and good luck with the rest of the year.
Your next question is from Curtis Nagle of Bank of America. Please go ahead. Your line is open.
Great. Thanks very much for taking my questions. First one, I just wanted a quick follow-up on the question on Synchrony. Are you guys seeing, you know, at this point, any tightening in terms of the standards, the credit standards that they're putting through? Or do you have an expectation that, you know, that could occur? If you could remind us, what percent of sales credit accounts for?
Sure. We have not seen any tightening at all, don't really expect that to happen in the near term. Obviously, credit conditions for some of their customers may be different than, you know, what they're seeing with our portfolio. They've been an exceptional partner for us, engaged with us in being creative about how to do business in this environment, we very much appreciate, you know, that partnership. About half of our business in 2019 was financed.
Got it. Great, thank you for that detail. Then just a quick one in terms of, I guess, order and cost flow. I'm just curious if, you know, the demand fall that you guys started to see in the second half of March hit the P&L in March, or perhaps it didn't until Q2, given that, you know, there's a lag between orders and when deliveries occur.
Curtis, I'm a little, I don't know if I heard that quite clearly. Are you asking about cost from a COVID -?
Yeah, for - y eah. The question I'm asking is, you know, I mean, basically, a revenue and cost recognition question. The question is, you know, you saw a big falloff in demand in orders in the back part of March, at least the second half. Did that all flow through in March, or did it spill over into the second quarter just because of, you know, there being a lag between those orders and when deliveries actually occur, and when, you know, costs will be recognized?
Shelly highlighted that, you know, about through the second week, we had really strong demand, and the last three weeks of the quarter demand was affected, as were deliveries. The close she highlighted as well, that at one point, a portion of our delivery capability was shut down as well, of about a quarter of the country. There was some impact in Q1 on our deliveries and our demand, you know, capabilities in total demand in the quarter, within the quarter.
Okay. Maybe I'll follow up, offline. Thanks very much. I appreciate it.
Okay, Curtis.
Your last question is from Seth Basham of Wedbush. Please go ahead. Your line is open.
Thanks a lot, and good afternoon. My first question is just a clarifying question to the last one. Just thinking about the timing of the impact on the P&L from the slowdown in activity at the end of the quarter. Given that lag between the time that you take orders and you actually deliver them, I would presume that most of the P&L impact, both on the top and bottom lines, from that slowdown, didn't occur in the first quarter, it occurred in the second quarter. Is that correct?
Seth, a couple of things you can point to is, look, our demand, as Shelley highlighted, was up 17% quarter to date through March, 2nd week in March. We posted, you know, net sales growth of 11%. There was certainly some impact on our total sales recognition in the quarter, in the first quarter. Certainly would have been much stronger if not for COVID-19, if that's what you're looking for. In terms of costs, clearly, we had cost impacts in the quarter as well. We didn't have the efficiencies of our operations, you know, those last three weeks as well. You know, our factories weren't as busy, and things of that nature. We absorbed quite a bit of cost pressure those last three weeks.
Gotcha. Second point of clarification is just on the April commentary of negative 50% sales rate. Is that a current run rate, or is that a month-to-date figure?
That was month to date.
Month to date. Okay, thank you. Presumably, it was worse than that at the beginning of April, and it's improved to better than that at this point in time.
Yeah, and as Shelly said, it was, you know, even worse the last couple of weeks in April, or I mean, in March, and then proceeded to get consecutively better each week this month.
Got it. The last question I had is thinking about the scenario analysis that you laid out, with cash generation of $50 million in the second half, based on your sales assumptions, et cetera. There's obviously some cost assumptions involved in that scenario, and I understand that you're not going to provide any insight into exactly what you're thinking from a cost management standpoint. Just more broadly, how are you thinking about your labor management as demand ramps back up? How are you gonna bring back labor relative to your sales? Can you manage that pretty fluidly?
Yeah. I think the evidence is in the decisiveness we've already demonstrated. Seth, I think, you know, having 70% of our teams on either furlough or reduced hours, and then, you know, labor cost reduction initiatives on a lot of other fronts as well, across the entire company. You know, we've taken about a quarter of our costs out of our operating expenses from what we planned, you know, the balance that last nine months of the year. We believe that we'll be cautious on bringing labor back. We obviously wanna see, you know, demand come before we start to accelerate our labor. You know, they do go hand in hand in some cases, and we'll manage that very closely.
Related to that, when you think about, the risk of losing employees that you have on furlough, is that contemplating your plans? Is that a real risk?
Well, certainly. You know, we think of our team members as family. You know, the pain that we incurred when we had to make that, those decisions is challenging. This is necessary for, you know, the overall health of the total business. Certainly all of the actions that we're taking to drive, you know, strong performance faster so that we can bring people back sooner. Certainly, that's top of mind for everybody.
Okay. Last question is just on labor. In terms of when you're operating a store, what's the minimum labor requirement to operate that store on a daily basis?
Well, it depends, because we've actually gone to a modified hour structure, so it's less than it once was, and so we're able to staff our stores with a couple of people, where in the past it was a minimum of like three , you know, across the country.
Understood. All right. Thank you very much, and best of luck.
All right. Thanks a lot, sir.
There are no further questions at this time. I will turn the call over to the company for closing remarks.
Thank you for joining us today. We look forward to discussing our second quarter 2020 performance with you in July. Sleep well and dream big.
This concludes today's conference call. Thank you for your participation. You may now disconnect.