Welcome to Sleep Number's second quarter 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, and welcome to the Sleep Number Corporation second 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 social distancing in our Minneapolis offices for the call today. 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.
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 second quarter earnings call. My SleepIQ score was 75 last night. The mission of Sleep Number, to improve lives through individualized sleep experiences, has never been more important or more relevant than it is today. Our unwavering belief in our company's purpose and our resourcefulness in finding ways to serve our customers have enabled Sleep Number to effectively navigate one of the most challenging periods in our nation's history. I'm grateful for our team's dedication to our mission and unrelenting focus on ensuring business continuity as we continue to create opportunities for market share gains, profitable growth, and significant shareholder returns over time.
Our better-than-expected second quarter performance in the face of monumental global health, economic, and social concerns demonstrates the significant competitive advantages of our integrated business model and is a testament to the resilience, passion, and commitment of our Sleep Number team. The swift and bold actions we have taken to combat the impact of the pandemic, including keeping our team safe, serving our customers, and maintaining our financial flexibility, underscore the strategic, financial, and operational agility we have built over the past several years. As a reminder, we took immediate actions to increase liquidity and reduce expenses. We prioritized investments and initiatives to drive near-term performance, aid our recovery, and speed our return to long-term growth. We quickly scaled digital CRM solutions that retained the value of our relationship-based selling approach through a blend of phone, chat, online, selling from home, and private appointments.
We seamlessly pivoted to remote headquarter operations, customer service, and innovative sales and delivery options, we prioritize our marketing efforts on loyal insiders and brand advocates, a powerful competitive advantage which represents our most efficient source of sales. As a result, second quarter financial results exceeded our expectations, including net sales of $285 million, which were 20% below prior year, with an average of 53% of our stores open during the quarter. Net loss per share of $0.45, year-to-date operating cash flows of $87 million, up 24% versus the prior year-to-date, and net debt of $226 million, which was $54 million lower than a year ago. Overall, we experienced improving sales trends throughout the quarter, with high single-digit demand growth in May and June combined, compared to 2019.
Several factors contributed to our better-than-expected performance, including our pivot to virtual relationship selling nationwide with impressive results, which mitigated the closed door impact. Stellar growth in our online chat and phone sales, up more than 200% from the prior year's second quarter. Year to date, we have surpassed 2019's total revenue from these touchpoints. Effective reopening of stores, aided by referrals and repeat sales from our lifelong relationships with Sleep Number customers. An immediate shift in our approach to customer acquisition. We increased our media mix into digital, resulting in a step-up in digital traffic from Q1. We also placed increased emphasis on financing and promotions, while significantly reducing overall media spending.
Growing engagement with our brand as consumers respond favorably to the proven quality sleep of our 360 smart beds, and the agility, real-time visibility, and controls inherent in our vertically integrated business model, which enabled us to quickly translate insights into operational and strategic advancements as we worked in lockstep with our partners and suppliers. Throughout the intense disruption of the pandemic and civil unrest, we have taken decisive actions to drive near-term results while advancing our pioneering innovations, enhancing our culture of individuality, and broadening our relevance to consumers. In the second quarter, we began providing new proprietary software features, including circadian rhythm insights and personalized sleep wellness reports to all of our SleepIQ customers. Through our research-informed 360 smart beds, Sleep Number is delivering proven quality sleep, supported by science-based evidence that links quality sleep and overall wellness.
COVID-19 has heightened individuals' concerns about their immunity and resilience. There is increased understanding that sleep is vital for healthy living, and quality sleep actually boosts one's immune system. Our data shows that SleepIQ sleepers are sleeping better. Since the pandemic began, our SleepIQ sleepers have gained an average of 11 minutes of restful sleep per night. This improvement is in sharp contrast to surveys about sleep within the general population, which indicate that 58% of individuals who reported a change in their sleep since the pandemic are sleeping less. We are working closely with our new scientific advisory board, an interdisciplinary group of physicians, clinicians, and researchers with expertise in sleep, science, and health. The advisory board is providing counsel as we mine our longitudinal data, which includes over 800 million sleep sessions.
We are bullish on our scientific accuracy and our ability to utilize the data elements with the highest impact on sleep quality. In August, we plan to commercialize individual heart rate variability insights as the next advancement in proactive health and wellness. 360 smart bed sleepers will benefit from understanding how their nighttime heart rate variability impacts their activity level and energy each day. With the reopening of our stores, we are excited to introduce our new m7 and i10 360 smart beds in the coming weeks. With more than 80% of consumers challenged by temperature concerns during sleep, our new 360 smart beds feature temperature balancing layers. These beds are designed to more closely contour to the body for greater support and spinal alignment, increased pressure relief, and reduced motion transfer.
While we temporarily halted most discretionary capital spending in the second quarter, we've maintained our investment in life-changing innovations that ensure our continued long-term success. For example, we recently acquired a patent portfolio from Gentherm, the global developer of thermal management technologies. These patents support the cooling and heating technology for our beds and bedding and further strengthen our competitiveness. We plan to introduce our Climate360 bed in 2021, and these additional patents will embolden our longer-term innovation roadmap. The current environment remains dynamic, and we expect continued disruption due to COVID-19 and the U.S. presidential election in the second half of 2020. We've demonstrated our agility and perseverance and will continue to benefit from our culture of innovation, strategic advantages, and execution discipline.
Our strategy is designed to deliver growth through customer acquisition and retention, net operating profit leverage, and to drive strong cash generation and mid-teen ROIC. We expect this strategy to drive solid financial performance through these challenging times, as we have for multiple years. Today, more than 95% of our stores are open. We continue to drive triple-digit online chat and phone growth. Our brand metrics are at all-time highs. Customer satisfaction, engagement, digital traffic, and conversion are all exceeding prior year. Our balance sheet remains strong. We have significantly more liquidity than a year ago. We expect the powerful combination of our proprietary innovations, data and digital communications, direct-to-consumer distribution, customer loyalty, and mission-driven team to drive demand during the second half. In addition, the pandemic has served as a catalyst for positive, longer-term change and reinvention.
In the wake of our necessary immediate actions to reduce costs and preserve our financial flexibility, we have identified new ways of doing business, such as virtual relationship selling and digital lead management, and we are accelerating other initiatives, such as connected health. These opportunities are leading us to reallocate headcount and strategically invest in new capabilities that will support our future growth. Consistent with our past, we will use our experience and learnings to strengthen our competitive moats and advance our purpose. The structural shift in consumer attitudes and behaviors related to health and safety, which have been accelerated by COVID-19, is likely to continue. Consumers are increasingly prioritizing the well-being of their family and home, with more than 25% of consumers expecting to purchase a health-related product before year-end, according to a recent Nielsen global survey.
Quality sleep has the power to improve health and wellness. Sleep Number is at the forefront of delivering life-changing benefits to individuals and the world. The tenacity and ingenuity of our team, the disciplined execution of our differentiated strategy, and the effective use of our capital, position us well to deliver long-term profitable growth. Now, David will provide additional financial details on our second quarter.
Thank you, Shelley. The second quarter was all about agility and progression. We demonstrated agility by acting with urgency based on the real-time performance metrics we use to run the business. We learned to do things differently under extremely challenging conditions, and we levered the technology and growth-driving capabilities we built the past few years. While our selling-from-anywhere capabilities helped us reach customers throughout the quarter, the progression of our sales has certainly benefited from being allowed to reopen our stores. Today, more than 95% of our nearly 600 stores are open. In April, just 23% were open on average, followed by 47% in May and 81% in June. While uncertainty remains regarding future impacts of COVID-19, we have demonstrated our ability to improve lives even in the toughest conditions.
Our financial performance for the second quarter was significantly better than the models we used to inform our cost and capital deployment decisions. April demand was down 48% versus the prior year, followed by high single-digit growth in May and June combined. This hyper-V shaped change in demand understandably stressed our fulfillment capacity, resulting in more than $30 million incremental deliveries carried, carrying forward into Q3. Looking forward, the Labor Day timing shift is expected to move about $10 million in deliveries from Q3 into Q4, and we expect Q4 sales will also benefit by more than $25 million from an extra fiscal week this year. Net sales in Q2 of $285 million were 20% lower than the prior year, compared with a 50% reduction assumed in the scenario used to support our cost and capital allocation decisions.
More than 27% of our sales in Q2 came from online and phone sales, compared with 7% the prior year. Despite this, ARU was just 4% lower than the prior year on mix shifts, partially offset by higher bedding sales. COVID-19 closures resulted in delivered mattress units 17% lower than the prior year. The mix shift and operational inefficiencies from COVID-19 closures and lower unit volumes pressured our gross margin rate in Q2 by 380 basis points versus the prior year to 57.2%. Managing the dynamics of extreme demand challenges, changes in Q2 has certainly been challenging. Through the fast actions of our teams and agility of our global supply partners, we had no significant supply disruptions during the quarter.
Constraints and COVID-related uncertainties that affect the flow of goods globally continue to be top of mind and managed day-to-day by our team and partners. One specific example of this during Q2 is our newest distribution center in the Los Angeles area. We opened in May as planned, however, we managed very real COVID-19 challenges to staff and operate it properly. As a result, we elected to run it temporarily as a hub rather than a mattress assembly location. We've leveraged learnings from operating previous distribution centers and love this location. We expect to convert it to our fourth assembly distribution center after we manage through Labor Day volumes. For similar reasons, we also postponed the opening of our fifth planned ADC in Dallas until next year. These decisions were necessary to mitigate COVID-related business risks. We will continue to provide updates each quarter on this multi-year initiative.
During our first quarter earnings call, I highlighted scenarios that, if realized, would consume about $50 million of free cash flow from operations in the first half. Our sales in Q2 were stronger than modeled, our early and aggressive actions resulted in $35 million lower operating expenses than in Q2 the prior year. This, while continuing to support our performance-driving initiatives and absorbing severance and year-to-date incentive compensation true ups. Our year-to-date financial performance also reflects the agility of our business model in the face of extreme challenges. We reduced expenses 3% in line with year-to-date net sales change, while investing 14% more to support our innovations. Despite the impacts of COVID-19, our gross margin rate in the first half is 10 basis points higher than the prior year to date, and our net operating profit is up 2%.
Our first half EBITDA was equal to the prior year, and we generated $65 million of free cash flow year to date, up 79% versus the first six months of 2019. Our commitment to efficient capital management and this performance enabled us to pay down nearly $300 million of our revolver at the end of the quarter. We ended Q2 with $226 million of net debt, down $54 million compared to a year ago, while increasing liquidity by $129 million, including the addition of the $75 million one-year term loan. Our 2.8 times ending leverage ratio improved from 3 times EBITDA for the same period last year. Remember that our covenant maximum is 4.5 times, and our targeted operating leverage range is 2.5 to 3 times EBITDA.
The fundamentals of our business and balance sheet are strong. We are well capitalized to support our initiatives with pace and confidence while navigating through ongoing COVID-19 related challenges. We are pleased with the performance of the business. We also acknowledge that uncertainties remain for the back half of the year from COVID-19, the presidential election, and possible recession pressures. We've built our spending plans for the balance of the year based on demand approaching flat to the prior year, including the extra week benefit this year. Our long-term bias favors continued prioritization of our innovation and marketing initiatives. We intend to lean more heavily into these growth drivers in the back half of 2020 and beyond.
We expect somewhat less gross margin rate pressure from mix shifts in the back half of the year, as consumer shopping preferences include both in-store and online purchases in advantage of our vertical business. We continue to actively balance near-term business risks with our commitment to sustain our advantage strategy. Our orientation for long-term performance embraces an approach now that enables us to rebound with pace over the coming quarters. In closing, I'd like to add my thanks to the Sleep Number team and business partners across the country who have worked tirelessly to drive performance and to improve lives through proven quality sleep. Thank you. Chantelle, at this point, please open the line for clarifying questions.
As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Our first question comes from Peter Keith with Piper Sandler. Your line is open.
Hi, thanks. Good afternoon, everyone. Thanks for taking the question. I was hoping you could just expand upon the comments around the $30 million of backlog from the quarter that got pushed to Q2 to Q3. I think you had commented that you don't have any supply chain issues, so what exactly caused that backlog, and was it maybe demand related in the final weeks of the quarter?
Sure. Hi, Peter. You know, we have been giving a little more color intraquarter than normal here since COVID-19. This is really an example of us doing that. You know, if you think about where we were in April, down nearly 50%. At that time, we had an average of 23% of our stores open. In May, we had an average of 47% open. In June, 81% open. Now, you know, nearly all of our stores open. If you think about the progression of the sales, down nearly 50% in April and then high single digits for May and June, you know, that did become, you know, a big swing in our overall performance during that time.
I also mentioned that our sales performance has been progressive and throughout the quarter, so that gives you a good indicator of, you know, how that flowed, how it built through the quarter. There's also a very strong correlation with us opening our stores and our performance growth. Naturally, you know, because of May significant performance and June, both, you know, very strong months. It built an increase in the backlog.
Peter, I'd just add on, you know, having the kind of demand change that we're talking about with April down 48% and the sudden and dramatic growth in May and June, you know, that causes some pretty big fluctuations for us to manage through, and that's part of what you're seeing with, $30 million of additional business to be delivered in the Q3.
Okay. Fair enough. I guess just to clarify 1 is on that, is both May and June were up, or was it just the balance, the combined were up?
Yeah. Each of those months were up-
Were up.
... versus prior year.
Yep. Okay. You had mentioned you'd pulled back on advertising during the quarter, which I think makes a ton of sense and not very different from other players in the industry. How are you thinking about advertising now going into Q3? Is that something that you want to increase and lean into, or are you still a little bit hesitant with some of this backlog?
No, we're leaning into this, Peter Keith. You know, we did have a significant decrease in our media spend in Q2. You know, I also have to say that the precision of our media strategy has really been a significant advantage for us. You know, that and the fact that we have, you know, internal digital buying. In the quarter, we had the ability to pivot and shift our spending to reach and find an engaged customer, even with the significant media reductions. You know, that combination with, you know, our virtual relationship selling, you know, helped us build. You know, when you look at May, to think that, you know, we were up over last year with an average of 47% of our stores open, it's a pretty remarkable, you know, pretty remarkable progression.
We're, you know, we're definitely adding back media at pace, and we expect to navigate around many hurdles here in the back half as well, both around, you know, the COVID-19 pandemic and also around the political environment.
Okay. Fair enough. Thanks for the answers, good luck.
Thank you.
Thanks, Peter.
Our next question comes from Bobby Griffin with Raymond James. Your line is open.
Good afternoon, everybody. Appreciate you taking my questions.
Hey, Bobby.
Dave, I first just wanted to clarify your comments earlier about the back, your spending plans for the back half. I think you mentioned something of revenue or demand kind of equal to last year. Can you maybe clean that up for me where I understand it? I guess I'm just putting in context, since you're running up in orders now, and you're shifting in $30 million worth of delivery, deliveries from Q2, as well as you got the extra week, I'm getting a little confused on, I guess, having revenue flat versus the back half of last year.
Right.
Is it just conservative-
Understand.
you know, uncertainty out there, whatever you might, wanna put around that to help me think about it?
Right. Good, I'll do that. We're not providing guidance, first of all, and this isn't guidance, and we're trying to talk through how we're thinking about running the business in a very challenged environment, where there's a lot of uncertainty still to be absorbed. I mean, you look at the changes even this week in California. We don't have control over when jurisdictions are gonna close stores or what have you. We're navigating through a pretty challenging environment, and in that environment, we're talking about how we're thinking about our spending in the back half of the year. We're basing our spending based on sales growth versus the prior year that's flat to the prior year, including the benefit of the extra week. That's just how we're thinking about it in this environment. That's how we're managing the business side.
Hope you'd think that that was appropriate, given the uncertainties ahead.
Okay, that makes sense. Thank you. That, yeah, that makes great sense. I guess the second part of my question is, Shelly, I was just curious, as you've seen your stores reopen, have you noticed anything different about customer behavior inside the store, versus kind of pre-COVID-19 levels? You guys have a pretty unique selling process there at Sleep Number, so I'm just curious, any tidbits you've picked up for customers as they've returned into your stores?
Well, Bobby, we see, you know, I would say, a wide variation of, you know, consumer, behavior based on state and county, and you know, how the pandemic has played out in different areas. You know, we're all about being individualized. It's all about individualization for us in all aspects of our business, including our beds, with, you know, the individualized comfort. We individualize the experience, and this is where, you know, having our talented frontline team, you know, connect with the customer, and same with our home delivery teams, and they're connecting with the customer.
They're weighing out and understand the sensitivity, where the customer's at, and they meet them in a way that helps make the customer feel very comfortable and safe and, you know, we're able to meet their needs and deliver, you know, a really stellar experience. It's exciting to see, you know, such high customer satisfaction scores during such a challenging time.
All right. I will jump back in the queue. I appreciate you answering my questions. Thanks, Bobby.
Your next question comes from Seth Basham with Wedbush Securities. Your line is open.
Thanks a lot, and good afternoon.
Hey, Seth.
Hey, Seth.
You commented on some of the recent trends in May and June. Perhaps you could give us some more color around how sales are trending in key markets like Florida, Texas, and California, where we've seen a rise in coronavirus cases in recent weeks.
Yeah, again, you know, we're seeing more variation than we normally would across regions and counties, you know, where you see the COVID-19, you know, flare-ups or concentrations. Yet I would also share with you that as we've opened stores, you know, all of our stores throughout the country have quickly become productive, certainly some more than others. I think this is a, you know, good example of the ongoing relationships our front lines building with their long-term customers and, you know, benefiting from that repeat and referral. It helps us have a jump start, you know, right from the beginning. Also, our digital lead management is helping with that as well. It ensures a strong start.
Gotcha. Now, looking, for example, at the group of stores that were already reopened at the beginning of June, how did those progress through the month? Did you see some trail off in year-over-year growth trends as we got later in the month over the course of the Fourth of July holiday weekend with the rise in coronavirus cases?
Yeah. As you know, we shared the progression through the second quarter. It continued to progress in a positive way throughout the full quarter. We saw the consistency or correlation to the opening of our stores. We averaged 81% of our stores open in June, Seth. Now, you know, we're at about 95%. We've seen the progression of sales match the progression of openings.
Yeah. I'm sorry, just to clarify my follow-up question there. If you look at stores that were open earlier, say, the group of stores that was already open at the beginning of June, how did sales in those stores progress over the last six weeks?
I'm not going to get into detail on the third quarter, but as I've stated, we've seen a strong progression of our business, and that also includes stores that have been open.
Got it. Thank you very much.
Thanks, Seth.
Your next question comes from Brad Thomas with KeyBanc Capital Markets. Your line is open.
Thanks for taking my question. I wanted to first ask about the strength you're seeing in the direct business. I was curious if you could talk a little bit more about if you think this is gonna be sort of a permanent shift for you. Do you think this is gonna be sticky as a growing percentage of sales, or do you think, as you reflect on the last few months, perhaps there were individuals that visited a store they hadn't closed yet, and they decided to end up finally converting online? I'd be curious more on the insights you're seeing here.
Let me start with the fact that we're 100% direct to consumer, which is very unique to Sleep Number. All of our distribution comes through either our stores, you know, online, chat, or phone. You know, this is what we've designed the strategy for the customer to be able to interact with us however she wants. We see the customer interact through multiple touch points, generally, and, you know, we've certainly been, you know, pretty aggressive in our digital communication, as well as our digital lead management, to be able to serve her particularly during this time, in a different way. As David highlighted, you know, the online phone and chat sales were 27% of our business, and I mentioned we've already surpassed 2019 numbers.
I expect this business to continue to be a larger part of our total as we move forward. As our stores have reopened, we've continued to see, you know, triple-digit growth in our online sales. You know, we know there's still going to be a lot of fluctuation around COVID-19 here in the back half, you know, so it's hard to provide, you know, clarity about what this is going to look like. I think importantly, we're gonna be very fluid and we've shown our ability to pivot and be agile and be responsive to the consumer where she wants to shop. In the end, you know, maybe this is, you know, double the penetration it was in the past.
We absolutely see it as additive and complementary to our stores in the long term.
That's very helpful, Shelley. If I could ask one of David, recognizing you're not giving guidance, it's not gonna stop us from trying to get more color out of you. I guess in a world where you're planning for, you know, the demand growth, including the extra week, to be flat-
... Can you help give us some insights into maybe, puts and takes to think about from a gross margin, and expense standpoint?
Okay, I will do my best. How we're thinking about it, Brad, is we're planning the expenses based on, as I said, demand that's about even with the prior year, including the extra week. However, we also plan to lean into our innovation drivers, our long-term growth drivers, and our near-term growth drivers, you know, through marketing capabilities. You'll see a little bit of an uptick in those areas in the back half of the year relative to prior year. In addition to that, I guess in, on the gross margin side, the mix shift with higher mix of our sales coming from online, phone, and chat, the natural tendency is for the mix to move a little bit down the line.
You saw that that impacted our ARU by about 4%, and it had a pretty reasonable impact on our gross margin rate. We expect less of an impact on our margin rate in the back half, as we expect to have more of our stores open, the majority of the back half. But again, we don't know for sure what that's gonna look like. Giving you guidance on or giving you kind of color on what to expect on gross margin is really tough, but that's how we're thinking about it.
Great. Very helpful. Thank you all so much.
You bet.
Your next question comes from Curtis Nagle with Bank of America. Your line is open.
Great. Thanks very much for taking my question. First, a quick one on the store base. I think you closed 19 in the quarter. How many of those were part of the 25 stores you had on month-to-month leases that you had indicated were potentially closed and, or had potential to close permanently? How many were part of, you know, just the basic, you know, relocation plan, and how should we think about the footprint for the rest of the year?
The majority of those were on month-to-month leases that we were taking action on, you know, given the environment and our ability to transfer the majority of those sales and profits from those stores to other stores in the geography. We're pretty much through that part of the effort at this point. We're really leaning into our growth drivers on all fronts. We have, you know, our capitalization is very strong. We have lots of liquidity to support our initiatives, and we'll be leaning into our CapEx and our store expansion plans, you know, in the back half as well.
Okay, understood. Just thinking a little bit more about the, you know, a slight downtick in revs per mattress. You know, you indicated that it's due to the online mix shift, which makes total sense. I guess, how much is that due to, you know, perhaps attachment selling, you know, maybe not being as, as strong, or how much is that due to, you know, an actual product mix? You know, people mixing a little bit lower in terms of, you know, the actual actual bed. You know, maybe more PSC beds relative to i beds, you know, how do we kind of think through that?
Well, you know, our business model, the more we have touch points with our customer, the more often we reach out, have a contact with them. If they only have a transaction online, it generally comes in at a lower model of product. The more often we have interactions, so if we have online plus chat, it moves up the line, and if it ends up in the store, it's got the best total solution for the customer and frankly, highest satisfaction for the customer, highest NPS scores, et cetera. You know, not only does it come with higher ARU with those in-store transactions, but it's overall a better overall experience in total. We've improved significantly through the digital capabilities that we've been talking about. There was only a minor slippage of the ARU, down 4%.
I think that's pretty minor, given the mix of sales of 27% coming from these other touch points of online, phone, and chat. However, you know, that is primarily changes in model mix, not as much about lower attach.
Okay. Very clear. Thank you.
Your next question comes from Atul Maheswari with UBS. Your line is open.
Good evening. Thanks a lot for taking my question. If online phone channels are still growing 100%, even with nearly all of your stores open, does it make you rethink your store strategy going forward? Will you look to pare back on your expectation of adding mid-single-digit square footage every year, or will you even potentially look to lower square footage going forward?
... We've contemplated this as part of our strategy for multiple years, and we constantly go back to our real estate strategy and look at a five-year horizon with, you know, changing consumer behavior. You know, we see this pandemic as, you know, absolutely a catalyst to not only, you know, shift consumer attitudes around health and wellness, but also, you know, how they shop. This has been contemplated in our strategies. This is, you know, why we have such a high average revenue per store already. Why we've, you know, held to having, you know, a distance of, you know, about 20 minutes between our stores.
Having the availability for a customer to have an in-store experience, we still see is very important for a brand like ours and a brand that you're going to be highly engaged with. You know, we see this as complementary. You know, yes, we still have a triple digit. I said triple digit, not 100. We're excited about that, and we see it as additive. We intend to, you know, grow all touchpoints.
Understood. Just as my follow-up, and I know this was touched upon earlier, but May and June were up high single digits, and I understand you don't wanna get into too many specifics here, but how would you compare that high single digit to how the first 2 weeks of July has trended? Just any color directionally, have sales remained in line or have sales decelerated or accelerated versus May and June?
Yeah, this is very similar to a question I had earlier. I indicated that our sales have been progressive throughout the second quarter. There's been a strong correlation with us opening our stores and the increased number of store openings, along with our, you know, stronger overall top line performance. As a reminder, in June, we averaged 81% of our stores open. Right now we have 95% of our stores open.
Okay, thank you.
You bet.
Our next question comes from Peter Keith with Piper Sandler. Your line is open.
Hey, thanks again, guys. A couple of follow-ups. You know, David, last call, you talked about a $150 million annualized cost reduction plan. The sales have gotten better, much faster than you thought. Where would you sort of peg that cost reduction plan on an annualized basis, given sort of the framework you've provided for the back half of the year to us?
Peter, That plan was based on, as you recall, scenarios that included down 50% in Q2, down 25%-ish in Q3, and flattish sales in Q4. Clearly, down 20% here in Q3, or excuse me, in Q2, you know, there are significantly more variable costs associated with the higher sales levels. Talking about the back half being essentially flat to the prior year for the whole back half, you know, clearly there's gonna be more variable costs that are incorporated in there. We're not gonna give an update on, you know, the overall spending cuts, but we did everything that we thought we would be doing and more.
You can look at the cash generation in Q2 as an indication, I tried to give you some kind of comparison in the sense that we expected, based on those models, to consume about $50 million in cash from free cash flows from operations in the first half and instead generated significantly more than that. What was it? $65 million or so in that same period. Pretty significant swing in overall liquidity and performance in that first half. We're just continuing to be appropriately conservative, given the uncertainties, on our spending in the back half. We will continue to pull every lever to drive performance where those opportunities allow, and if we needed to, we can always pull back as well.
Yeah, Peter, you know, the add I'll provide here is, as we went into the pandemic and we took actions against all those costs, including, you know, significant furloughs, and, you know, now at this point, you know, we have brought back our the majority of our team. The change in business and the trajectory and challenges did result in some job eliminations along the way. At the same time, you know, we continue to place the business in a path that we have the financial flexibility, and yet we wanna keep building and driving our performance overall. It's just, it's important to make the necessary cuts and, at the same time, be able to pivot and grow or cut more, depending on where we're at.
We're gonna remain very agile, and I think we've demonstrated our ability to do that, in short periods of time, in pretty dramatic ways here in the second quarter.
Okay, fair enough. That's a good answer. Also, I wanna circle back on maybe sales trends at stores that have been open for over a month or two. One thing we hear industry-wide is that the average selling price just continues to strengthen week over week as we've moved through June and into July. Are you seeing that at stores that perhaps opened up in May? Is there sequential improvement in those stores, or it tends to open up and then kind of hold steady from that first week?
Well, our model is so different than most. You know, we have quite a bit of, you know, consistency in our sleep professionals' performance with our selling process, and that delivers a very, you know, consistent and growing ARU, and that's what we've seen. As you know, we're now, today, now in this position of, you know, 95% of our stores are open, you know, then our overall, you know, ARU is, you know, far more normalized. We've seen that, you know, pretty immediately as stores have opened, our ARU is, you know, right where you would expect it.
I think that's one of the, you know, one of the exciting things I've seen in the business, Peter, is, gosh, our, you know, our, you know, second- and third-tier metrics have held, even with all this disruption, have held so steady in, you know, the fluctuations. As things move back, they move right back. That's very encouraging for, you know, our ability to be able to navigate through all of this, you know, over an extended period of time.
Sure. Okay. One last question for you guys, sorry for maybe specifically targeting June. You've kind of used two different phrases around demand growth and sales growth. Yet you have this big backlog in June that would have impacted sales for the month rather dramatically. Were sales in June overall positive, despite that $30 million backlog?
When we're talking about this demand and sales on an interim basis, we're talking about sales orders and not necessarily delivered sales, delivered net sales. The answer is yes, they were.
Delivered net sales?
Both.
Yeah. Okay. No, that's impressive. All right. Thanks a lot, guys. I appreciate the extra insights.
Okay.
Yeah.
Thanks a lot.
Thank you.
There are no further questions at this time. I'll now turn the call back over to the speakers for closing remarks.
Thank you for joining us today. We look forward to discussing our third quarter 2020 performance with you in October. Sleep well and dream big.
This concludes today's conference call. You may now disconnect.