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Tempur Sealy International Inc (NYSE:TPX)
Q2 2020 Earnings Call
Jul 30, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Tempur Sealy Second Quarter 2020 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Ms. Aubrey Moore, Investor Relations. Please go ahead, ma'am.

Aubrey Moore -- Investor Relations

Thank you, operator. Good morning, everyone, and thank you for participating in today's call. Joining me in our Lexington headquarters are Scott Thompson, Chairman, President and CEO; and Bhaskar Rao, Executive Vice President and Chief Financial Officer. After prepared remarks, we will open the call for Q&A. Forward-looking statements that we make during this call are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that these forward-looking statements, including the company's expectations regarding sales, earnings, net income and adjusted EBITDA, and anticipated performance for 2020 and subsequent periods, involve uncertainties.

Actual results may differ due to a variety of factors that could adversely affect the company's business. The factors that could cause actual results to differ materially from those identified include economic, regulatory, competitive, operating, and other factors discussed in the press release issued today. These factors are also discussed in the company's SEC filings including, but not limited to, annual reports on the Form 10-K and the company's quarterly reports on Form 10-Q, under the heading Special Note Regarding Forward-Looking Statements and/or Risk Factors. Any forward-looking statement speaks only as of the date on which it is made. The company undertakes no obligation to update any forward-looking statements.

This morning's commentary will include non-GAAP financial information. The press release contains reconciliations of this non-GAAP financial information to the most directly comparable GAAP information, except as otherwise discussed in the press release, as well as information regarding the methodology used in our constant currency presentations. We have posted the press release on the company's investor website at investor.tempursealy.com and have also filed it with the SEC. Our comments will supplement the detailed information provided in the press release.

And now, with that introduction, I will turn the call over to Scott.

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Thank you, Aubrey. Good morning, and thank you for joining us on our 2020 second quarter earnings call. Our thoughts continue to be with all the people around the world whose lives have been impacted by the global health crisis. I'll begin with providing an overview on how we've strengthened our competitive position. Then Bhaskar will review in detail our quarterly financial performance, discuss several second quarter highlights and review the balance sheet and liquidity. Finally, I'll conclude with some thoughts about our long-term business outlook. Our second quarter global operations were dramatically affected by COVID-19. The board of directors and I are proud of the company's swift response to the unprecedented challenges the worldwide health crisis has presented.

We focused on the safety of our employees while working tirelessly to continue delivering on our commitments to our retailers and supplier partners. It was definitely a quarter of lows and highs ending clearly on a high note. Despite the remarkable amount of volatility and transformation within our industry we are reporting a second quarter net sales decrease of only 8%. In fact, U.S. sales grew 2%. We're pleased to report adjusted EBITDA per our credit facility decreased only 3% compared to prior years. Our leverage ratio improved to a record low of 2.8 times adjusted EBITDA, down significantly from 3.7 times as of June 30, 2019. And short-term liquidity expanded to over $600 million. I want to some time discussing how we've strengthened our competitive position in the marketplace and how we see opportunity to continue our momentum in future periods.

Over the last five years, we've focused on finding problems and addressing them with an eye to creating long-term value. This has kept us nimble and guided our decisions in making our investments in people, products and processes. These decisions created a solid foundation, which began to pay off in a big way last year. We saw this trend accelerate into the first quarter of 2020 and set the company up well to deal with the unforeseen worldwide health crisis. I want to briefly touch some of the foundational elements that have improved our competitive position over the past five years. First, we've completed the largest launch of our all new innovative Tempur products in the U.S. in our history. These products have done well in the marketplace. Our product quality was evident when Tempur-Pedic was awarded Number 1 in customer satisfaction for retail mattress segment in the JD Powers 2019 Mattress Satisfaction Report.

Second, our multiyear investment in Sealy operations have resulted in high quality products and high levels of service for our customers but also improving our profitability. After a strong year of growth in 2019 we believe Sealy is now the largest bedding producer in the United States. Third, we expanded our relationship with new and existing third-party retailers through multiple new supply agreements. Retailers have recognized the investments we've made in our products, brands, customer service and manufacturing operations and we continue to receive inbound interest from retailers who want to lean more heavily into Tempur Sealy family of products and brands. In addition our Retail Edge Program has allowed us to provide cutting edge market insights and sales tools to our third-party retailers.

The majority of these -- this program is focused on expanding retailers' web-based business and their understanding of customer trends. The program is working well as our legacy-based retailers have ramped up their online business, which provides us more share in a growing online market. Four, our omni-channel focus resulted in rapid expansion in our direct channel, diversifying distribution and allowing product representation wherever customers want to shop. We've experienced tremendous success within the direct channel to-date. By the end of 2019 our full year global direct channel sales had nearly doubled during a two-year period. More recently, this quarter has seen online growth rates of over 125% and solid brick-and-mortar store performance once the stores were reopened. Our U.S. Direct business is expected to be over $300 million this year ranking it in the top 10% all U.S. bedding retailers on a stand-alone basis.

Unlike many other DTC competitors, our direct-to-consumer business is highly profitable with decreasing customer acquisition cost and significant cash flow generation for the company. Fifth, with targeted product, we've rapidly expanded our presence with an alternative distribution channel particularly with online retailers, on-time only retailers. It's still very early in this rollout. We are pleased with the momentum and the profits that we generated. Sixth, we've pivoted our media strategy in the U.S. to include online channels as we follow customer trends. This change in our media mix allows us to optimize our strategies for consumers early and late in their shopping process, while continuing to drive high interest in our brands and products. Seven, we completed several opportunistic tuck-in acquisitions including Sherwood Bedding and Sleep Outfitters, which are expected to have high return on invested capital and further our vertical integration.

Eighth, we strengthened our balance sheet, improved our cash flow, and Bhaskar will discuss our financial strength in more detail shortly. Finally, the ninth and most important component of our business, our committed, capable people who have strong shared values. We have a culture to deliver for our customer all over the world and from that grow shareholder value. The foundation we have built over the last five years is rooted in adaptability and prudent capital allocation. This positions us well to address unforeseen disruptions in the market due to COVID-19, which had a peak impact on our business in the early part of the second quarter. Our proactive response has maintained our optionality for our business in the fog of uncertainty. Early in the second quarter we took material actions to adapt to an expected depressed long-term sales outlook.

However, we were met with a sudden surge in demand beginning in May as consumers started to shop for bedding again all over the world. We worked quickly to ramp up our operations to support the robust sales environment. The strong demand for bedding in general and our products specifically has continued into the third quarter unabated. Second quarter sales could have been stronger, but both we and our suppliers had reduced capacity earlier in the quarter in response to the falling demand and our U.S. Sealy manufacturing operation was unable to keep up with the increased demand for our products as the quarter progressed. The Tempur-Pedic manufacturing process is less labor-intense and has fewer components than the Sealy process and thus is not as impacted by the current issue. Our U.S. order bank at the end of the second quarter was twice as large as compared to the prior year.

We're still in the process of ramping our U.S. production capabilities to meet the heightened demand and we expect to continue experiencing capacity constraints on U.S. Sealy products through the third quarter. We believe an important driver of the robust sales wave is the recent shift in consumer spending habits as consumers are focused on in-home products versus travel and entertainment. The duration and magnitude of this trend as well as the continued acceleration in sales we are seeing leads us to believe that our sales trends are not only due to pent up demand or government stimulus but that we are likely experiencing a new favorable long-term trend. We are well-positioned to benefit from this new environment. Our research points to the fact that consumers have become omni-channel shoppers and are powerful omni-channel platform is well-positioned to capitalize on the current market, as consumers can find our products wherever they wish to shop.

Our research shows that 90% of consumers shop online at some point in their mattress buying process. You might find it also interesting that our research on consumers before the virus indicated that three out of four online buyers visit a brick and mortar store before buying a mattress online. The point is that our customers are omni-channel buyers and we are built to serve that kind of customer. We estimate about 25% of our U.S. sales are purchased directly online through either our own e-commerce or through existing third-party retailers, which is up from the time before COVID-19 reached the U.S. We also continue to work with our third party-retailers to improve their online presence through our Retail Edge Program, so that we can continue to help customers shop for our products both online and offline.

During the second quarter, we saw a number of new -- saw the number of new customers on our own websites more than double versus prior year but also seeing a healthy level of repeat sales. We believe our e-commerce business is truly best-in-class with a high level of customer loyalty and engagement. One benefit of the current operating environment is more efficient spend for media. Total advertising spend was down 16%. Our second quarter net sales were only down 8%. We believe we are getting more for our money in advertising on a national level and expect leverage on advertising to continue into the third quarter. Additionally our digital customer acquisition costs continues to fall. Our direct team continues to optimize for profit and are capitalizing on the recently reduced digital advertising cost in the marketplace.

This makes the third quarter in a row of falling cost to acquire a customer, proving we're not buying volume, we're chasing unprofitable sales. Our second quarter adjusted EBITDA shows how strong our competitive position is within the industry. We are pleased with the quarter to achieve adjusted EBITDA per our credit facility of a $110 million. As we've discussed before, we see our financial strength as a powerful competitive advantage in a thinly capitalized industry that enhances our operating and strategic flexibility. The last six months have heightened the importance of this attribute. To this end, we are lowering our targeted leverage ratio for the second time in the last 12 months. Our new revised ratio of net consolidated indebtedness to adjusted EBITDA target is now 2 times to 3 times. Reduction in our leverage target is not due to any market concerns.

It is a strategic move to provide us with industry-leading flexibility. You can clearly see from our recent performance that the company's business model and experienced executive team can handle economic volatility and still generate strong cash flow. We believe this lower leverage ratio will benefit our shareholders over the long term. Lastly, due to our strong adjusted EBITDA performance in the fourth quarter of 2019 and the first half of 2020, it is now possible that by the end of the third quarter 2020 we may achieve a trailing four quarter adjusted EBITDA in an amount equal to or greater than the $600 million needed to trigger the threshold payout under our aspirational long-term incentive comp plan.

As a reminder, the aspirational plan was put in place five years ago to motivate the company's approximately 150 top leaders to turnaround the business in a difficult and changing industry. The threshold target of $600 million represents a 44% improvement in trailing four quarter adjusted EBITDA from the time the plan was put in place. The current aspirational plan will terminate December 31, 2020 and we do not anticipate adopting a similar plan in the future. If the plan is triggered, the company would incur non-cash stock compensation expense. In order to ensure that we have adequate time the third quarter financials to undergo additional review we plan to host our third quarter earnings call slightly later than usual.

So with that, I'll turn it over to Bhaskar to review our financials in more detail.

Bhaskar Rao -- Executive Vice President and Chief Financial Officer

Thank you Scott. Before going into details, I would like to briefly expand on the trends we experienced through the quarter. We exited the first quarter with accelerating negative trends as COVID began impacting our North American market. In early April, the trends reached the worst at down 80% during a few days. We then saw sale trends improve throughout the remainder of the month and we ended April down 55% as compared to the prior year. Heading into May we anticipated that the April trends would continue to modestly improve throughout the remainder of the quarter. However, business conditions improve quicker than we anticipated in the U.S and by Memorial Day, we began to experience positive year-over-year trend in the U.S. The reopening of brick-and-mortar stores, the acceleration of our e-commerce business and the improving global trends drove the sequential improvements from April to May to June.

The inability to foresee this rapid change of volume has caused some inefficiencies in labor and shipping costs that's pressuring gross margin. We are still experiencing these costs as we wrap up. We have and we continue to spend whatever money we need to service our customers. Turning to the financial results, please note that we have adjusted $25 million of charges during the quarter. These charges were in accordance with our senior secured credit facility and the subsequent financial details have been adjusted for these items. I want to call out that $8 million of those charges were in operating margins from COVID costs associated with temporarily closed company-owned retail stores and sales force retention cost. Of those $8 million in charges, $6 million were in North America and $2 million were in International.

The impact on EPS for the second quarter was $0.11 per share. Before going into the segment details, I would like to highlight a few items as compared to the prior year. Adjusted gross margin declined 280 basis points to 40.6%. Adjusted operating margin was 11.7%. Adjusted EBITDA for the credit facility decreased slightly to $110 million and adjusted earnings per share was $0.79. Turning to North American results, North American net sales decreased 3% in the second quarter. On a reported basis the North American wholesale channel decreased 6% and the direct channel increased 27%. The direct channel's growth was driven by robust web sales trends of up over a 140% versus the prior year partially offset by the headwinds in our owned retail doors as most were closed during the period.

Since those stores have opened again, trends improved and we now are seeing same-store sales positive year-over-year in July. North American adjusted gross profit margin declined 220 basis points to 38.6% as compared to the prior year. The decline was principally driven by product and brand mix, partially offset by decrease floor model expenses and lower commodity costs. As anticipated, we experienced negative brand mix in the quarter as Sealy recovered more quickly than Tempur. During the second quarter some retailers were deemed essential and were able to remain open throughout the quarter. Those retailers had lower average selling price versus our fleet average, which benefited Sealy trends, creating a temporary pressure on our average selling price and margin during the second quarter.

Tempur trends were negatively impacted as all of our Tempur retail stores were closed during part of the quarter and most retailers focused on volume, which emphasized Sealy over high price Tempur products. While we expect these temporary headwinds to average selling price from product and brand mix to still be present in the third quarter, we believe that they will lessen substantially as Tempur sales trends have improved and are running ahead of Sealy. North American adjusted operating margin was 14.3% and excluding COVID-19 charges was 15.4%, an improvement of 150 basis points as compared to the prior year. This improvement was primarily driven by lower operating expenses as a result of cost actions during the quarter, partially offset by the decline in gross margin.

These results include an incremental bad debt expense of $7 million principally related to the bankruptcy of one department store in the U.S. during the quarter. When you take this into consideration, you can see why we are especially pleased with our expense management practices over the past few months, which resulted in expanded operating margins by mitigating the unprecedented impacts of the pandemic on our business. Turning to international, net sales decreased 30% on a reported basis. On a constant currency basis, international net sales decreased 27%. As a reminder, our international products are priced at the upper end of the luxury market. In the U.S., we have products across a wider range of prices, which is very different than our international go-to-market approach.

Given our concentration internationally in the luxury market, we expected and have seen slower recovery of sales trends. There was a wide variation of performance between different regions in the second quarter. Our Asia business, which was first to be impacted by the pandemic and experienced large declines in February and March rebounded nicely and returned to growth during the second quarter. Outside of Asia, our International business was challenged due to the timing of the global pandemic but conditions generally improved throughout the quarter. All major markets are now open for commerce and are experiencing varying degrees of improving sales trends. As compared to the prior year, our International adjusted gross margin declined 150 basis points to 53%.

The decline was primarily due to fixed cost deleverage on lower unit volumes and decreased royalties partially offset by favorable country mix. International adjusted operating margin was 14.6% and excluding COVID charges was 16.6%, a decline of 370 basis points as compared to the prior year. This decline was primarily due to fixed cost deleverage on operating expenses, increased bad debt expense and the decline in gross margin. These declines were partially offset by the performance of the Asian joint venture. Turning to the company's global performance; excluding COVID charges, adjusted operating income was $78 million. Adjusted EBITDA per the credit facility was $110 million and adjusted EPS was $0.79, which clearly demonstrates the flexibility of our business model. The slight decrease in adjusted EBITDA per the credit facility was primarily due to fixed cost deleverage on lower unit volumes partially offset by expense management principally in other selling and marketing and lower floor model expenses.

Commodities were slightly better than expected for the second quarter and we expect favorable commodity cost to continue for at least the next few months. We believe that in the third quarter we will experience about $5 million of benefit from commodities including the impact of tariffs. The U.S. government recently ruled in favor of extending the anti-dumping actions to an additional seven countries which we did -- which were deemed as dumping products in the U.S. We believe these activities could materially benefit demand for U.S. made value priced mattresses. These actions are designed to limit the import of extremely low price products so we expect there could be a bit of a tailwind for the industry as it may raise the opening price points in the U.S. market and provide some benefit to our U.S. Sealy, Sherwood and Comfort Revolution businesses.

Our supply chain has been impacted by the rapidly changing environment. Some materials in the production of bedding products are being used to -- used for making personal protective equipment as the U.S. Government has mandated that domestic suppliers of the material redirect capacity for such use. We have taken certain steps including pricing actions to partially mitigate the impacts as our supply remains constrained on these items. Now moving to the balance sheet and cash flow items, we generated second quarter record operating cash flows from continuing operations of $155 million and spent $23 million on capex during the second quarter. Our record operating cash flow was driven by our focus on disciplined cash management.

I would like to further discuss our liquidity. At the second quarter, consolidated debt less cash was $1.6 billion. As Scott pointed out, our leverage ratio under the credit facility was 2.8 times down significantly from 3.7 times at the end of the second quarter 2019 and is within our new target range of 2 to 3 times. As a reminder, we entered into a $200 million 364-day term loan in May, which increased our liquidity during a time of great uncertainty. We ended the quarter with over $600 million of available liquidity, which included a $147 million of cash on our balance sheet and over $400 million available under our revolving credit facility. I want to touch briefly on our accounts receivable, going into the quarter we recognized some of our customers were under financial strain from mandated shutdowns, which could expose our AR.

As of June 30, 2020 despite the substantial volatility in the market, our accounts receivable aging was consistent as compared to the prior year. This was an especially good sign to me that the broader U.S. bedding market has held up much better than we had expected. And the credit risk can return to normalized levels. As we have discussed on previous earnings calls, our variable cost structure naturally flexes. During the quarter, we implemented further cost reductions with a focus on preserving cash and improving our liquidity position when we felt it was needed. These reductions were primarily in advertising, personnel, other staffing related items and variable compensation. As the business trends improved, the variable expenses increased in line with revenues and as we felt more confident in our outlook, we brought back most of the discretionary expenses as well.

We now expect most of our income statement line items to have a similar rate to sales as they have historically. In short, we are playing offense not defense which changes our cost outlook. We are not in a position to issue full year 2020 adjusted EBITDA guidance today, but I would like to offer color on our near-term expectations excluding any material unforeseen changes in the operating environment. Our trends for the third quarter to-date have accelerated from the second quarter across all geographies and all brands. Given the improving trends we have an internal target for global net sales to be about 25% positive in the third quarter as compared to last year. This takes into consideration our capacity constraints and would imply that by the end of the third quarter adjusted EBITDA could possibly reach the aspirational plans low end threshold of $600 million on a trailing four quarter basis.

This would be a remarkable result in the third quarter as it would be a 25% year-over-year growth. As a refresher, the aspirational plan is tied to challenging performance targets. The plan is triggered when the company achieves between $600 million and $650 million of adjusted EBITDA on a trailing four quarter basis through the end of 2020 as determined by the compensation committee of the board. If the threshold is triggered, then between 550,000 and 825,000 restricted stock units will vest resulting in a non-cash one-time charge between $33 million and $50 million and a dilution of 1% to 1.5% in the quarter if the performance target is achieved. There will be a true-up in the fourth quarter if the trailing four quarter adjusted EBITDA achieved is greater than in the third quarter.

Lastly, I would like to flag a few items for modeling purposes. For the full year 2020 we currently expect D&A to be $135 million and $140 million. Total capex to be between $100 million and $110 million, which includes maintenance capex of $70 million, interest expense of $80 million to $85 million, a tax rate between 28% and 29% and a diluted share count of 53 million shares. If we trigger the aspirational plan, we would expect D&A would be higher by at least $33 million. The tax rate will be unfavorably impacted as this non-cash compensation charge would not be deductible and the share count would also increase.

With that, I'll turn the call back over to Scott.

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Thank you, Bhaskar. Great job. Tempur Sealy is a market-leading, vertically integrated, omni-channel global company with solid fundamentals in a growing category. We believe we're well-positioned to deliver above market performance as we focus and are passionate on our long-term initiatives. Our four key long term corporate initiatives include: first, develop the highest quality bedding products in all the markets we serve; two, promote worldwide brands with compelling marketing; three, optimize our powerful omni-channel distribution platform; and fourth, drive increased EBITDA. These long term initiatives helped us weather one of the greatest challenges industry has ever faced and positioned the company not just to deal with the crisis but to emerge even stronger on the other side.

I would be remissed if I did not thank our world-class workforce, an outstanding third-party retailers, suppliers, licensees and joint venture partners, all who have made Tempur Sealy resilient and successful. There are few items in particular that give me confidence about the future. First, our go-to-market approach around the world is diversified and it's proven to follow the customer wherever and however they want to shop. Second, our pivot into compressed products has been promising, realizing solid growth both with TEMPUR-Cloud and Cocoon by Sealy. These products have been highly successful, driving additional direct channel growth and generating interest in Tempur Sealy products within a new segment of consumers.

We continue to invest in this growing portion of the market and have purchased over 25 compression machines for our network to assist us in providing the most convenient and highest quality product to the consumer. Three, Sealy has become the number one brand in the U.S., which speaks to market share gains, a high level of quality and value in the industry. Our new Sealy plant in Dallas, Texas is on track to open in the fourth quarter to help support further growth. Fourth, our recent acquisitions have been very successful. On the manufacturing side, our acquisition of Sherwood bedding company has gone well, and provides us a powerful entry into the private label and OEM market.

The Sherwood team has plans to expand the manufacturing capabilities with a new Sherwood plant in the Northeast and to increase the square footage in an existing facility in Florida. Additionally, they have leverage Tempur Sealy's strong retail relationships as well as Sherwood's strong product lineup to expand their balance of share for OEM products at existing distribution. On the retailer side, I want to highlight our acquisition of Sleep Outfitters from bankruptcy has been very successful as it seamlessly integrated their retail store base into our operations, and they are now contributing to our financial performance.

Five, the recently increased Tempur-Pedic U.S. media spend is supporting the recovery of premium bedding in U.S. market and helping all retailers move ASP up. And six, lastly, our margins, cash flow, adjusted EBITDA during the period were above our expectations and compare favorably within and outside the industry. Over the last five years we've had tremendous -- we've made tremendous progress in strengthening the foundation of our company. With a strong foundation in place and a healthy tailwind of consumers eager to spend on their home, Tempur Sealy is now positioned to grow its sales and earnings for the years ahead.

With that, operator, please open the call up for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Curtis Nagle with Bank of America. Your line is open.

Curtis Nagle -- Bank of America Merrill Lynch -- Analyst

Good morning, guys. Thanks very much for taking my question. Yeah, so I just wanted to quickly just touch on mix and gross margin in 3Q, so you'll have less capacity constraint in Tempur versus Sealy, obviously, sales are going to be extremely strong in the quarter just pointing to that more stores open including your own. So I just want -- why wouldn't we or why shouldn't we expect a pretty decent improvement in North America gross margin due to these mix factors?

Bhaskar Rao -- Executive Vice President and Chief Financial Officer

Curt, we would expect gross margin expansion in the third quarter. You hit it right on is that if you compare to the first quarter, we should see improvement and obviously on a year-over-year basis just reiterating some of those things you said is that we would anticipate product brand mix to dissipate as we get through the third quarter as well as we will have a bit of a commodity tailwind for us. And then some of that deleverage that we saw in the second quarter that should dissipate as well. So you're spot on.

Operator

Thank you. And our next question comes from the line of Bobby Griffin with Raymond James. Your line is open.

Bobby Griffin -- Raymond James & Associates, Inc. -- Analyst

Good morning, everybody. Hope you're all doing well and staying safe. Congrats on managing through a difficult quarter.

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Thank you Bobby.

Bobby Griffin -- Raymond James & Associates, Inc. -- Analyst

Scott, I have one of your favorite two-part questions here, but I was just curious if you could spend a little bit on as the business start to recover what kind of did you see in the wholesale trends by account size in the U.S.? And then maybe compare and contrast that to kind of the trends in International Wholesale? I know there's some investor worry about just the different size and the fragmented nature of the bedding industry with small businesses and stuff.

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Yeah. Thanks for your question. Let me see if I can kind of help you with that. In the U.S., in general, I would say the larger retailers came out of the box faster. They were a little bit quicker to lean into online. A little bit more aggressive in their advertising. And so we saw that -- the bigger retailers came out faster and then probably I'm going to say 30 to 45 days later, we saw what I'll call the all other in our terminology. It's like someone turned the switch on almost started coming out of the box. And by the time you got to the end of the quarter and into July, I would tell you that both the larger retailers and all other were about equal as far as the strength of which they came out of this particular trough. Internationally, I mean it is all over the board by country. I don't think there's anything from an international standpoint where there was any difference between the large retailers and the small retailers coming out of the box internationally. It is clearly by country, and it all relates to the virus.

Bobby Griffin -- Raymond James & Associates, Inc. -- Analyst

Thank you.

Operator

The next question comes from the line of Atul Maheswari with UBS. Your line is open.

Atul Maheswari -- UBS -- Analyst

Good morning. Thanks and thanks a lot for taking my question. Scott, at this point what is giving you visibility with respect to sales over the balance of the third quarter? I understand that July is very strong, but what's giving you the confidence that this will continue in August and September? And then along those lines, is the continuation of July trends what's baked into your guidance of 25% sales growth or are you expecting trends to decelerate in August and September and still hit the 25% mark? Thank you.

Scott L. Thompson -- Chairman, President and Chief Executive Officer

All right. Thank you for your question. Let me be first of all clear. As we sit here today, I mean this is a very broad-based order trend that we're seeing. July to-date, we're experiencing order growth in every country in the world we operate. So I mean it's not just U.S. stimulus checks or something like that. We're seeing order growth in every country in July. I think that's one of the most important things that I would tell you that gives us confidence. Also if we look outside of our category, when we look at home furnishings, look at home development, look at RV sales, I mean there is clearly a huge wave of discretionary income that is moving between, I'll call it travel and entertainment for lack of a better way to say it into other categories and we're benefiting from that.

We've got an extremely large back order, which is unusual for us. So we've got the orders in-house, we have literally turned down tens of millions of dollars of orders because we're capacity constrained and I don't think we've ever turned down orders in our history. So we're turning down some orders in the U.S. primarily in the Sealy side of the house. So when we look at things, we have pretty good visibility to the third quarter and in the -- I'm not going to call it guidance in the 25% to give you some perspective. Most of the risk in that number has to do with capacity constraints not demand. Demand feels very strong everywhere we look. Now, we don't have a long visibility because I think obviously that's going to be dependent on some of the healthcare issues worldwide. But we've got, what I'd call very strong visibility in the third quarter, which is why we felt comfortable giving you some perspective.

Bhaskar Rao -- Executive Vice President and Chief Financial Officer

Atul, just to answer your second part of that question, what I would say is just as a reminder we did start our new distribution in the back half of the third quarter. We're not going to necessarily parse up the quarter but just be mindful that it did start in 3Q of 2019.

Operator

Thank you. And our next question is from the line of Peter Keith with Piper Sandler. Your line is open.

Peter Keith -- Piper Sandler -- Analyst

Hey. Good morning, everyone. Congrats on the rapid recovery. I want to just maybe have a follow-up question to the last comments about capacity constraints and your current approach to advertising and Scott, I think you'd said you're playing more offense. Are you leaning into advertising as much as you want to right now or have you pulled back because of some of the supply constraints that you've talked about?

Scott L. Thompson -- Chairman, President and Chief Executive Officer

No, we're playing a long game. I mean, you can make an argument that we could pull back on Tempur advertising, make a little bit more money in the third quarter and do that kind of stuff. But look, we're advertising big on Tempur and leaning into our media really for the foreseeable future. And what we're seeing over the last couple of months is the Tempur growth rate has come up significantly and now is actually growing faster than Sealy. We think it's important for us to help lead the industry kind of out of this trough and help push ASP because that has a huge economic benefit for our retailers and we kind of look at that as part of our responsibility as the largest bedding company in the world.

Operator

Thank you. Our next question is from the line of Seth Basham with Wedbush Securities. Your line is open.

Seth Basham -- Wedbush Securities -- Analyst

Thanks a lot and good morning and congrats on delivering a very strong quarter in the end. The question I have is just around mix. You mentioned leading the industry out from an ASP standpoint. But can you comment on within the Tempur brand are you anticipating seeing ASPs move higher on a year-over-year basis and your mix be favorable to gross margins for the balance of the year?

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Within the Tempur brand -- within the Tempur brand I would expect we have positive product mix within the Tempur brand is what we're seeing right, Bhaskar?

Bhaskar Rao -- Executive Vice President and Chief Financial Officer

Absolutely. So if you think about what happened in the second quarter specifically is, is that retailers were coming back now as we sit here in the third quarter. The vast majority if not all of our retailers are back at the sales force in in-house. So when you think about it the training sales force is back and now versus a volume focus will be focused on higher price products specifically on the Tempur side and that should help with ASP, not only within Tempur but in Sealy as well.

Operator

Our next question comes from the line of Keith Hughes with SunTrust. Your line is open.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Thank you. As you look toward the third quarter with the 25% you discussed earlier, would you still expect North American sales to come in, in excess of that or is there going to be a catch up here with the International given the weak second quarter at hand?

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Yeah, we would expect North America to be stronger, but we'd also expect International to be positive.

Bhaskar Rao -- Executive Vice President and Chief Financial Officer

That's right, Scott.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Okay. Thank you.

Operator

Our next question is from Laura Champine with Loop Capital. Your line is open.

Laura Champine -- Loop Capital -- Analyst

Thanks for taking the question. So it's really about what's happening industry wide. You mentioned some concerns around supply chain constraints impacting Sealy. Can you give us more color on what components are being impacted and how that's -- how you expect that supply to come back online. And will that potentially drive up the pricing of those components, which might offset some of the tailwinds that you see on COGS on the Tempur side?

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Okay. Thank you for your question. Hey, look, I think we're benefiting from two things. I think we're benefiting from our competitive position and being positioned correctly going into this and then you're absolutely right. We also have an industry tailwind that we're riding. When you go to the capacity constraints and go down to the supplier issues, the supply chain is operating well. But I would have to say it's a little bit fragile. It wasn't built for quite this sales surge that the industry is going through. So there are some hiccups in the supply chain, probably the biggest choke point in North America right now would be in the area of springs and that's mainly pocketed springs, working very closely with our supply partner there. There has been some price increases that were passed on relative to the springs here in the third quarter. I think that takes care of it, we'll see. But it depends on what goes on in the future. But it's possible that there might be minor price increases in inner spring beds going forward.

Operator

[Operator Instructions] Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Your line is open.

Brad Thomas -- Keybanc Capital Markets Inc. -- Analyst

Hi. Good morning. And nice results here. Wanted to follow up on the topic of e-commerce; Scott, you gave us a lot of interesting tidbits here on the call this morning. I was hoping you could talk a little bit more about your learnings over the last few months and how your outlook for Cloud and Cocoon have evolved given the strength that you've been seeing? And how you think you might be able to further enhance the e-commerce offerings of the Tempur-Pedic brand in particular? Thanks.

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Great. Thank you. It's one of my favorite topics. First of all, the TEMPUR-Cloud has been an absolute home run; works perfectly in high density cities and it's an outstanding product. The Cocoon by Sealy, we've had it for a number of years and it has just continued to accelerate in the marketplace and now it's become a significant bed in the box product in the marketplace. I think I'm going to answer your question kind of two ways because you've kind of focused on what I call the direct business, but another -- I mean we're working very hard with our retailers and during this shutdown, we're able to help them with their e-commerce business.

And the traditional retailer, OK, that everybody has been saying is going to get disrupted and everything, I will tell you that the traditional retailers did an outstanding job during the shutdown online and we saw sales increases from the traditional retailers, 4 times what they were doing before the pandemic. So, a lot of the learnings really happened in the traditional retailers. And I think you'll see the traditional retailers now making the proper investments in people and processes to be more competitive online. And so we're thrilled with what we see from the traditional retailers from an online standpoint and we're glad to help them at times in that process.

Of course, we continue to work on our ability. I think the business is going to continue to grow but I will also say one of most interesting things that's happened since stores have opened. You would normally expect as the stores open for the online business to kind of do a little bit of give back as customers are in store. And to-date, what we're seeing both in our direct business and maybe even more importantly in our third-party retailer business is the online business is not coming down. It's holding as they open stores and that was a little bit surprising but it's an outstanding trend for the industry and proof to my earlier comment that this pandemic has forced the traditional retailers to get in the game and they have been very surprised both on the volume, the profitability and their ability to do business online as they were forced to.

Operator

And our next question is from Bob Drbul with Guggenheim. Your line is open.

Robert Drbul -- Guggenheim Partners -- Analyst

Hi. Good morning. I was just wondering if you could give us a little bit more color in terms of the commodity cost, input costs. How, if you are opportunistic with some of your buys over the last few months and just sort of how you're positioned? I think you said there should be some benefit in the third quarter, but just the duration of the input costs and commodity costs that you're positioned for the remainder of the year?

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Absolutely. Good question. So as we think about commodities, generally the way our contracts and our relationship work is we have anywhere between a 30- to 60-day lock as it relates to future purchases. So with that as a backdrop is I would anticipate in the third quarter somewhere between $4 million to $5 million of upside on a year-over-year basis.

Robert Drbul -- Guggenheim Partners -- Analyst

Great. Thank you.

Operator

Our next question comes from the line of William Reuter with Bank of America. Your line is open.

Mary -- Bank of America Merrill Lynch -- Analyst

Hi. This is Mary [Phonetic] on for Bill. Thanks for taking my question.

Scott L. Thompson -- Chairman, President and Chief Executive Officer

You bet.

Mary -- Bank of America Merrill Lynch -- Analyst

You previously implemented cost savings that were expected to generate $300 million of savings. Are you still moving forward with those given your strong results and had any of those actions have been taken before demand really picked up?

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Well, I can do some of that. Some of those actions were taken and then immediately reversed as I think you can probably tell from the prepared remarks. Going into this we thought we had a pretty tough road in front of us, very aggressive in getting our cost down. By the time we got our cost down, we realized, oops, we need our cost to get up. We need people. We need advertising. And the majority of those cost reductions were almost immediately reversed and now we are in the growth mode. We're probably in the market hiring somewhere close to 600 to 700 incremental people to staff new operations. So, probably that would be a different business plan than we found ourselves in. And when we did roll that out, we did say that those cost were quite frankly cost we didn't want to cut and so actually we're happy that we did that, we've got to spend the money, brought people back from furlough and now are in an active growth mode.

Bhaskar Rao -- Executive Vice President and Chief Financial Officer

The only additional thing I would call out than the prepared material we did indicate that suppliers or our customers are our number one priority. So, in order to make sure that we get the supply where it needs to be is that we are investing from a cost standpoint to make sure that is satisfied.

Operator

And our last question comes from the line of Seth Basham with Wedbush Securities. Your line is open.

Seth Basham -- Wedbush Securities -- Analyst

Hi. I was just hoping if you could touch a little bit more on capital allocation. Obviously, you brought back target leverage ratio, but remind us what the restrictions are as it relate to share repurchases and how you're thinking about share repurchases going forward here?

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Sure. We have board authorizations for a large amount of share repurchase. I don't remember the exact number, but we can look it up. But we did put a kind of a safety net loan and in the second quarter to put some additional liquidity into the company. It's a 364 loan. And in that loan we agreed not to buy stock back until we paid back that loan. Quite frankly, we're probably not going to need that loan. In fact we're not going to need that loan but it's still outstanding. So before we could buy stock back, we would need to pay off that, was it $300 million, $400 million?

Bhaskar Rao -- Executive Vice President and Chief Financial Officer

$200 million.

Scott L. Thompson -- Chairman, President and Chief Executive Officer

$200 million loan and then we would be back in the game if we chose to buy stock back.

Operator

Thank you. I'm not showing any further questions. I'll now turn the call back over to Scott Thompson for closing remarks.

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Thank you, operator. To the over 7,500 employees around the world, thank you for what you do every day to make the company successful. To our retail partners, thank you for your outstanding representation of our brands. To our shareholders and lenders, thank you for your confidence in Tempur Sealy's leadership team and the board of directors. That ends our call for today.

Operator

[Operator Closing Remarks]

Duration: 56 minutes

Call participants:

Aubrey Moore -- Investor Relations

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Bhaskar Rao -- Executive Vice President and Chief Financial Officer

Curtis Nagle -- Bank of America Merrill Lynch -- Analyst

Bobby Griffin -- Raymond James & Associates, Inc. -- Analyst

Atul Maheswari -- UBS -- Analyst

Peter Keith -- Piper Sandler -- Analyst

Seth Basham -- Wedbush Securities -- Analyst

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Laura Champine -- Loop Capital -- Analyst

Brad Thomas -- Keybanc Capital Markets Inc. -- Analyst

Robert Drbul -- Guggenheim Partners -- Analyst

Mary -- Bank of America Merrill Lynch -- Analyst

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