Sleep Country Canada Holdings' (SCCAF) CEO David Friesema On Q2 2017 Results - Earnings Call Transcript

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About: Sleep Country Canada Holdings Inc. (SCCAF)
by: SA Transcripts

Sleep Country Canada Holdings Inc (OTC:SCCAF) Q2 2017 Earnings Conference Call August 3, 2017 10:00 AM ET

Executives

David Friesema - Chief Executive Officer and Director

Robert Masson - Chief Financial Officer and Corporate Secretary

Stewart Schaefer - President of Dormez-vous and Chief Business Development Officer

Analysts

Patricia Baker - Scotiabank

Meaghen Annett - TD Securities

Martin Landry - GMP Securities

Kenric Tyghe - Raymond James

Vishal Shreedhar - National Bank

Stephen MacLeod - BMO Capital Markets

Matt Bank - CIBC World Markets

Operator

Good morning, and welcome to Sleep Country Canada Financial Results Conference Call for the Second Quarter ended June 30, 2017. We will begin today’s call with management’s discussion followed by a question-and-answer period spoken to investors and financial analysts. For your convenience, the second quarter earnings release, the second quarter financial statement and management discussion and analysis are available in the Investor Relations section of the company's website at sleepcountry.ca. They're also available on SEDAR. The results were released yesterday after market close.

Please note that remarks on this conference call may contain forward-looking statements about Sleep Country Canada's current and future plans, expectations, intentions, results, levels of activity, performance, goals or achievements or any other future events or developments. Forward-looking statements are based on information currently available to management on the estimates and assumptions made based on factors that management believes are appropriate and reasonable in these circumstances. However, there can be no assurance that estimates and assumptions will prove to be correct. Many factors could cause actual results, levels of activity, performance, achievements, future events or developments to differ materially from those expressed or implied by forward-looking statements.

As a result, Sleep Country Canada cannot guarantee that any forward-looking statements will materialize. You are cautioned not to place undue reliance on these forward-looking statements, except as may be required by law. Sleep Country Canada has no obligations to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For additional information on these assumptions and risks, please consult the cautionary statement regarding forward-looking information contained in the company's MD&A dated August 02, 2017, available at sedar.com.

I will now turn the conference over to Mr. Friesema. Please go ahead.

David Friesema

Thank you, operator. Good morning, everyone, and thank you for being with us. Joining me today is Robert Masson, our CFO as well as Stewart Schaefer our Chief Business Development Officer. It has been an exciting 6 months for Sleep Country. We started the year on strong note and carried this momentum into the second quarter as evidenced by the progress we made with our financial results and completion of a number of key milestones. Most notably, we achieved our 16th consecutive quarter of same-store sales growth, renovated 7 stores and opened 5 new stores. Successfully completed the relocation of 3 distribution centers and successfully launched our e-commerce platform. This progress should provide a clear indication of the strength of our growth strategy. Our ability to execute and our commitment to build on the positive experience that we deliver to customers.

Before we discuss our financial results, I want to review a couple of our key milestones and how they condition us for future growth and success. First half of 2017 saw the launch of our brand-new e-commerce platform, featuring our exclusive mattress in a box Bloom as well as full line of accessories. Bloom was designed with our sleep experts and can be shipped directly to your door. We are happy with the rollout so far, and we have seen positive response from the product, which is available online and in-store. This new shopping platform provides our customers with convenience and ease of online shopping, augmenting the positive in-store experience they get from coming to our store and trying products in person. Here at Sleep Country we pride ourselves on always delivering a superb shopping experience to our customers, and this new platform allows us to continue delivering on that promise.

With our e-commerce website in place, we are also able to connect with customers who are not in our current core market and introduce them to our quality products and services. The initial success for e-commerce platform launch was matched by the progress we made against several of our targets for the year. At the end of last year, we informed you that are increasing -- that we were increasing our target for the number of stores we were going to renovate, from 20 to 30 for the year. We also indicated our target per stores opened in new existing markets would be eight to 12 for the year.

I'm pleased to report that we are on pace for both of those target, with seven new stores opened and 21 stores renovated as of June 30, 2017. With these additions and renovations, our stores count increased to 242 as of June 30, 2017, with 91 stores or 38% in the new and improved design. During the remainder of the year, we will continue to strategically select existing locations to undergo renovations and we will also remain focused on new store openings. Each of which will feature the enhance design.

We've also made significant advancements on the planned relocation of four redistribution centers. We previously shared that during 2017, we would be relocating four of our large distribution centers to support our future growth. I'm very happy to report that three of the four centers have been relocated and that they went seamlessly. The final relocation is related to start at the beginning of the fourth quarter this year.

In addition to the substantial progress made in our growth strategy, we also achieved strong results for the second quarter of 2017. Sales during the quarter increased by 10.7% to $133 million from $120.2 million in Q2 2016. Same-store sales growth was 7.5% for the second quarter on top of 12.2% in the same period last year. Making our sixth consecutive quarter -- 16th consecutive quarter of same-store sales growth.

Looking at our sales by category, we continued to see growth in both our mattresses and our accessories. Mattress sales had a strong performance for the second quarter of 2017 and grew by 12.6% and accessory sales were up 3.9%. I will expand on our growth prospects and outlook in my closing remarks. I will now turn the call over to Rob who will review our financial results more closely. Rob?

Robert Masson

Thanks, Dave, and good morning, everyone. In the interest of time and because our MD&A provides a full accounting, I will largely confine my remarks to second quarter performance. Revenue grew by 10.7% for the second quarter and as a result gross profit was up by $3.6 million to $37.3 million from $33.7 million in Q2 2016. Gross margin for Q2 2017 remained steady at 28.1% compared with 28% in the comparable quarter. As a percentage of revenue, this was reflected in an 80 basis point reduction in sales and distribution expenses and a 40 basis point decrease in store occupancy costs. These cost reductions were offset however, by a 120 basis point increase in inventory and other directory-related expenses net of volume rebates. This increase was largely due to the change in product mix as well as Q2 2016 being positively impacted by a one-time reversal of a warranty reserve related to an insolvent vendor.

Total G&A expenses for Q2 2017 increased by $1.6 million to $17.8 million compared with $16.2 million in Q2 2016. G&A expenses grew largely due to increased stock compensation expenses, merit increases, additional hire and support business growth, increases in rent and other occupancy-related charges due to the relocation of 3 distribution centers. And lastly, higher credit card and finance charges as a result of more customers financing sales compared to the previous quarter.

Operating EBITDA increased by 12.9% to $20.2 million in Q2 2017, operating EBITDA margins also improved to 15.2% of revenues, a 30 basis point improvement from 14.9% of revenue in the last year. This quarter was primarily a result of revenue increases and improved gross profit margins, partially offset by an increase in G&A expenses.

Depreciation and amortization was $3.3 million in Q2 2017 compared to $3.1 million in Q2 2016. Finance-related expenses decreased to $0.9 million for Q2 2017 compared with $1.1 million in the same period in 2016. The decrease was a result of lower average balance outstanding on the senior credit facility and a lower expected interest rate.

During the second quarter of 2017, adjusted net income increased by 18.2% to $11.9 million or $0.32 per share compared with $10.1 million or $0.27 per share in Q2 2016. Income tax expense was $4.1 million for Q2 2017, up from $3.7 million in Q2 2016. An increase in income tax expense was largely a result of improvements in business results and operating margins.

Net cash flows generated from operating activities amounted to $27.9 million in year-to-date 2017 compared with $9.1 million in year-to-date 2016. This increase was the result of $31.4 million generated from operating activities, offset by $3.6 million use of cash due to an increase in working capital.

As of June 30, 2017, the balance in our revolving credit facility was $119 million compared to $129 million as of June 30, 2016. Lastly, our Board of Directors declared a dividend of $0.165 per share payable on August 28, 2017, to shareholders of record at the close of business on August 18, 2017. That concludes my remarks. I'll now turn the call back to Dave.

David Friesema

Thanks, Rob. As you've heard, our Q2 results and performance in the first half of 2017 successfully demonstrates the strength of our core growth strategy and ability to execute against our targets. Our primary focus since IPO has always been grow our market share while ensuring we continue to provide exceptional customer shopping experience. Our market share is growing through a combination of organic growth initiatives as reflected in same-store sales increases as well as by adding new stores and expanding into new markets. We are well on track to meet our target of 20 to 30 store renovations for the year, with 21 completed as of June 30, 2017.

Tied to the renovation strategy is continue to grow through new stores. And in 2017, we have opened 7 new stores, on pace to meet our goals of 8 to 12 for the year. 2017 has thus far demonstrated that this 2-prong strategy of new store openings and renovations to enhance store design is a solid foundation for us to achieved strong financial performance while delivering value to our shareholders. As I mentioned earlier, we are pleased with our recent launch our new e-commerce platform. We've been very encouraged by our initial results and are already looking to grow our product offerings online by testing a number of new categories, including blankets and throws. I also want to make clear that 2017 will be a year of ramp-up for the platform. It is important to understand that we are expecting a near-term drag in our EBITDA performance of approximately $1 million to $1.5 million for the 2017 year. This bottom line impact is consistent with other investments we've made in the past to grow our business, and we have entered -- as we have entered in a new market products for categories. We believe that this strategic investment is an important one for us to make.

Customer satisfaction has always been a key priority for Sleep Country, and we strive to always find new ways to improve on it. Our e-commerce platform is just one more way we want to ensure customers are always thinking: why buy a mattress anywhere else. As I mentioned earlier, we are also in the process of the relocating 4 of our largest distribution centers in 2017. 3 of the 4 have already been completed. We anticipate the relocation efforts will result in a one-time drag in EBITDA performance of approximately $1 million. However, they are an important aspect of our strategic plan. It will create new efficiencies with our logistics systems, ability to provide better customer service while also expanding on our distribution capacity for the future. Throughout the remainder of the year, we will continue to execute on our strategy by further expanding in both existing and new markets through new store additions, renovations, existing stores or a new enhanced design, improving same-store sales and making investments in our advertising to drive traffic to our stores and sales training focused on increasing our [basket] size and average unit selling price.

We are encouraged by our performance in the first half of 2017 and a significant progress on our goals. We expect to build on this momentum as we head into the seasonally busiest quarters of the year.

This concludes our remarks. We'll now be pleased to answer your questions. Operator, please begin the question period.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Patricia Baker with Scotiabank. Your line is open.

Patricia Baker

Good morning, everyone. Can we talk about what happened to accessories in the second quarter. I know you had a positive sales trend there, but 3.9% represents pretty significant deceleration from what we've seen. Are there any particular dynamics? Are you thinking now there are any issues with that particular line of your business? Just provide us with a better sense of what's going on, please?

David Friesema

Sure. I'm going to give an overall statement and then Stewart is going to just give a couple of more details. So what I just want to talk about firstly is, as we've said since we went public, very quarter will bring new opportunities. So sometimes traffic drives our business and sometimes it's average unit selling price. Sometimes it's accessories and sometimes it's mattresses. So every quarter will be slightly different on that. We are comping on an increase in 2016 Q2 of 32.5% on our accessory sales.

And while we always wanted to add up the most we can possibly have, we're still very comfortable with our accessory sales, and we're very comfortable with the processes that we have in place to continue to pull the different levers that we have for growth. And as I say, every quarter will bring a different result based upon which lever happened to have, gain the most ground in that particular quarter. But Stew has a little bit additional information on that.

Stewart Schaefer

As Dave said, our accessories remain solid and continue to grow to plan, and we're excited about some new offerings that are going to be rolling out in the back half of the year. That being said, Patricia, our main pillow campaign of our Polar Tropic pillow was a little less productive than we had hoped, getting off to a really slow start for the first 3 weeks. It did gain a lot of momentum as we were going towards the end of the campaign, which ended in July and ended quite strong, but the first few weeks were slower than we anticipated.

Patricia Baker

Okay. And that probably accounts for that number being where it was. Because you were up against a 30 plus number in Q1 as well as when you compared the year-over-year trends. So it's just really a bit of slow pillow issue?

Stewart Schaefer

100%. I mean that was, it was, within that 3-week period of time that we just saw that it was not performing. It took a while before it gained momentum.

Patricia Baker

Okay. Just have a second question. I have got a lot of questions but I'll only ask 2, and I'll get back the queue. So I think, Rob, you indicated that you had higher financing for purchases in the quarter. Are you seeing any kind of a trend there that's suggesting that customers are behaving differently or is it just a bit of an anomaly in this quarter?

David Friesema

Yes, we are seeing higher percentage sales that are being financed and that is mostly driven by our lifestyle basis that we have started promoting, and that typically drives up the basket size of the order. And so then, there are some customers that will then take advantage of our financing that we have in place. So it definitely supports that higher basket size for some customers that need that.

Patricia Baker

Can you remind us what the average price of a lifestyle basis so that we understand or the differentials so we understand how that's requiring more financing?

David Friesema

Stew, you want to take that?

Stewart Schaefer

Yes, sure. A box spring is typically is anywhere between $200 to $400, Patricia, and a lifestyle base will range from $799 up to $3500. So it is a replacement. So the mattress is the same, but the replacement of and the strategy behind it is to move a customer from the box bringing to a higher basket size with a lifestyle base.

Operator

And your next question comes from the line of Meaghen Annett from TD Securities.

Meaghen Annett

First of all, with respect to your marketing and advertising initiatives, can you just talk a bit to your investments and your strategy in the quarter? Particularly around the accessories, anything in addition to the May pillow offering and also the e-commerce launch? So I noticed that while the absolute dollar change there was pretty modest. The marketing and advertising was down as a percent of sales. And just as the follow up, can you just talk to maybe your longer-term strategy with respect to marketing and advertising? And how do you see that component trending over time?

Stewart Schaefer

Sure. And I will, I'll start with your second question first. So as we've been saying all along, we do consider marketing and advertising a big driver of our business, and we're going to continue to focus on that. And we're certainly not going to try and use that as an opportunity to leverage our expenses. We really want to invest in it, and we're going to continue to do that. As an example, on a year-to-date basis, we've grown our advertising approximately 20% over last year, which I think is nice big investment. But I will -- now getting to your first question. Our marketing spend will generally be a lumpy spend because timing plays a big part in it. And you'll notice in Q1, our increase in our marketing was quite a bit higher as a percentage than in Q2. And that's not because we changed our focus at all, it's just more of a timing issue. But our focus continues exactly as it's always been. Does that answer, Megan?

Meaghen Annett

That's perfect. Thank you. On the mattress side of the business. Clearly, sales growth there has remained pretty attractive, relatively steady pace of growth over the last, call it, eight quarters. So can you just talk to some of the drivers behind that and how those drivers might have evolved over time? Are we seeing this being mostly driven by growth in AUSP? And just kind of as a follow up, are you seeing any benefit currently from the sales of the lifestyle basis there?

Stewart Schaefer

Sure. So I'll start off by just saying that Q2 from a qualitative point of view -- and this is talking to our suppliers and finding out -- generally speaking, Q2 is not considered a strong quarter for our industry. So we're very excited with our results. Having said that -- now going to answer your question, I'll just real quickly go through, why do we consider that help us, what are the levers we pull to grow our business. Number one is driving traffic to the stores. Number two, is our conversion rate so what percentage of shoppers become buyers. Number three, is our average unit selling price. Number four, is our basket size in total, which should be averaging a selling price plus accessories and that makes up same-store sales.

Now we have e-commerce, but that -- we'll keep that aside for now. And then there's also a new stores, which help us grow. And while we don't give details about any one of those levers, because of competitive reasons, I will say that we continue to work on all four of them. And so -- and every quarter is different. Sometimes AUSP plays a bigger role, sometimes traffic does and so forth.

Lifestyle basis obviously, are something that is the benefit to our average unit selling prices and we're going to continue to promote those. Because they do -- they offer an opportunity to our customers to make a decision as to whether that suits their lifestyle or not. So it may not be quite as granular as you hope, Megan, but we really don't want to give details on where we're seeing the growth because it's a very competitive industry.

Operator

Your next question comes from the line of Martin Landry from GMP Securities. Your line is open.

Martin Landry

Hi, good morning. My first question is, I'm wondering if you have seen any drag on your EBITDA from the DC relocations this quarter and also from your investments in your e-commerce platform?

David Friesema

Yes, Martin, we launched our e-commerce platform this quarter. So the first quarter, we didn't have much of a drag other than the department that has been created for that. So on a year-to-date basis the drag is just to touch under $400,000. And on the DC front, likewise, it's approximately just under $400,000 as well in terms of the overlapping rent for the three distribution centers that we've moved to date.

Martin Landry

Okay, okay. And then you've talked about an increase in accessory offering in the fall, wondering if you could give us a little bit of an idea maybe in terms of number of SKUs that will be added on your accessory line?

Stewart Schaefer

Martin, it's Stewart. Typically, in terms of count, there'll be 6 new SKUs that will be rolling out, of which 2, Dave already mentioned, which are blankets and throws. The other 4 are similar to the line that we all recarry but as an expansion on, including chic duvets [ph] and some new pillows. Pardon me, also and also some new platform beds and headboards.

Martin Landry

Okay. And lastly, I mean, one of your competitors is having financing challenges, I'm wondering if you've seen any impact from the liquidation that they've gone through in the recent weeks?

David Friesema

Yes, Martin, that's going to be really difficult for us to quantify. I guess the best answer we have is -- I don't think we're seeing any negative or positive affect from it yet.

Operator

Your next question comes from the line of Kenric Tyghe with Raymond James.

Kenric Tyghe

Just with respect to competitive intensity, has that remained rational through the period and perhaps just another way of going at the last question, is looking at what is a very important quarter. Are your expectations or is the market setting up for what you expect to be a fairly typical third quarter in back-to-school? Or are there indications that perhaps there is going to be certain needs for sort of a different approach to market through those third quarter because of some of the disruption created by those liquidations and some potentially irrational behavior in the market?

David Friesema

Well, It's hard to kind of -- can't really predict what's going to happen down the road, but I can say -- first and foremost, this is a very promotional-driven business, and we aren't seeing any change in that. People are continuing to advertise as much or more than they always have. So It certainly isn't getting any easier out there. But as far as big changes to what people are doing, I haven't seen anything yet.

Kenric Tyghe

Fair enough. And then just in terms of competitive intensity, are you seeing a change in where people are allocating dollars or how people are choosing to allocating dollars? Perhaps a de-emphasis on their mattress business versus their accessories business or vice versa, looking at key competitors?

David Friesema

I certainly wouldn't -- we certainly wouldn't notice a decrease in mattress advertising at all because it always feels like there's a lot out there and there is. And as far as other people focusing attention on other areas, I would say that we would see a little of that but not much. We need to invest and try to grow their business, which is what we're doing. And we're pretty comfortable with the fact that we've been winning on that front.

Kenric Tyghe

Great, thank you.

Operator

Your next question comes from the line of Vishal Shreedhar from National Bank. Your line is open.

Vishal Shreedhar

I'll start kind of add onto another question here. The Toronto market, housing market is softening and I would -- I perceived that there is some investor concern out there that Sleep Country sales may follow. I know in the past management has talked about the relationship between housing and mattress sales and your inclination was that it's more of a consumer confidence issue which tends to be stronger at least most recently. Do you still feel comfortable with that view? And do you have -- is there any data that you could point to about how Sleep Country performs in declining housing markets but stable consumer confidence?

David Friesema

So I think what we -- A few points on that. Number 1 is, we never said that housing wouldn't affect us. We have said more that it is a trigger for a purchase not so much a directly correlated effect. Over all the years we've been doing this, we find that consumer confidence in GDP, just general economic environment is a bigger correlation for us as to how business might be. When you look at -- we currently feel that we've been in a test case for the last 2 to 3 years, in Alberta for instance, with a very bad economy. And every indication we have is that we've been taking market share there and our business continues to be positive in that area in total.

Vishal Shreedhar

How did you guys do in Vancouver when the government imposed those actions to reduce house prices. Did that impact a Sleep Country's performance?

David Friesema

It certainly didn't help our performance. It made things more difficult. But I believe that we were able to overcome that nicely by -- I must say, it's difficult to answer that question just because on any given -- as I mentioned earlier on, every given -- every quarter has different inputs to us. And so we looked at B.C. we would see that we continue to be very happy with the business, but there may have been some froth taken off the very top.

Vishal Shreedhar

So you're saying -- if I try to paraphrase here you're saying that it is a factor but it isn't -- housing slowdown is a factor but it isn't the key factor in your view, and the business can continue to perform provided that consumer confidence and GDP growth remain robust, is that a fair way to characterize it?

David Friesema

That -- and not only is that a fair way to characterize it, I would also say that just going back to my comments about Alberta, I think that we've also with, focusing on the levers that we've been focusing on, we seem to be doing better than the market does in a down market as well.

Vishal Shreedhar

So related to this secondary potential impact from housing, and I know it's a difficult question to answer, but do you perceive that there was any impact in this current quarter that investors or analysts may be able to extrapolate into future quarters for the purpose of forecasting?

David Friesema

Unfortunately -- I wish we were able to look at data that clearly and see a direct correlation but we can't.

Vishal Shreedhar

Just want to move to some -- hopefully bit of -- if you use your questions here, e-com, will that start to benefit results in H2 or is it too small yet?

Stewart Schaefer

Vishal, its Stewart. We're still very early days so probably not. But the early days and we're quite pleased with what we're seeing so far. Just to touch on it a little bit. The website launched smoothly and platform is stable. Traffic to our site has been growing over the last 8 weeks. We launched our Bloom video on June 9, and we're excited actually about seeing over 1.8 million views so far. But on a more granular basis, transactions online are growing weekly, so we're very pleased about that. And the mix of products between Bloom, our bed-in-a-box and our other accessories is going very well. And we're also pleased with the traffic that we're seeing driven into the store by customers asking about the Bloom product. So like I said, very early days, and we have some exciting plans that we're planning to unfold over time. But we're going to walk before we run, and I don't really expect third quarter to make any major dent on our numbers.

Vishal Shreedhar

Okay. And then an easy one here, hopefully, an easier one, financing management indicated that, that was an increasing focus for consumers. I know it impacts the SG&A line from the credit card fees there. But how does that impact the rest of P&L. Is there some profitability benefit from the financing as well that flows through?

David Friesema

No, I mean, obviously, the financing does cost us money, if a Company, I mean, if a customer comes in and uses their credit cards, we get charged for that or if they use this financing, they get charged a slightly higher fee. So for us, the trade off is, we generally want financing on larger basket size orders and for that, we're willing to trade the cost of that financing for more gross profit dollars. So we're very comfortable with our financing and what, the offering we have for customers. And it has grown a little bit, but it's mostly as we say because of the lifestyle basis that we have been promoting.

Operator

Your next question comes from Stephen MacLeod from BMO Capital Markets.

Stephen MacLeod

Just looking at back half of the year, I was wondering if you could provide a little bit color on how the incremental cost drag from e-commerce and the D.C. will be slipped between Q3 and Q4 from [indiscernible] perspective?

David Friesema

I think we mentioned that from a D.C. perspective, we talked about a drag of $1 million, so we're halfway through the year, and the drag is approximately $400,000 so that will be split relatively even between Q3 and Q4. And then on the e-commerce front, we talked about a drag of just under $400,000 and we talked about a full year drag of $1 million to $1.5 million and again, we can't really took to the split between Q3 and Q4 because we've just launched our cycle. We're not sure what the seasonality of that business is going to be.

Stephen MacLeod

So the cost related to, so there are driven by traffic going to the site?

David Friesema

Well, most of the EBITDA drag is driven by the increased digital marketing spend that we have put behind that initiative.

Stephen MacLeod

And then on e-commerce site, sure, you provided some really good color on the last question. But I'm just curious, can you give us a little bit more color around the split in transaction activity online between accessories versus the Bloom product or the Floom product? And if you can talk a little bit about the phenomena of the site driving traffic into the store?

David Friesema

So I'll answer the second one first. Early days, but what we have been seeing, Stephen, is customers walking in to our stores specifically asking for the Bloom product, which we're very excited about. And clearly, we are in early days even with our advertising campaigns behind it. So those 1.8 million YouTube views, I guess, there's a lot of Canadians already seen it. So we're thrilled about that. It also substantiates our feeling on the bed-in-a-box phenomena that one size doesn't necessarily always fit all and the reality is that people still want to take a nap and test out the mattress before they make a $1000 decision. So that part, we're pleased. And online, the transactions -- I can't breakdown, for competitive reasons, the split between accessories and Bloom mattress but it is -- we're very pleased with what we're seeing.

Stephen MacLeod

And then just finally, I mean, in terms of your incremental ad spend, are you seeing a better return from your digital ad spend, relative to what you would've expected?

David Friesema

Again, very early as the -- as a percentage -- for competitive reasons I won't tell you what the percentage is so please excuse me. But digital is very new to us and as our general spend majority of it is our traditional form of advertising. We started paid advertising, I'll tell you, as of the beginning of June, so not even our launch which was May 2nd, and the results that we've seen thus far has been very pleasing to us. So I would anticipate that we will continue to grow that digital spend in proportion to our overall ad spend.

Operator

Your next question comes from the line of Matt Bank from CIBC. Your line is open.

Matt Bank

First on the gross margin, what drove that negative product mix? And should we read into this for future quarters and was it just sort of quarter-to-quarter volatility?

Robert Masson

So each our mattresses -- different mattresses we get from different suppliers, do have slightly different profiles in terms of the gross margin as well as the volume rebates that we get back from them. In this quarter, we just had a change in mix and that drove some of that. But the biggest driver was a warranty reserve that we reversed in Q2 of last year which gave us a positive benefit which obviously, from a comparison perspective made the margin not increase as much this quarter. So that was the main driver.

Matt Bank

Okay. And on the industry overall, it came up earlier in the call that Q2 was weak. From what you've heard from suppliers, has that continued into Q3?

David Friesema

Well, first of all, I do want to be very clear on this. It was a qualitative statement, not a quantitative statement. But -- because again, we don't always have direct knowledge immediately and so Q2 from talking to our suppliers, was not -- was considered a weaker quarter in general. We don't actually have much data yet on Q3 because we're only one month into it. But that's all the information we would have on that front.

Matt Bank

And then I just wanted to ask on the IPO, 5 to 7-year targets, are you going update your view on the -- on some of those as you track extremely strong versus?

David Friesema

No, our plan going forward is not to update any forward-looking comments. Our opinion is that we much rather be judged for what we've done rather than what we say we are going to do. So in the future, we don't anticipate changing that.

Operator

[Operator Instructions] Your next question comes from the line of Patricia Baker from Scotiabank.

Patricia Baker

Just the last person asked about the gross margin and I was going to ask further on the warranty reserve. Can you give us any indication of the magnitude of that so that we can really get a better view from a strictly apples to apples operating-to-operating comparison year-over-year? You know what really happened to the gross margin or you're not willing to tell us that number?

David Friesema

I mean for competitive reasons, I don't think we want to disclose that. I mean it was.

Patricia Baker

You said it was the biggest driver?

David Friesema

Yes, it was the biggest driver. It was offset by some other reductions in inventory provisions from an aging perspective. And that's I think what we want to disclose.

Patricia Baker

And I have a question for you, Stewart. You gave us a lot of information on even though it's very early days, what's happening with e-commerce. And one thing I was quite curious about because I know it is one of the raison d'etre, only one behind establishing the e-commerce platform. But did you see the pickup in markets where there are no store so that your brand is being -- your building brand awareness beyond where you have physical stores. Did you get orders outside of markets where you have the physical stores? Because I think it's quite important.

David Friesema

So funny that's your first question. Because the first order that we had was someone from Toronto that was shipping out into an area of the Atlantic provinces [ph] that we're not in. So yes, again, it's still early days but I -- so we've seen a little bit of traffic from customers who know the brand. They don't live in our existing markets where we have stores, but interestingly enough, we hope to see more going into the back-to-school is customers who're do know our brand very well, and our confidence with that looking to maybe make purchases for their kids in provinces in universities across the country, at a province.

Patricia Baker

Yes, it would be really interesting to see. I think that could be a great opportunity for Bloom.

Operator

There are no further questions at this time. Mr. Friesema, I turn the call back over to you.

David Friesema

Thank you very much. Since there are no further questions, we'd like to thank you for joining us, and we look forward to speaking with you on our third quarter call or at any time you have a questions, you can always reach out. So thank you very much. Have a good day.

Operator

Thank you. This concludes today's conference call. You may now disconnect.