The Container Store Group, Inc. (TCS) Q2 2020 Earnings Call Transcript

The Container Store Group, Inc.  (NYSE: TCS) Q2 2020 earnings call dated Oct. 20, 2020

Corporate Participants:

Caitlin Churchill — Investor Relations

Melissa Reiff — Chairwoman, Chief Executive Officer and President

Jeff Miller — Chief Financial Officer

Analysts:

Steven Forbes — Guggenheim Securities — Analyst

Kate McShane — Goldman Sachs — Analyst

Tami Zakaria — J.P. Morgan — Analyst

Presentation:

Operator

Greetings, and welcome to Container Store Second Quarter 2020 Earnings Conference Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions]

I would now like to turn the conference over to Caitlin Churchill.

Caitlin Churchill — Investor Relations

Good afternoon, everyone, and thanks for joining us today for The Container Store’s second quarter fiscal year 2020 earnings results conference call. Speaking today are Melissa Reiff, Chairwoman and Chief Executive Officer; and Jeff Miller, Chief Financial Officer. After Melissa and Jeff have made their formal remarks, we will open the call to questions.

Before we begin, I need to remind you that certain comments made during this call regarding our plans, strategies, expectations regarding liquidity and goals, our anticipated financial performance and our plans in response to COVID-19 and the potential impact of COVID-19 on our business may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those important factors are referred to in The Container Store’s press release issued today, and in our Annual Report on Form 10-K, filed with the SEC on June 17, 2020. The forward-looking statements made today are as of the date of this call, and The Container Store does not undertake any obligation to update their forward-looking statements.

Finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call. A reconciliation schedule of the non-GAAP financial measures to the most directly comparable GAAP measures is also available in The Container Store’s press release issued today. A copy of today’s press release may be obtained by visiting the Investor Relations page of the website at www.containerstore.com.

I will now turn the call over to Melissa. Melissa?

Melissa Reiff — Chairwoman, Chief Executive Officer and President

Thank you, Caitlin, and welcome, everyone, to our Q2 earnings release call. We appreciate you joining. I would like to welcome Jeff to his first earnings call as Chief Financial Officer, and also mentioned that Jodi Taylor is here with us as well today. I will first discuss the highlights of our fiscal Q2 performance and then as always, I’ll provide an update on our strategic priorities, including our very exciting brand partnerships that we highlighted in our press release today. Jeff will then review our financial results in detail, followed by Q&A.

We are very proud of our second quarter financial results, which we believe reflects the combination of our many efforts over the last few years and that is to reinvigorate our business and execute our strategic priorities. We believe that we have done this with excellence and determination, positioning us to benefit from the industry tailwinds created from the stay-at-home environment, we remain in today. For the quarter, we reported consolidated net sales growth of 5% driven by sales at The Container Store, as our Elfa third-party net sales were flat to the prior year. We continue to see strong growth in our online channel with online sales up 86.4% versus the same time period last year. We also delivered adjusted EPS of $0.43 compared to $0.08 in Q2 last year, demonstrating our solid sales growth, gross margin expansion and disciplined SG&A expense management that led to very strong SG&A leverage.

As we discussed on our last call, at the end of July, we had reopened our stores with the exception of our downtown San Francisco store, which was operating in a curbside pickup only model at that time. During Q2, all 93 stores were opened and operating at close to normalized schedules with limited in-store customer capacity. Q2 to-date through August — through fiscal August, TCS net sales were slightly down to last year. In fiscal September, TCS net sales were up 17.8% to last year, bringing the entire quarter up 5.3%. The 17.8% increase in September sales does not include the $6.5 million of online orders taken in fiscal September that are expected to ship, deliver and be recognized in our Q3 financial results.

Our September performance coincided with the launch of The Home Edit Netflix show get organized with The Home Edit, which premiered on September 9th. As you may know, we have a wonderful partnership with The Home Edit and have offered our customers an exclusive Home Edit product collection since spring of 2019, and we are continuing to add to the offering. We’re thrilled with the success of this collaboration and are excited to continue to develop our partnership in a mutually beneficial way. We believe that many of the key factors driving our strong performance in Q2 have continued into the third quarter of fiscal 2020. The October trends we have experienced to-date have improved from September levels. However, as Jeff will elaborate on later, we expect our remaining Q3 sales trends to moderate, as we think about the holiday season with conservatism, and we are having to chase some inventory in certain merchandise categories.

Over the past few years, we have put time, effort and investment into optimizing our marketing, pivoting to digital channels with our brand marketing campaigns, as well as building our partnerships throughout social media with key household names, including a brand ambassador program, all with the goal of increasing our relevancy, broadening our appeal and expanding our awareness. Along with that work, we have also invested in our supply chain with our second distribution center in Aberdeen, Maryland, fully operational and already gathering and already generating efficiencies, greatly enhancing our ability to fulfill demand and replenish stores in a more timely and cost-efficient manner. We are proud of our excellent execution, and believe, we are well positioned to continue capitalizing on our many opportunities.

Also, our entire organization remains focused and committed to effectively and efficiently making further progress against each of our strategic initiatives. As you know, our number one strategic initiative is to own Custom Closets. As part of this effort, we continue to build awareness for our Custom Closets to influential trade programs and social influencer partnerships like What’s Up Moms, which is a top parenting channel on YouTube. We continue to update our Custom Closets design tools and have expanded our virtual closet design capacity to support the growing demand for virtual engagement with our customers by rolling the service out now to all of our stores.

And as our stores were fully operational throughout the second quarter, we were thrilled to see strong sequential improvement in Custom Closets when comparing to the first quarter of this year, with sales in this category almost flat for Q2 as compared to last year. Custom Closets turned positive in the month of September, and we are seeing a relative halo effect from The Home Edit Netflix show launch, with Custom Closets leads increasing and comprise of an even more diverse customer demographic.

Back to marketing, first as a reminder, The Container Store is exclusive product partner for the storage and organization category with The Home Edit and it’s a social partner media with — and we are a social partner media with them, since we launched our product partnership in spring 2019. The Container Store has prominent placement throughout The Home Edit, get organized with The Home Edit Netflix series, including our branding, our products, shopping trips and our shopping bags. Our partnership with The Home Edit has driven interest in the overall category of homes organization and Custom Closets and has fueled a nice increase for us in new customer acquisition.

Since the Netflix show release, our POP! loyalty program sign-ups increased 39% compared to the same period last year, making the month of September 2020, our highest month for POP! enrollments since 2015 at 142,000 new sign-ups. With more than 9.2 million POP! stores at — POP! stores at the end of the quarter, our POP! program continues to grow. Additionally, The Container Store’s Instagram page recently surpassed 1 million followers, and just so proud of the progress we have made with our digital marketing efforts.

Demonstrating our relentless focus on forging the most impactful and collaborative relationships with great brands and household names, we are truly delighted to announce today our partnership with Marie Kondo, and the January launch of an exclusive co-branded product offering that will be available at all of our stores and online in January of calendar 2021. This versatile collection features more than 100 sustainably sourced products and is designed using premium materials, including bamboo, ceramic and recycled fiber wood. This beautiful collection brings to life the one and only Marie Kondo and her vision and spirit of making space for what matters most. It is expected to appeal to a variety of consumers seeking simple solutions with an elevated esthetic to maximize space in their homes. We are very excited about all the great opportunities that are in our pipeline for the future.

Well, Jeff will review our financial details a more — while, Jeff will review our financial results in more detail, I’d like to highlight the very strong financial position we are in as we enter into the second half of our fiscal year. We generated the best second quarter sales, earnings and free cash flow in the company’s history, finishing the quarter with almost $62 million in cash on our balance sheet and zero balance on our revolving line of credit. For Q2 of — our Q2, of course, did benefit from the tight pandemic driven expense management that resulted in higher than normal flow-through of sales. And we do expect expense normalization in the second half of the year, as a number of cost return with operations fully resumed particularly in payroll and marketing expense.

Like many others in retail who are beneficiaries of the current environment, we are also working hard to maintain the appropriate levels of inventory with increased demand for our products and solutions. We have experienced out of stock — out of stocks in certain general merchandise categories, and like many, our supply chain is working hard to keep up with our sales trends. However, by and large, our customers have opted for other similar products we offer, if we are out of stock on a specific products they want. We are focused on becoming much more efficient around our supply chain and working smarter to further reduce the time it takes to get products into our distribution centers and from our distribution centers to our stores and customers. We remain laser focused on constantly improving the customer experience in every aspect from beginning to end.

As mentioned, we are pleased with our quarter-to-date sales trends and we are working very hard to keep up the strong demand we are seeing. Our second — our strong second quarter performance would not have happened without our committed incredible employees in our two distribution centers, our 93 stores, our call center and our office team. Their dedication, perseverance and support has always been inspiring and appreciative. But these last six months have shown that we are stronger than we thought. We’re smarter than we thought. And we can work and execute as a team, better than ever. It is really been rewarding. I was also so pleased to be able to show a token of our support financially to our front-line employees in our stores, distribution centers and call center, by providing them with an ad hoc bonus we recently paid and a further opportunity for additional bonus in early 2021.

Before I turn the call over to Jeff, I want to announce Jodi Taylor’s planned retirement effective March 1, 2021. As with everything in our company, we approach transitions and change management with great thought and diligence. Jodi successfully transitioned her CFO responsibilities to Jeff back in August. And we will be transitioning her CAO and Secretary responsibilities in the coming months. And while she will be — will still be here and working, I know for the next four months. On behalf of our entire company and our Board of Directors, I want to sincerely thank Jodi for her invaluable contributions over the past 13 years. She has been an incredible partner and friend to me and I know we’ll always have a bit of TCS glue with her. Jodi has three grandchildren on the way in the coming months. So I’m not too worried about her keeping busy. It promises to be a hectic and fulfilling start to her retired life, and we all wish her the very best.

So in closing, I just want to reiterate that these exceptional results have been years in the making and the credit goes to our entire organization for executing the many initiatives we have prioritized, thereby ensuring our prime position to capitalize further and leverage even more the elevated consumers’ interest in their homes and in the storage and organization category. Our homes are now more important than ever and storage and organization, whether it’d be a pantry or a door or a complete Custom Closets matters. And it’s impossible to predict exactly how the coming months will unfold from a macro perspective, but it’s The Container Store, we are on point, we are positive, we all know our direction and how we’re moving forward. We are confident and excited about the rest of the year and beyond.

And with that, I will ask Jeff to discuss our financial results in more detail. Jeff?

Jeff Miller — Chief Financial Officer

Thank you, Melissa, and good afternoon, everyone. I’m pleased to be here for my first earnings call as CFO, and I look forward to meeting many of you in time. I also want to express my well-wishes to Jodi upon the announcement of her retirement in March next year. It is due to Jodi’s hard work and many contributions over the years that we have a strong and deep finance and accounting organizations that I feel very fortunate to lead.

Now turning to our results that Melissa shared, we are very proud of our second quarter, which saw a sequential improvement from the first quarter, as our stores were fully reopened and we benefited from the significant work we have done to revitalize the business. These efforts span merchandising, marketing, stores and e-commerce with notable strides made developing influencer partnerships, of which The Home Edit has been the most significant, particularly on the heels of the September launch of their Netflix show.

For the second quarter, consolidated net sales increased 5% year-over-year to $248.2 million. And as we noted on our last call on July 28th, at that time for the second quarter, we had preserved approximately 90% of our retail sales orders taken at The Container Store compared to the same time — same timeframe last year. We have now experienced a strong acceleration in sales trends in the fiscal month of September, driven by the successful launch of The Home Edit’s Netflix show as Melissa said.

During Q2, our online channel continued its strong performance, delivering sales growth of 86.4%. Our online sales represented almost 19% of our TCS Q2 net sales. And when you include curbside pickup, our website generated sales in Q2 were up 92.9%, representing a total of approximately 30% of TCS net sales, compared to 16.1% in Q2 last year.

By segment, sales for The Container Store retail business increased 5.3% to $233 million, compared to $221.2 million last year. Other product categories were up 10.1% in Q2, contributing 550 basis points of the increase in net sales. Custom Closets sales were almost flat, demonstrating a strong improvement from our first quarter results and turning positive in the month of September. As a result of the COVID-19 pandemic and resulting store closures during the first quarter, we chose not to provide comp store sales metrics. Additionally, in the second quarter of fiscal 2020, we only had one store that would not be considered for comp store metrics. And therefore, the overall increase in net sales and comp stores were materially consistent. We do not believe the comp store sales will be a meaningful metric to present in fiscal 2020.

We saw strength in categories to working and learning from home, such as our office categories, as well as categories that are highlighted in The Home Edit’s Netflix show such as kitchen and storage. And within Custom Closets, we saw strength in new Elfa products, such as our new Graphite finish and our new Grab & Go prepackaged Elfa solutions. Speaking of Elfa, in Q2, their third-party net sales remained flat at $5.2 million. And excluding the impact of foreign currency translation, Elfa third-party net sales declined 6.6% year-over-year, given the economic impact of COVID-19. From a profitability standpoint, our consolidated gross margin for Q2 was 58.8%, compared to 57.9% last year.

By segment, gross margin at The Container Store increased 50 basis points, driven primarily by less promotional activity and a favorable higher-margin product sales in the second quarter of fiscal 2020, partially offset by increased shipping costs as a result of a higher mix of online sales. Elfa gross margin increased 380 basis points, primarily due to favorable customer and product sales mix and to a lesser extent, lower direct material costs.

Consolidated SG&A dollars declined 11.2% to $101.2 million, compared to $114 million in Q2 last year. As a percentage of sales, SG&A decreased by 740 basis points versus last year, primarily due to reductions in payroll, marketing, transportation and other expenses, combined with a leverage of SG&A expenses on higher sales during the quarter. Our current year Q2 SG&A improvement includes an approximate $6 million reduction in payroll related expense and an approximate $5 million reduction in marketing expenses from last year. However, with the sales surging in September, we chase staffing both at our stores and distribution center. We don’t expect this level of low spending to continue as we have increased staffing levels commensurate with sales, reinstated salary cuts and our plans to return to more normalized marketing spend, including Q4 plans to increased marketing spend associated with the Marie Kondo product launch.

Our net interest expense in the second quarter of fiscal 2020 decreased 16.9% to $4.5 million from $5.4 million in the prior year, due to lower interest rates combined with the lower principal balance on our senior secured term loan facility. The effective tax rate for the quarter was 31% compared to 26.8% in the second quarter of last year. The increase in the effective tax rate is primarily due to the company’s jurisdictional mix of income and additional tax expense related to stock-based compensation.

Net income for the quarter on a GAAP basis was $20.2 million, or $0.41 per diluted share as compared to GAAP net income of $3.6 million, or $0.08 per diluted share in the second quarter of last year. On an adjusted basis, excluding severance and certain COVID-19 related cost, adjusted net income was $20.9 million, or $0.43 per diluted share as compared to last year’s adjusted net income of $3.9 million, of $0.08 per diluted share, which excludes certain cost associated with closing our Elfa France operations in Q2 last year. Our adjusted EBITDA nearly doubled to $44.1 million in the second quarter of this year, compared to $22.4 million in Q2 last year.

Turning to our balance sheet. We ended the quarter with $61.8 million in cash, $245 million in borrowings and total liquidity, including availability on our revolving credit facilities of approximately $168.5 million. Our current leverage ratio is just under 1.8 times leveraged. We ended the quarter with consolidated inventory down 11.6%, primarily due to higher inventory last year associated with the ramp up of our distribution center facility in Aberdeen, Maryland. As Melissa mentioned, we are chasing inventory in certain general merchandise categories, such as kitchen, office and storage that are in the process of rebuilding stock with merchandise in transit as we speak. We feel good about our on-hand Custom Closets inventory levels ahead of our upcoming Elfa sale.

We are very pleased with our strong free cash flow performance. We generated $84.3 million in free cash flow in the first half of fiscal 2020, up significantly from last year when we utilized $15.8 million in free cash flow. We expect to deliver positive free cash flow in fiscal 2020 and expect our total capex for the fiscal year to be approximately $15 million. As a reminder, we deferred approximately $12 million of certain cash lease payments in our first quarter of this fiscal year. The benefit of which is reflected in our year-to-date adjusted EBITDA. Less than half of these lease amounts are expected to be repaid in the second half of this fiscal year, and the remaining amounts are expected to be repaid primarily in fiscal 2021. We plan to use our excess cash to make additional debt payments in fiscal 2020.

Given the unusual sales trends in our business, we believe that is appropriate to provide more color about our go-forward Q3 expectations. There are few points I would like to make. As we said, fiscal Q3 is off to a strong start, as a halo effect with The Home Edit’s Netflix show launch has continued into October. With that said, we are not assuming the quarter-to-date elevated level of sales persist. The expected moderation of sales throughout Q3 is partly due to our conservative approach and estimating holiday department sales in the light of the notable declines over the past few years in our holiday sales. Therefore, we currently expect year-over-year sales growth in Q3 to modestly exceed the 5% growth we just reported for Q2.

With regards to gross margin for Q3, we expect gross margin to be relatively consistent with or up slightly to last year based on our planned promotional guidance and inclusive of freight surcharge headwinds. And also, as Melissa said, the flow-through of our Q2 sales increase was far greater than normal, due to the lower SG&A spending and expense cuts in Q2, associated with the pandemic. As we look to Q3, with the sales recovery and restoration of expenses, we would expect our SG&A expenses to be largely on top line with the same period last year.

That concludes our prepared remarks. I will now turn the call over to the operator to open up the lines for questions. Operator?

Questions and Answers:

Operator

Yes. I’m with you guys.

Melissa Reiff — Chairwoman, Chief Executive Officer and President

Okay. Bear [Phonetic] this for a second or more. Don’t do that.

Operator

No, no, I’m there. I’m there.

Melissa Reiff — Chairwoman, Chief Executive Officer and President

I’m kidding. I mean, we have the three queued up, right?

Operator

I’m sorry, could you repeat that?

Caitlin Churchill — Investor Relations

The first question — sorry, the question will come from Steven Forbes. Could you unmute his line?

Operator

Absolutely, in a moment. And now, Steven Forbes with the question.

Steven Forbes — Guggenheim Securities — Analyst

Thank you. Good evening, Melissa, Jeff. How are you doing?

Melissa Reiff — Chairwoman, Chief Executive Officer and President

Great, Steven. How are you?

Steven Forbes — Guggenheim Securities — Analyst

Doing well. Hanging in there. My daughter stopped screaming. So let’s say, a plus one of the day. Anyway, Melissa, you mentioned right the constraint on the back of The Home Edit launch in early September. And you sort of talked about right in two categories, kitchen and storage, that were the most relevant. So curious, if you can sort of dig down a little deeper and talk about specific trends within those sub categories, like how dramatic of an improvement did you see and how correlated was the performance to the launch of the show?

Melissa Reiff — Chairwoman, Chief Executive Officer and President

Well, definitely, Steven, it was — the show had a huge impact. It premiered September 9th and we saw a dramatic increase. And the assortment that we’re offering with the Home Edit, it’s a beautiful assortment and it primarily focuses on kitchen and bath and storage. And so those have been the three categories that have just really taken off. We’ve also benefited in some other categories, because we’re seeing more traffic online, we’re seeing — we’re seeing some traffic in stores, and so it exposes the customer to the rest of our store and Custom Closets. But it has really been incredible. And as we’ve said in our remarks, we are chasing some inventory. We’ve got it on that — we’ve got it all come in. We’re just like that hamster on the wheel. We’re trying to catch up. But we’re doing very well and really pleased with the way our distribution centers has just been heroic and their response to try to get the orders out as quickly as possible. For the most part, our customers have been patient. And as I said in my remarks, sometimes, Steve, they will opt for — instead of a Home Edit product, they will opt for some — a product that’s similar or they’ll wait patiently until we get the product in that maybe we’re out of stock on temporarily.

Jeff Miller — Chief Financial Officer

Yeah, Melissa, I’d just like to add to that. When we look at the quarter as a whole, what we were seeing prior to launch of the Home Edit show, sales trends had improved from our Q1 performance, and we’re seeing that in July and August, as we move through the quarter, that was certainly better from, say in Q1. And Melissa mentioned, of course, certain acceleration after launch.

Melissa Reiff — Chairwoman, Chief Executive Officer and President

Yeah. But that’s true. I mean, it was strong before the launch, but it really took off after the launch.

Steven Forbes — Guggenheim Securities — Analyst

And then maybe just on that point, right, of maybe inventory shortages, and you mentioned, right, the demand comp versus reported comp dynamic at the end of quarter. Can you quantify that with the gap was between demand comp versus reported comp in the month of September?

Jeff Miller — Chief Financial Officer

Yeah. We mentioned that we had approximately $6.5 million [Phonetic] of sales that we had sold online, they have not shipped yet. So we expect those sales to be shipped and delivered in Q3 of this fiscal year.

Steven Forbes — Guggenheim Securities — Analyst

And then maybe last one from me. As you think about the return to unit growth over the horizon here, I mean, how has this renewed strength in the business striding just even have a growth in the POP! numbers and just a relevant stride of the home category and how you guys split into it? Has it sort of impacted your plans for unit growth for next year or impacted the real estate initiative, if you can sort of talk to there?

Melissa Reiff — Chairwoman, Chief Executive Officer and President

Yeah, it’s a really good question, Steven. You know, everything — when COVID hit, obviously, we were all on kind of pause and reevaluating our plans and we’ve had to be very nimble and quick on our feet, and I think we’ve done a good job at that. And we don’t know what the future has been a whole, none of us do. But we are actively planning and executing our plans for next year or, obviously, over the moon about Marie Kondo and our partnership there and trying to plan for that. In terms of growth and new stores, we’re opening one new store this year and we are looking for other opportunities for more store growth, like we said it thousand times, we feel like we have a lot of runway. It will probably a most — most definitely, I believe, be a smaller store in footprint. But, yeah, we’re taking that kind of one day at a time as we all are. But this is certainly — we worked hard for the last four years, not to toot our own horn here. But this is a combination of so many people in our organization, if not everyone in our organization working on these partnerships and trying to be innovative and creative and making sure that we’re relevant and our category is relevant. So we’re going to continually — continue to drive it just full speed ahead. And I have to say that I’ve never felt before that every aspect, every area of our business is just seems to be just so coming together, Steven, and firing on all cylinders. It’s really gratifying and we weren’t rewarding and I want our organization to take time to celebrate. But we can’t rest on our laurels, we have to always look ahead and see what the next five years, three years are going to bring it and that’s what we’re doing.

Steven Forbes — Guggenheim Securities — Analyst

Thank you, both. Stay safe.

Melissa Reiff — Chairwoman, Chief Executive Officer and President

You bet. Take care. Thanks, Steve.

Jeff Miller — Chief Financial Officer

You bet.

Operator

Thank you. [Operator Instructions] Our next question comes from Kate McShane.

Kate McShane — Goldman Sachs — Analyst

Hi, good afternoon. Kate McShane from Goldman Sachs. Thanks for taking my question.

Melissa Reiff — Chairwoman, Chief Executive Officer and President

Hi, Kate.

Kate McShane — Goldman Sachs — Analyst

So my question centered around the Home Edit lift, I wondered if there was a way you could compare what you’re seeing from the Home Edit lift versus what you saw when there was a last Netflix show with Marie Kondo. Can you maybe walk us through some of the similarities, maybe some of the differences? And how should we think about this partnership going forward, is it something where they’re going to be more seasons of the Home Edit? Or it’s one season and now it’s a social media presence? Could you maybe walk us through how it evolves over time?

Melissa Reiff — Chairwoman, Chief Executive Officer and President

Right. And again, I don’t want to speak to the Home Edit, but we — oh, we’re echoing. Sorry, Kate. We’re certainly planning on continuing our partnership in a very big way with the Home Edit. The last Marie Kondo show, that was a little bit different than the Home Edit. This is lasting. This is more general merged with the Home Edit and it’s been — it’s been going on for the next — for the last six months and we anticipate it to continue. The Marie Kondo launch in January, I think she just recently announced that there’s going to be a Marie Kondo, another Marie Kondo Netflix show. I don’t know the timeframe yet. So we’re just working very closely with both the Home Edit and Marie Kondo and being good partners and supporting them and they’re supporting us. And we feel like that the market is just right for this, obviously, with all of us more at home, the young people as well as even older people really focusing on their home, it does matter, and so we’re excited and we’re just taking it as it comes.

Kate McShane — Goldman Sachs — Analyst

That’s helpful. Thank you. I just had two follow-up questions. One was, of the $6.5 million orders that you quantified that was demand comp that will be delivered in Q3. Is there any risk or does that account for any cancellations that may have occurred?

Jeff Miller — Chief Financial Officer

No. I mean, a normal cadence of our online ordering and the delays from when the order is taken from the time we actually deliver [Phonetic] it to the customer.

Melissa Reiff — Chairwoman, Chief Executive Officer and President

I mean, Kate, there is always a chance for cancellation, but we have not seen that. And I’m so sorry for this echo coming on your end.

Kate McShane — Goldman Sachs — Analyst

Oh, it sounds okay to me. Thank you.

Melissa Reiff — Chairwoman, Chief Executive Officer and President

Okay.

Kate McShane — Goldman Sachs — Analyst

The last question I had was on the Custom Closets, it’s great to hear that business [Technical Issues] in September, are you surprised at all you didn’t see the business maybe inflect a little bit earlier just with all the movement that we’ve seen in people migrating out of cities, moving to the suburbs and again, the focus on the home that you and others are talking about?

Melissa Reiff — Chairwoman, Chief Executive Officer and President

Yeah, that’s another great question. All three of our Custom Closets line, Elfa, Avera and Laren, all three actually exceeded our expectations a little bit as we headed into the quarter and we ended flat to last year. We did see improvements in sales trends in Custom Closets this quarter over Q1 of this year. And I really wasn’t surprised as the good news is that we are definitely in great inventory shape for our upcoming Elfa sale as it relates to Custom Closets. So we are not chasing that inventory at all. And I do believe, Kate, that there are some customers that maybe weren’t entirely comfortable spending lengthy amount of time in our stores, because that Custom Closet process is a little more, the traditional one is a little more involved. And so they may not have felt super comfortable doing that. But now what is so cool is that we immediately pivoted and started our online Custom Closet design tools as well as our virtual design consultations. So those we’ve seen a really nice increase in our virtual consultations, the customers are really responding to that. I think they are still comfortable with Zoom or Teams or Google Meets or whatever it is. And so that has really improved and now we’ve rolled out [Phonetic] Elfa all stores. So, I mean, we had is a little bit, but pre-COVID — COVID hit, I am sorry, when COVID hit, we just jumped on that like crazy, and we are very pleased with the response.

Kate McShane — Goldman Sachs — Analyst

Thank you.

Melissa Reiff — Chairwoman, Chief Executive Officer and President

You bet.

Operator

And our next question is coming from Tami Zakaria. Tami, please state your question.

Tami Zakaria — J.P. Morgan — Analyst

Hi, everyone, congrats on the great results. Very impressive.

Melissa Reiff — Chairwoman, Chief Executive Officer and President

Thank you.

Tami Zakaria — J.P. Morgan — Analyst

I have two — you are welcome. I have two quick ones, actually. So regarding your expectation for the third quarter, it seems like you are guiding to just about 5% growth. So does that mean, you expect sales growth to go negative in October and November or how are you thinking about the three months of the quarter?

Jeff Miller — Chief Financial Officer

I mean, we are looking at Q3 overall as modestly increasing from the 5%. I think the biggest thing is when we talk about December and holiday sales and our historical experience with that, we are planning the month of December pretty conservatively and that’s really the basis for our kind of our Q3 expectations.

Melissa Reiff — Chairwoman, Chief Executive Officer and President

Tami, as we shared, September was very strong, and October is improving for September. So, we don’t even end our October until this Saturday. I don’t know what November and December are going to bring. But — and we have planned conservatively holiday because of the past declines that we’ve had. But I have to say I am super charged about our holiday this year. And the reason I am is because we have 80% new product. We have a new buyer that has just been this fantastic addition to our team. We also offered our POP! customers a special online only for them, opportunity to purchase holiday, it’s live now. And I think it goes through — Jeff, I can’t remember. I think it goes through this — not very long. But anyway, they have been purchasing online just for the POP! customers, and then we’ll open it up to everyone. But I think holiday, I hope it could surprise us, that I feel very good in our plan. I don’t think we are sandbagging. And I don’t think we’re being too aggressive. I think we are being smart.

Jeff Miller — Chief Financial Officer

At a prudent time.

Melissa Reiff — Chairwoman, Chief Executive Officer and President

Yeah.

Tami Zakaria — J.P. Morgan — Analyst

Got it, got it. That’s super helpful. And then just looking back on the second quarter, September was up about 17%. Could you talk about July and August?

Jeff Miller — Chief Financial Officer

Yes, like we said before, the September was up 17.8%. And what we are seeing prior to the launch of the Netflix show, we were seeing sales improvement from our Q1 experience in both July and August. And, of course, early September, there is a significant acceleration in sales as a result of the Netflix launch.

Melissa Reiff — Chairwoman, Chief Executive Officer and President

Yeah, I think August, if I recall correctly, Tami, it was just down slightly.

Jeff Miller — Chief Financial Officer

Yes, single swipe it was up, July and August were down low single-digits.

Melissa Reiff — Chairwoman, Chief Executive Officer and President

But it turned positive before — yeah, before September, yes.

Tami Zakaria — J.P. Morgan — Analyst

Got it. So August was better than July, slightly better.

Jeff Miller — Chief Financial Officer

Yeah, [Indecipherable] low single-digits.

Tami Zakaria — J.P. Morgan — Analyst

Got it. Okay. Okay, if I can squeeze in one last one. I think you mentioned for the third quarter you expect SG&A to be in line with last year. So, did you mean that on a rate basis or dollar basis?

Jeff Miller — Chief Financial Officer

Dollars. Yes, dollars. When we are looking at it from dollars perspective, during this time period, it’s certainly hard to talk percentages, especially when you are looking at Q2 and everything else going on in COVID. So I want to be specific about that being from a dollar spend. Of course, with pleasure [Phonetic] anything else changes, but just a reminder, 50% of our SG&A is fixed and the other 50% is variable.

Tami Zakaria — J.P. Morgan — Analyst

Got it. That’s super helpful. So basically in line with last year’s dollar value of SG&A, that’s how we should be modeling it?

Jeff Miller — Chief Financial Officer

Right.

Tami Zakaria — J.P. Morgan — Analyst

Got it. Okay. Thank you so much. Best of luck.

Melissa Reiff — Chairwoman, Chief Executive Officer and President

Thank you so much, Tami.

Jeff Miller — Chief Financial Officer

Thank you, Tami.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I’d like to turn the floor back to management for closing remarks.

Melissa Reiff — Chairwoman, Chief Executive Officer and President

Well, thank you very much again for joining our call today. Thank you for the questions. Thank you, operator. Thank you, Caitlin. We will definitely look forward to talking with you after Q3. So, everybody have a great day. Thanks so much.

Operator

[Operator Closing Remarks]