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Select Comfort Announces First Quarter 2015 Results

Raises Full-Year 2015 Outlook

  • First quarter net sales increased 27% to an all-time quarterly record of $350 million, with 22% comparable sales growth
  • First quarter EPS increased 74% to an all-time quarterly record of $0.54
  • Full-year outlook raised to $1.35 per share

MINNEAPOLIS--(BUSINESS WIRE)--Apr. 22, 2015-- Select Comfort Corporation (NASDAQ: SCSS) today reported first quarter 2015 results for the period ended Apr. 4, 2015. Net sales increased 27% in the quarter, with 22% comparable sales growth, while earnings per share increased 74% compared to the prior year.

"Continued strong consumer response to the combination of our advertising, benefit-driven products and differentiated retail experience delivered performance ahead of expectations," said Shelly Ibach, president and CEO of Select Comfort. "Our investments in innovation, technology and distribution are growing the business in a sustainable, profitable manner and creating value for our shareholders."

First Quarter Statement of Operations Overview

  • Net sales increased 27% to a record $350 million, with comparable sales up 22% and 6 points of growth from net new store additions
  • Gross profit increased 26% to $216 million; gross margin of 61.7% reflected a higher mix of our new FlexFit™ adjustable bases, partially offset by product mix and efficiency gains
  • Operating expenses totaled $172 million, or 49.2% of net sales, a 350 basis point rate improvement versus prior year. The year-over-year increase in expenses included variable expenses related to higher sales, and planned spending increases in G&A and R&D to support growth initiatives
  • Operating income increased 69% to $44 million, or 12.5% of net sales, a 320 basis point rate improvement versus the prior year's first quarter
  • Earnings per diluted share grew 74% to a record $0.54

Cash Flows and Balance Sheet Review

  • Net cash provided by operating activities was $49 million for the first quarter of 2015, compared with $39 million last year
  • Capital expenditures for the first quarter of 2015 were $18 million
  • Repurchased $20 million, or 0.6 million shares, in the first quarter with $135 million cumulative cash returned to shareholders through repurchases since April 2012 (5.8 million shares at an average cost of $23.40 per share) or 109% of free cash flows

Financial Outlook
The company has increased its full-year 2015 earnings per diluted share outlook to $1.35, compared with the previous outlook of $1.30 per share. The outlook continues to include $11 million (pre-tax), or $0.13 per diluted share, of estimated launch costs related to the company's ERP (Enterprise Resource Planning) system planned for implementation in the fourth quarter of 2015. The outlook implies earnings per share growth of 24% excluding the impacts of the extra week in 2014 ($0.06 favorable impact to the fourth quarter of 2014 earnings per share) and the estimated 2015 ERP launch costs. The outlook assumes high-single-digit total net sales growth for the balance of the year and a 6% increase in store count in 2015.

Conference Call Information
Management will host its regularly scheduled conference call to discuss the company's results at 5 p.m. EDT (4 p.m. CDT; 2 p.m. PDT) today. To listen to the call, please dial (800) 593-9959 (international participants dial (517) 308-9340) and reference the passcode "Sleep." To access the webcast, please visit the investor relations area of the Sleep Number website at http://www.sleepnumber.com/eng/aboutus/InvestorRelations.cfm. The webcast replay will remain available for approximately 60 days.

About Select Comfort Corporation
SLEEP NUMBER, a sleep innovation leader, delivers unparalleled sleep experiences by offering high-quality, innovative sleep products and services. The company is the exclusive designer, manufacturer, marketer, retailer and servicer of a complete line of Sleep Number® beds including our newest addition, the SleepIQ Kids™ bed. Only the Sleep Number bed offers SleepIQ® technology – proprietary sensor technology that works directly with the bed's DualAir™ system to track and monitor each individual's sleep. SleepIQ technology communicates how you slept and what adjustments you can make to optimize your sleep and improve your daily life. Sleep Number also offers a full line of exclusive sleep products including FlexFit™ adjustable bases and Sleep Number® pillows, sheets and other bedding products. Consumers also benefit from a unique, value-added retail experience at one of the more than 460 Sleep Number® stores across the country, online at SleepNumber.com, or via phone at (800) Sleep Number or (800) 753-3768.

Forward-looking Statements
Statements used in this news release relating to future plans, events, financial results or performance are forward-looking statements subject to certain risks and uncertainties including, among others, such factors as current and future general and industry economic trends and consumer confidence; the effectiveness of our marketing messages; the efficiency of our advertising and promotional efforts; our ability to execute our company-controlled distribution strategy; our ability to achieve and maintain acceptable levels of product and service quality, and acceptable product return and warranty claims rates; our ability to continue to improve and expand our product line; consumer acceptance of our products, product quality, innovation and brand image; industry competition, the emergence of additional competitive products, and the adequacy of our intellectual property rights to protect our products and brand from competitive or infringing activities; availability of attractive and cost-effective consumer credit options; pending and unforeseen litigation and the potential for adverse publicity associated with litigation; our "just-in-time" manufacturing processes with minimal levels of inventory, which may leave us vulnerable to shortages in supply; our dependence on significant suppliers and our ability to maintain relationships with key suppliers, including several sole-source suppliers; the vulnerability of key suppliers to recessionary pressures, labor negotiations, liquidity concerns or other factors; rising commodity costs and other inflationary pressures; risks inherent in global sourcing activities; risks of disruption in the operation of either of our two primary manufacturing facilities; increasing government regulations, which have added or will add cost pressures and process changes to ensure compliance; the adequacy of our management information systems to meet the evolving needs of our business and to protect sensitive data from potential cyber threats; the costs, distractions and potential disruptions to our business related to upgrading our management information systems; our ability to attract, retain and motivate qualified management, executive and other key employees, including qualified retail sales professionals and managers; and uncertainties arising from global events, such as terrorist attacks or a pandemic outbreak, or the threat of such events. Additional information concerning these and other risks and uncertainties is contained in the company's filings with the Securities and Exchange Commission (SEC), including the Annual Report on Form 10-K, and other periodic reports filed with the SEC. The company has no obligation to publicly update or revise any of the forward-looking statements in this news release.

 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited – in thousands, except per share amounts)
       
Three Months Ended
April 4, % of March 29, % of
2015 Net Sales 2014 Net Sales
 
Net sales $ 349,809 100.0 % $ 276,412 100.0 %
Cost of sales   133,976 38.3 %   105,029 38.0 %
Gross profit   215,833 61.7 %   171,383 62.0 %
 
Operating expenses:
Sales and marketing 140,503 40.2 % 125,022 45.2 %
General and administrative 28,254 8.1 % 18,896 6.8 %
Research and development   3,351 1.0 %   1,663 0.6 %
Total operating expenses   172,108 49.2 %   145,581 52.7 %
Operating income 43,725 12.5 % 25,802 9.3 %
Other income, net   153 0.0 %   102 0.0 %
Income before income taxes 43,878 12.5 % 25,904 9.4 %
Income tax expense   15,079 4.3 %   8,912 3.2 %
Net income $ 28,799 8.2 % $ 16,992 6.1 %
 
Net income per share – basic $ 0.55 $ 0.31
 
Net income per share – diluted $ 0.54 $ 0.31
 
 
Reconciliation of weighted-average
shares outstanding:
Basic weighted-average shares outstanding 52,346 54,113
Dilutive effect of stock-based awards   980   731
Diluted weighted-average shares outstanding   53,326   54,844
 
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share amounts)
subject to reclassification
   
(unaudited)
April 4, January 3,
2015 2015
Assets
Current assets:

Cash and cash equivalents

$ 46,351 $ 51,995
Marketable debt securities – current 75,035 69,609

Accounts receivable, net of allowance for doubtful accounts of $732 and $739, respectively

17,886 19,693
Inventories 56,004 53,535
Prepaid expenses 17,670 17,792
Deferred income taxes 8,745 8,786
Other current assets   13,807     11,185  
Total current assets 235,498 232,595
 
Non-current assets:
Marketable debt securities – non-current 40,874 44,441
Property and equipment, net 177,734 165,453
Goodwill and intangible assets, net 15,777 15,986
Deferred income taxes 6,844 3,433
Other assets   15,735     12,279  
Total assets $ 492,462   $ 474,187  
 
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 80,170 $ 84,197
Customer prepayments 26,135 28,726
Accrued sales returns 15,165 15,262
Compensation and benefits 23,941 33,066
Taxes and withholding 24,785 10,207
Other current liabilities   16,128     15,594  
Total current liabilities 186,324 187,052
 
Non-current liabilities:
Warranty liabilities 3,360 2,722
Other long-term liabilities   32,524     27,506  
Total non-current liabilities   35,884     30,228  
Total liabilities 222,208 217,280
 
Shareholders' equity:

Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding

-

-

Common stock, $0.01 par value; 142,500 shares authorized, 52,299 and 52,798 shares issued and outstanding, respectively

523 528
Additional paid-in capital - -
Retained earnings 269,693 256,413
Accumulated other comprehensive income (loss)   38     (34 )
Total shareholders' equity   270,254     256,907  
Total liabilities and shareholders' equity $ 492,462   $ 474,187  
 
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited - in thousands)
subject to reclassification
   
Three Months Ended
April 4, March 29,
2015 2014
 
Cash flows from operating activities:
Net income $ 28,799 $ 16,992

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 10,783 9,176
Stock-based compensation 2,782 (108 )
Net loss (gain) on disposals and impairments of assets 177 (2 )
Excess tax benefits from stock-based compensation (858 ) (19 )
Deferred income taxes (3,415 ) (1,450 )
Changes in operating assets and liabilities:
Accounts receivable 1,780 (552 )
Inventories (2,469 ) (4,438 )
Income taxes 15,453 3,795
Prepaid expenses and other assets (1,661 ) 1,030
Accounts payable 7,458 3,600
Customer prepayments (2,591 ) 4,785
Accrued compensation and benefits (8,977 ) 4,080
Other taxes and withholding (58 ) 36
Warranty liabilities 900 185
Other accruals and liabilities   761     1,754  
Net cash provided by operating activities   48,864     38,864  
 
Cash flows from investing activities:
Purchases of property and equipment (17,796 ) (16,660 )
Proceeds from sales of property and equipment 33 5
Investments in marketable debt securities (18,195 ) (13,623 )
Proceeds from maturities of marketable debt securities 16,244 10,000
Increase in restricted cash   -     (500 )
Net cash used in investing activities   (19,714 )   (20,778 )
 
Cash flows from financing activities:
Net decrease in short-term borrowings (16,530 ) (6,094 )
Repurchases of common stock (20,475 ) (10,236 )
Proceeds from issuance of common stock 1,353 411
Excess tax benefits from stock-based compensation   858     19  
Net cash used in financing activities   (34,794 )   (15,900 )
 
Net (decrease) increase in cash and cash equivalents (5,644 ) 2,186
Cash and cash equivalents, at beginning of period   51,995     58,223  
Cash and cash equivalents, at end of period $ 46,351   $ 60,409  
 
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)
   
Three Months Ended
April 4, March 29,
2015 2014
 
Percent of sales:
Retail 91.6 % 89.7 %
Direct and E-Commerce 5.9 % 6.4 %
Wholesale/other   2.5 %   3.9 %
Total   100.0 %   100.0 %
 
Sales change rates:
Retail comparable-store sales 22 % 2 %
Direct and E-Commerce   17 %   2 %
Company-Controlled comparable sales change 22 % 2 %
Net opened/closed stores   6 %   7 %
Total Company-Controlled Channel 28 % 9 %
Wholesale/other   (19 %)   (21 %)
Total   27 %   7 %
 
Stores open:
Beginning of period 463 440
Opened 8 17
Closed   (8 )   (14 )
End of period   463     443  
 
Other metrics:
Average sales per store ($ in 000's) 1, 3 $ 2,424 $ 2,120
Average sales per square foot 1, 3 $ 1,038 $ 1,042
Stores > $1 million net sales 1, 3 99 % 97 %
Stores > $2 million net sales 1, 3 63 % 47 %
Average revenue per mattress unit 2 $ 3,923 $ 3,373
 
 

1 Trailing twelve months for stores open at least one year.

 

2 Represents Company-Controlled Channel total net sales divided by Company-Controlled Channel mattress units.

 

3 Fiscal 2014 included 53 weeks, as compared to 52 weeks in fiscal 2015 and 2013. The additional week in 2014 was in the fiscal fourth quarter. Company-Controlled comparable sales metrics have been adjusted to remove the estimated impact of the additional week on those metrics.

 
   

SELECT COMFORT CORPORATION AND SUBSIDIARIES

Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)

(in thousands)

 

We define earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA") as net income plus: income tax expense, interest expense, depreciation and amortization, stock-based compensation and asset impairments. Management believes Adjusted EBITDA is a useful indicator of our financial performance and our ability to generate cash from operating activities. Our definition of Adjusted EBITDA may not be comparable to similarly titled definitions used by other companies. The table below reconciles Adjusted EBITDA, which is a non-GAAP financial measure, to the comparable GAAP financial measure:

 
Three Months Ended Trailing-Twelve Months Ended
April 4,   March 29, April 4,   March 29,
2015 2014 2015 2014
 
Net income $ 28,799 $ 16,992 $ 79,781 $ 53,602
Income tax expense 15,079 8,912 40,301 27,995
Interest expense 10 10 53 47
Depreciation and amortization 10,544 8,885 40,426 32,151
Stock-based compensation 2,782 (108 ) 9,688 3,692
Asset impairments   209     3     703     100  
Adjusted EBITDA $ 57,423   $ 34,694   $ 170,952   $ 117,587  
 
 
Free Cash Flow
(in thousands)
 
Three Months Ended Trailing-Twelve Months Ended
April 4, March 29, April 4, March 29,
2015 2014 2015 2014
 
Net cash provided by operating activities $ 48,864 $ 38,864 $ 154,468 $ 81,947
Subtract: Purchases of property and equipment   17,796     16,660     77,730     79,162  
Free cash flow $ 31,068   $ 22,204   $ 76,738   $ 2,785  
 

Note - Our Adjusted EBITDA calculation and our "free cash flow" data are considered non-GAAP financial measures and are not in accordance with, or preferable to, "as reported," or GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the Company's financial performance by investors and financial analysts.

 
GAAP - generally accepted accounting principles in the U.S.
 
 
SELECT COMFORT CORPORATION AND SUBSIDIARIES
Calculation of Return on Invested Capital (ROIC)
(in thousands)
   
ROIC is a financial measure that we use which quantifies the return we earn on our invested capital. We compute ROIC as outlined below. Management believes ROIC is a useful metric for investors and financial analysts. Our definition and calculation of ROIC may not be comparable to similarly titled definitions and calculations used by other companies. The tables below reconcile net operating profit after taxes (NOPAT) and total invested capital, which are non-GAAP financial measures, to the comparable GAAP financial measures:
 
Trailing-Twelve Months Ended

April 4,
2015

March 29,
2014

Net operating profit after taxes (NOPAT)

Operating income $ 119,669 $ 81,263
Add: Rent expense 1 59,592 51,418
Add: Interest income 466 383
Less: Depreciation on capitalized operating leases 2 (14,761 ) (13,248 )
Less: Income taxes 3   (55,697 )   (40,963 )
NOPAT $ 109,269 $ 78,853
 

Average invested capital

Total equity $ 270,254 $ 232,123
Less: Cash greater than target 4 (36,125 ) (22,848 )
Add: Long-term debt 5 - -
Add: Capitalized operating lease obligations 6   476,736     411,344  
Total invested capital at end of period $ 710,865 $ 620,619
 
Average invested capital 7 $ 661,708 $ 580,352
 
Return on invested capital (ROIC) 8   16.5 %   13.6 %
 

1 Rent expense is added back to operating income to show the impact of owning versus leasing the related assets.

 

2 Depreciation is based on of the average of the last five fiscal quarters' ending capitalized operating lease obligations (see note 6) for the respective reporting periods with an assumed thirty-year useful life. This is subtracted from operating income to illustrate the impact of owning versus leasing the related assets.

 

3 Reflects annual effective income tax rates, before discrete adjustments, of 33.8% and 34.2% for 2015 and 2014, respectively.

 

4 Cash greater than target is defined as cash, cash equivalents and marketable debt securities less customer prepayments in excess of $100 million.

 

5 Long-term debt includes existing capital lease obligations.

 

6 A multiple of eight times annual rent expense is used as an estimate of capitalizing our operating lease obligations. The methodology utilized aligns with the methodology of a nationally recognized credit rating agency.

 

7 Average invested capital represents the average of the last five fiscal quarters' ending invested capital balances.

 

8 ROIC equals NOPAT divided by average invested capital.

 

Note - Our ROIC calculation and data are considered non-GAAP financial measures and are not in accordance with, or preferable to, GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the Company's financial performance by investors and financial analysts.

 
GAAP - generally accepted accounting principles in the U.S.
 

Source: Select Comfort Corporation

Investor Contact:
Select Comfort Corporation
Dave Schwantes, 763-551-7498
investorrelations@selectcomfort.com
or
Media Contact:
Joele Frank, Wilkinson Brimmer Katcher
Tim Lynch / Scott Bisang, 212-355-4449


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