Select Comfort Announces Third Quarter 2015 Results

MINNEAPOLIS--(BUSINESS WIRE)--

Select Comfort Corporation SCSS today reported results for the third quarter ended Oct. 3, 2015.

"Our third quarter and year-to-date sales and profitability demonstrate the strength of our consumer innovation strategy and business model, even as we take on large transformational initiatives," said Shelly Ibach, president and chief executive officer of Select Comfort. "We have implemented our new ERP system on time and on budget. As anticipated, the implementation has caused customer service and delivery disruptions, which we expect to be isolated to the fourth quarter. We look forward to the agility and efficiencies this system will enable for our customers and team. Our strategy and results remain on track and we are reaffirming our 2015 outlook of $1.35 per share."

Third Quarter Statement of Operations Overview

• Net sales increased 16% to $374 million, with comparable sales up 11%
• Gross profit increased 18% to $234 million; gross margin increased to 62.5% (+110 basis points versus prior year)
• Operating income increased 28% to $45 million, or 12.1% of net sales (+120 basis points versus prior year)
• Earnings per diluted share grew 41% to $0.62

Cash Flow Review

• Net cash provided by operating activities was $132 million for the first nine months of 2015
• Capital expenditures for the first nine months of 2015 were $61 million
• Share repurchases totaled $18.5 million (0.7 million shares) for the third quarter, compared with $10 million for the third quarter of last year

Financial Outlook
The company confirmed its guidance for 2015 earnings per diluted share of $1.35. The outlook remains as planned and assumes sales growth for the second-half of the year consistent with previous guidance of mid- to high-single-digit, adjusting for the extra week in the prior year's fourth quarter. It assumes approximately 490 stores at year end, a 6% increase versus the prior year end. We continue to expect our full-year 2015 return on invested capital (ROIC) to be in the mid-teens, above our 10% weighted average cost of capital.

For reference, earnings for fourth quarter 2014 included $0.10 per diluted share of one-time benefits ($0.06 for the extra week and $0.04 for a legal settlement). Please refer to the last schedule of this news release for supplemental financial information that summarizes discrete items impacting our outlook for the second-half of our fiscal year.

Conference Call Information
Management will host its regularly scheduled conference call to discuss the company's results at 5 p.m. EST (4 p.m. CST; 2 p.m. PST) 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 475 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
				October 3,			% of			September 27,			% of
				2015			Net Sales			2014			Net Sales
Net sales				$	373,919		100.0	%		$	323,366		100.0	%
Cost of sales					140,283		37.5	%			124,782		38.6	%
	Gross profit				233,636		62.5	%			198,584		61.4	%
Operating expenses:
	Sales and marketing				156,899		42.0	%			137,863		42.6	%
	General and administrative				27,817		7.4	%			23,022		7.1	%
	Research and development				3,521		0.9	%			2,353		0.7	%
		Total operating expenses			188,237		50.3	%			163,238		50.5	%
Operating income					45,399		12.1	%			35,346		10.9	%
Other income, net					78		0.0	%			96		0.0	%
Income before income taxes					45,477		12.2	%			35,442		11.0	%
Income tax expense					13,623		3.6	%			11,888		3.7	%
Net income				$	31,854		8.5	%		$	23,554		7.3	%
Net income per share – basic				$	0.63					$	0.44
Net income per share – diluted				$	0.62					$	0.44
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding					50,945						53,271
	Dilutive effect of stock-based awards				756						700
Diluted weighted-average shares outstanding					51,701						53,971

SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited – in thousands, except per share amounts)
				Nine Months Ended
				October 3,			% of			September 27,			% of
				2015			Net Sales			2014			Net Sales
Net sales				$	999,017		100.0	%		$	834,541		100.0	%
Cost of sales					379,009		37.9	%			322,177		38.6	%
	Gross profit				620,008		62.1	%			512,364		61.4	%
Operating expenses:
	Sales and marketing				424,029		42.4	%			369,597		44.3	%
	General and administrative				79,951		8.0	%			63,183		7.6	%
	Research and development				10,275		1.0	%			5,725		0.7	%
		Total operating expenses			514,255		51.5	%			438,505		52.5	%
Operating income					105,753		10.6	%			73,859		8.9	%
Other income, net					364		0.0	%			276		0.0	%
Income before income taxes					106,117		10.6	%			74,135		8.9	%
Income tax expense					34,426		3.4	%			25,108		3.0	%
Net income				$	71,691		7.2	%		$	49,027		5.9	%
Net income per share – basic				$	1.39					$	0.91
Net income per share – diluted				$	1.36					$	0.90
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding					51,654						53,677
	Dilutive effect of stock-based awards				870						681
Diluted weighted-average shares outstanding					52,524						54,358

SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited – in thousands, except per share amounts)
subject to reclassification
				October 3,			January 3,
				2015			2015
Assets
Current assets:
	Cash and cash equivalents			$	72,678		$	51,995
	Marketable debt securities – current				33,243			69,609
	Accounts receivable, net of allowance for doubtful accounts of $750 and $739, respectively				26,286			19,693
	Inventories				77,753			53,535
	Prepaid expenses				14,815			17,792
	Deferred income taxes				8,561			8,786
	Other current assets				12,865			11,185
		Total current assets			246,201			232,595
Non-current assets:
	Marketable debt securities – non-current				8,581			44,441
	Property and equipment, net				197,886			165,453
	Goodwill and intangible assets, net				85,093			15,986
	Deferred income taxes				10,219			3,433
	Other assets				17,913			12,279
		Total assets		$	565,893		$	474,187
Liabilities and Shareholders' Equity
Current liabilities:
	Accounts payable			$	115,330		$	84,197
	Customer prepayments				25,387			28,726
	Accrued sales returns				19,313			15,262
	Compensation and benefits				32,960			33,066
	Taxes and withholding				25,236			10,207
	Other current liabilities				25,100			15,594
		Total current liabilities			243,326			187,052
Non-current liabilities:
	Warranty liabilities				5,143			2,722
	Other long-term liabilities				45,501			27,506
		Total non-current liabilities			50,644			30,228
		Total liabilities			293,970			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, 50,646 and 52,798 shares issued and outstanding, respectively				506			528
	Additional paid-in capital				-			-
	Retained earnings				271,410			256,413
	Accumulated other comprehensive income (loss)				7			(34	)
		Total shareholders' equity			271,923			256,907
		Total liabilities and shareholders' equity		$	565,893		$	474,187

SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited - in thousands)
subject to reclassification
						Nine Months Ended
						October 3,				September 27,
						2015				2014
Cash flows from operating activities:
	Net income					$	71,691			$	49,027
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization					33,694				29,579
		Stock-based compensation					8,952				4,294
		Net loss on disposals and impairments of assets					202				115
		Excess tax benefits from stock-based compensation					(1,991	)			(754	)
		Deferred income taxes					(5,633	)			(4,306	)
		Gain on sale of non-marketable equity securities					(6,891	)			-
		Changes in operating assets and liabilities, net of effect of acquisition:
			Accounts receivable				(6,543	)			(14,195	)
			Inventories				(24,120	)			(8,552	)
			Income taxes				13,433				9,883
			Prepaid expenses and other assets				4,756				(4,146	)
			Accounts payable				24,623				27,359
			Customer prepayments				(3,351	)			13,847
			Accrued compensation and benefits				(97	)			17,318
			Other taxes and withholding				3,569				4,484
			Warranty liabilities				3,945				953
			Other accruals and liabilities				15,348				10,929
				Net cash provided by operating activities			131,587				135,835
Cash flows from investing activities:
	Purchases of property and equipment						(61,435	)			(58,377	)
	Proceeds from sales of property and equipment						41				5
	Investments in marketable debt securities						(29,299	)			(58,403	)
	Proceeds from marketable debt securities						101,087				38,237
	Acquisition of business						(70,018	)			-
	Proceeds from sale of non-marketable equity securities						12,891				-
	Increase in restricted cash						-				(500	)
				Net cash used in investing activities			(46,733	)			(79,038	)
Cash flows from financing activities:
	Net increase (decrease) in short-term borrowings						2,119				(7,499	)
	Repurchases of common stock						(70,300	)			(31,480	)
	Proceeds from issuance of common stock						2,658				1,631
	Excess tax benefits from stock-based compensation						1,991				754
	Debt issuance costs						(639	)			-
				Net cash used in financing activities			(64,171	)			(36,594	)
Net increase in cash and cash equivalents							20,683				20,203
Cash and cash equivalents, at beginning of period							51,995				58,223
Cash and cash equivalents, at end of period						$	72,678			$	78,426

SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)
				Three Months Ended								Nine Months Ended
				October 3,				September 27,				October 3,				September 27,
				2015				2014				2015				2014
Percent of sales:
	Retail				92.2	%			92.2	%			91.7	%			90.8	%
	Direct and E-Commerce				5.2	%			5.8	%			5.7	%			6.1	%
	Wholesale/other				2.6	%			2.0	%			2.6	%			3.1	%
		Total			100.0	%			100.0	%			100.0	%			100.0	%
Sales change rates:
	Retail comparable-store sales				12	%			16	%			15	%			9	%
	Direct and E-Commerce				3	%			18	%			11	%			5	%
		Company-Controlled comparable sales change			11	%			16	%			15	%			9	%
	Net opened/closed stores				4	%			8	%			5	%			7	%
		Total Company-Controlled Channel			15	%			24	%			20	%			16	%
	Wholesale/other				51	%			(23	%)			2	%			(14	%)
		Total			16	%			23	%			20	%			14	%
Stores open:
	Beginning of period				467				451				463				440
	Opened				11				13				24				46
	Closed				(3	)			(4	)			(12	)			(26	)
	End of period				475				460				475				460
Other metrics:
	Average sales per store ($ in 000's) 1, 3			$	2,559			$	2,216
	Average sales per square foot 1, 3			$	1,063			$	1,007
	Stores > $1 million net sales 1, 3				100	%			98	%
	Stores > $2 million net sales 1, 3				69	%			50	%
	Average revenue per mattress unit 2			$	3,992			$	3,733			$	3,991			$	3,600

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
		October 3,			September 27,			October 3,			September 27,
		2015			2014			2015			2014
Net income		$	31,854		$	23,554		$	90,638		$	55,452
Income tax expense			13,623			11,888			43,452			28,418
Interest expense			44			10			87			40
Depreciation and amortization			11,643			10,125			43,100			37,095
Stock-based compensation			3,125			2,259			11,457			5,467
Asset impairments			17			28			619			153
Adjusted EBITDA		$	60,306		$	47,864		$	189,353		$	126,625
Free Cash Flow
(in thousands)
		Three Months Ended						Trailing-Twelve Months Ended
		October 3,			September 27,			October 3,			September 27,
		2015			2014			2015			2014
Net cash provided by operating activities		$	86,533		$	86,257		$	140,220		$	133,858
Subtract: Purchases of property and equipment			22,497			18,611			79,652			77,368
Free cash flow		$	64,036		$	67,646		$	60,568		$	56,490

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 we use to determine how efficiently we deploy our capital. It quantifies the return we earn on our invested capital. Management believes ROIC is also a useful metric for investors and financial analysts. We compute ROIC as outlined below. 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
				October 3,				September 27,
				2015				2014
Net operating profit after taxes (NOPAT)
Operating income				$	133,640			$	83,514
Add: Rent expense 1					63,078				54,983
Add: Interest income					537				398
Less: Depreciation on capitalized operating leases 2					(15,809	)			(13,830	)
Less: Income taxes 3					(58,896	)			(42,501	)
NOPAT				$	122,550			$	82,564
Average invested capital
Total equity				$	271,923			$	249,032
Less: Cash greater than target 4					-				(47,881	)
Add: Long-term debt 5					-				-
Add: Capitalized operating lease obligations 6					504,624				439,864
Total invested capital at end of period				$	776,547			$	641,015
Average invested capital 7				$	710,701			$	617,599
Return on invested capital (ROIC) 8					17.2	%			13.4	%

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 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 32.5% and 34.0% 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.

SELECT COMFORT CORPORATION AND SUBSIDIARIES
Fiscal 2015 Outlook - Supplemental Information
		Full-Year		Second-Half		Q3-2015		Q4-2015
		2015 Outlook*		2015 Outlook*		Actual		Outlook
		$1.35		$0.60		$0.62		($0.02)
*As per outlook provided on July 22, 2015 and reiterated November 4, 2015
Select discrete items of note (not all inclusive)
Net impact of BAM Labs acquisition1		-		-		$0.04		($0.04)
Accelerated shipments into Q3 from Q4 ($10M sales estimate)2		-		-		$0.04		($0.04)
Q4 inefficiencies (sales & costs) from systems cutover3		($0.09)		($0.09)		-		($0.09)
ERP implementation data conversion and training costs4		($0.16)		($0.13)		($0.09)		($0.04)
Incremental information technology depreciation in G&A5		($0.04)		($0.04)		-		($0.04)

1		Includes Q3 reported gain on our minority equity investment in BAM Labs (~18% ownership of BAM Labs prior to the acquisition) based on the remeasured fair value less acquisition related expenses; Q4 estimated operating income impact of including BAM Labs financial results in our consolidated operating income and EPS, including amortization of acquired definite-lived intangible assets. Note: BAM Labs acquisition expected to be accretive to EPS in 2017
2		In advance of our ERP implementation, an estimated $10 million of sales were accelerated into Q3 from Q4
3		Estimated negative sales impact of $10 million to $12 million in Q4-2015 along with cost inefficiencies as processes are migrated to the new ERP system
4		Costs to convert data from our prior legacy systems to our new ERP system, and enterprise-wide training expenses related to the new ERP system
5		Includes incremental depreciation related to our new ERP system and other technology system enhancements

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