Select Comfort Announces Second Quarter 2016 Results

  • Reported net sales of $277 million and EPS of $0.03
  • Share repurchase authorization increased to $300 million
  • Reiterates full-year 2016 EPS outlook of $1.25 to $1.45 per share

MINNEAPOLIS–(BUSINESS WIRE)–Select Comfort Corporation (NASDAQ: SCSS) today reported second quarter
2016 results for the period ended July 2, 2016.

“Our second quarter results were in line with our expectations and
reflect the recovery from our ERP implementation. We were pleased with
the improvement in our customer metrics and sales trends, despite the
sluggish consumer environment,” said Shelly Ibach, president and chief
executive officer of Select Comfort. “Our investments have strengthened
our competitive position as we meet the expectations of a rapidly
changing consumer. We are focused on leveraging these investments to
deliver strong returns for our shareholders.”

Second Quarter Review

  • Net sales increased 1% to $277 million, including 6 percentage
    points of growth from stores opened in the last twelve months,
    partially offset by a 6% comparable sales decline; sales were impacted
    by an estimated $5-$10 million due to residual effects of the ERP
    implementation completed in the first quarter
  • Gross profit of $171 million and gross margin of 61.9% were
    consistent with the prior year
  • Earnings per diluted share of $0.03, compared with $0.21 in the
    prior year’s quarter; earnings per share were impacted by an estimated
    3 to 5 cents due to residual effects of the ERP implementation

Cash Flows and Balance Sheet Review

  • Generated $47 million in net cash from operating activities for the
    first six months of 2016, compared with $45 million for the same
    period last year, demonstrating the strength of our business model
  • Invested $24 million in capital expenditures and returned $70 million
    of cash to shareholders during the first six months of 2016 compared
    with $39 million and $50 million, respectively, for the same period
    last year
  • Ended the quarter with $16 million of borrowings against the $150
    million revolving credit facility as planned

Share Repurchase Authorization
The company also announced an
increase in the outstanding share repurchase authorization to $300
million, effective at the beginning of the fiscal third quarter. The
company expects to generate more than $750 million in cash from
operations from 2016 through 2019 by executing its consumer innovation
strategy. The company is committed to delivering superior shareholder
returns, including returning cash to shareholders through share
repurchases. Over the past five years, Select Comfort has invested more
than $400 million in capital spending and acquisitions, while returning
nearly $300 million in cash to shareholders through share repurchases.

Financial Outlook
The company reiterates its outlook for
2016 earnings per diluted share of $1.25 to $1.45, compared with
full-year 2015 earnings per diluted share of $0.97. The outlook assumes
low-teen sales growth for the full year. The outlook assumes a 10%
increase in store count in 2016 and capital expenditures of
approximately $65 million, compared with $86 million in 2015. The
outlook does not contemplate a worsening consumer spending environment.

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
Nearly 30 years ago, Sleep
Number transformed the mattress industry with the idea that ‘one size
does not fit all’ when it comes to sleep.
Today, the company is the leader in sleep innovation and ranked “Highest
in Customer Satisfaction with Mattresses” in 2015 by J.D. Power. As the
pioneer in biometric sleep monitoring and adjustability, Sleep Number is
proving the connection between quality sleep and health and wellbeing.
Dedicated to individualizing sleep experiences, the company’s more than
3,400 employees are improving lives with innovative sleep solutions. To
find better quality sleep visit one of our more than 500 U.S. Sleep
Number® stores or SleepNumber.com.

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 may 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,
political unrest 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
July 2, % of July 4, % of
2016 Net Sales 2015 Net Sales
 
Net sales $ 276,878 100.0% $ 275,289 100.0%
Cost of sales   105,617   38.1%   104,750   38.1%
Gross profit   171,261   61.9%   170,539   61.9%
 
Operating expenses:
Sales and marketing 134,785 48.7% 126,627 46.0%
General and administrative 27,018 9.8% 23,880 8.7%
Research and development   7,062   2.6%   3,403   1.2%
Total operating expenses   168,865   61.0%   153,910   55.9%
Operating income 2,396 0.9% 16,629 6.0%
Other (expense) income, net   (229 ) (0.1%)   133   0.0%
Income before income taxes 2,167 0.8% 16,762 6.1%
Income tax expense   751   0.3%   5,724   2.1%
Net income $ 1,416   0.5% $ 11,038   4.0%
 
Net income per share – basic $ 0.03   $ 0.21  
 
Net income per share – diluted $ 0.03   $ 0.21  
 
 

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding 46,394 51,672
Dilutive effect of stock-based awards   650     872  
Diluted weighted-average shares outstanding   47,044     52,544  
 
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited – in thousands, except per share amounts)
       
 
Six Months Ended
July 2, % of July 4, % of
2016 Net Sales 2015 Net Sales
 
Net sales $ 629,858 100.0% $ 625,098 100.0%
Cost of sales   249,523   39.6%   238,726   38.2%
Gross profit   380,335   60.4%   386,372   61.8%
 
Operating expenses:
Sales and marketing 285,453 45.3% 267,130 42.7%
General and administrative 57,924 9.2% 52,134 8.3%
Research and development   14,664   2.3%   6,754   1.1%
Total operating expenses   358,041   56.8%   326,018   52.2%
Operating income 22,294 3.5% 60,354 9.7%
Other (expense) income, net   (326 ) (0.1%)   286   0.0%
Income before income taxes 21,968 3.5% 60,640 9.7%
Income tax expense   7,583   1.2%   20,803   3.3%
Net income $ 14,385   2.3% $ 39,837   6.4%
 
Net income per share – basic $ 0.30   $ 0.77  
 
Net income per share – diluted $ 0.30   $ 0.75  
 
 

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding 47,247 52,009
Dilutive effect of stock-based awards   698     926  
Diluted weighted-average shares outstanding   47,945     52,935  
 
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited – in thousands, except per share amounts)
subject to reclassification
   
July 2, January 2,
2016 2016
Assets
Current assets:
Cash and cash equivalents $ 2,401 $ 20,994
Marketable debt securities – current 6,567

Accounts receivable, net of allowance for doubtful accounts of
$1,001 and $1,039, respectively

23,513 29,002
Inventories 73,696 86,600
Income taxes receivable 15,284
Prepaid expenses 16,415 10,207
Deferred income taxes 15,527 15,535
Other current assets   15,785     13,737  
Total current assets 147,337 197,926
 
Non-current assets:
Marketable debt securities – non-current 8,553
Property and equipment, net 202,082 204,376
Goodwill and intangible assets, net 82,079 83,344
Other assets   23,244     19,197  
Total assets $ 454,742   $ 513,396  
 
Liabilities and Shareholders’ Equity
Current liabilities:
Borrowings under revolving credit facility $ 16,000 $
Accounts payable 85,814 103,941
Customer prepayments 24,588 51,473
Accrued sales returns 15,755 20,562
Compensation and benefits 25,683 15,670
Taxes and withholding 12,344 9,856
Other current liabilities   25,854     23,447  
Total current liabilities 206,038 224,949
 
Non-current liabilities:
Deferred income taxes 13,485 12,499
Other long-term liabilities   61,412     53,609  
Total non-current liabilities   74,897     66,108  
Total liabilities 280,935 291,057
 
Shareholders’ equity:

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

Common stock, $0.01 par value; 142,500 shares authorized, 45,929
and 49,402 shares issued and outstanding, respectively

459 494
Additional paid-in capital
Retained earnings 173,348 221,859
Accumulated other comprehensive loss       (14 )
Total shareholders’ equity   173,807     222,339  
Total liabilities and shareholders’ equity $ 454,742   $ 513,396  
 
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited – in thousands)
subject to reclassification
 
Six Months Ended
July 2, July 4,
2016 2015
 
Cash flows from operating activities:
Net income $ 14,385 $ 39,837
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 27,960 21,903
Stock-based compensation 7,606 5,828
Net loss on disposals and impairments of assets 7 184
Excess tax benefits from stock-based compensation (472 ) (1,945 )
Deferred income taxes 985 (4,515 )
Changes in operating assets and liabilities:
Accounts receivable 5,489 (825 )
Inventories 12,904 (14,842 )
Income taxes 15,324 4,221
Prepaid expenses and other assets (6,838 ) (944 )
Accounts payable (15,282 ) 7,879
Customer prepayments (26,885 ) (3,066 )
Accrued compensation and benefits 9,249 (8,121 )
Other taxes and withholding 1,654 (2,622 )
Other accruals and liabilities   1,034     2,082  
Net cash provided by operating activities   47,120     45,054  
 
Cash flows from investing activities:
Purchases of property and equipment (23,764 ) (38,938 )
Proceeds from sales of property and equipment 67 41
Investments in marketable debt securities (19,306 )
Proceeds from marketable debt securities   15,090     41,932  
Net cash used in investing activities   (8,607 )   (16,271 )
 
Cash flows from financing activities:
Net increase (decrease) in short-term borrowings 12,574 (7,478 )
Repurchases of common stock (71,366 ) (51,629 )
Proceeds from issuance of common stock 1,623 2,458
Excess tax benefits from stock-based compensation 472 1,945
Debt issuance costs   (409 )    
Net cash used in financing activities   (57,106 )   (54,704 )
 
Net decrease in cash and cash equivalents (18,593 ) (25,921 )
Cash and cash equivalents, at beginning of period   20,994     51,995  
Cash and cash equivalents, at end of period $ 2,401   $ 26,074  
 
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)
       
 
Three Months Ended Six Months Ended
July 2, July 4, July 2, July 4,
2016 2015 2016 2015
 
Percent of sales:
Retail 90.6 % 91.0 % 90.8 % 91.4 %
Direct and E-Commerce 6.0 % 6.2 % 6.2 % 6.0 %
Wholesale/other   3.4 %   2.8 %   3.0 %   2.6 %
Total   100.0 %   100.0 %   100.0 %   100.0 %
 
Sales change rates:
Retail comparable-store sales (7 %) 13 % (5 %) 18 %
Direct and E-Commerce   (2 %)   14 %   3 %   15 %
Company-Controlled comparable sales change (6 %) 13 % (5 %) 18 %
Net opened/closed stores   6 %   5 %   5 %   6 %
Total Company-Controlled Channel 0 % 18 % 0 % 24 %
Wholesale/other   21 %   (9 %)   15 %   (15 %)
Total   1 %   17 %   1 %   22 %
 
Stores open:
Beginning of period 497 463 488 463
Opened 19 5 33 13
Closed   (10 )   (1 )   (15 )   (9 )
End of period   506     467     506     467  
 
Other metrics:
Average sales per store ($ in 000’s) 1, 3 $ 2,333 $ 2,480
Average sales per square foot 1, 3 $ 937 $ 1,048
Stores > $1 million net sales 1, 3 98 % 100 %
Stores > $2 million net sales 1, 3 59 % 67 %
Average revenue per mattress unit 2 $ 4,206 $ 4,081 $ 4,074 $ 3,991
 

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 2016 and 2015. 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
July 2, July 4, July 2, July 4,
2016 2015 2016 2015
 
Net income $ 1,416 $ 11,038 $ 25,067 $ 82,338
Income tax expense 751 5,724 11,691 41,717
Interest expense 251 10 497 53
Depreciation and amortization 14,053 10,921 53,261 41,582
Stock-based compensation 3,840 3,046 12,068 10,591
Asset impairments   14     15     66     630  
Adjusted EBITDA $ 20,325   $ 30,754   $ 102,650   $ 176,911  
 
 
Free Cash Flow
(in thousands)
 
Three Months Ended Trailing-Twelve Months Ended
July 2, July 4, July 2, July 4,
2016 2015 2016 2015
 
Net cash (used in) provided by operating activities $ (16,861 ) $ (3,810 ) $ 110,008 $ 139,944
Subtract: Purchases of property and equipment   11,475     21,142     70,412     75,766  
Free cash flow $ (28,336 ) $ (24,952 ) $ 39,596   $ 64,178  
 
 

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
July 2,

2016

July 4,

2015

Net operating profit after taxes (NOPAT)

Operating income $ 37,035 $ 123,587
Add: Rent expense 1 64,232 61,157
Add: Interest income 219 521
Less: Depreciation on capitalized operating leases 2 (16,749 ) (15,280 )
Less: Income taxes 3   (27,055 )   (57,496 )
NOPAT $ 57,682 $ 112,489

 

Average invested capital

Total equity $ 173,807 $ 255,392
Less: Cash greater than target 4
Add: Long-term debt 5
Add: Capitalized operating lease obligations 6   513,856     489,256  
Total invested capital at end of period $ 687,663 $ 744,648
 
Average invested capital 7 $ 724,593 $ 686,514
 
Return on invested capital (ROIC) 8   8.0 %   16.4 %
 

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 31.9% and 33.8% for 2016 and 2015, 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, if
applicable.
 

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.
 

Contacts

Select Comfort Corporation
Investor Contact:
Dave
Schwantes, 763-551-7498
investorrelations@selectcomfort.com
or
Media
Contact:

Susan Eich, 763-551-6934
Susan.Eich@selectcomfort.com