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Select Comfort Announces Third Quarter 2014 Results

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Select Comfort Corporation (NASDAQ:SCSS) today reported third-quarter 2014 results for the period ended Sept. 27, 2014. Demand for Sleep Number products drove traffic and 16% comparable sales growth. Earnings per share grew double-digits in line with net sales growth.

“Third-quarter results reflect the strength of our consumer-focused innovation strategy and the progress we are making with our growth initiatives,” said Shelly Ibach, president and CEO of Select Comfort. “Connectivity through technology, like SleepIQ, is playing an increasingly important role in the consumer lifestyle brand we are building.”

Third-quarter Statement of Operations Overview

  • Net sales increased 23% to $323 million, compared to $264 million in the third quarter of 2013. Comparable sales increased 16% and new stores added 8 points of growth for the quarter. Sales benefited from 13% growth in average revenue per unit (ARU) and 10% growth in units.
  • Gross profit dollars increased 19% to $199 million; gross margin of 61.4% compared to 63.1% last year, reflected a higher mix of our new FlexFitTM adjustable base series and higher logistics costs to meet the increased demand.
  • Operating expenses totaled $163 million, or 50.5% of net sales, compared to $136 million, or 51.5% of net sales, for the same period last year, including planned spending to support growth initiatives.
  • Operating income totaled $35 million, up 15% compared to $31 million in the prior year.
  • Earnings per diluted share were $0.44, a 22% increase over the prior year.

Cash Flow and Balance Sheet Review

  • Cash flows from operating activities were $136 million for the first nine months of the year, compared with $90 million for the same period last year.
  • Capital expenditures for the first nine months of 2014 were $58 million, consistent with last year.
  • During the third quarter, the company repurchased 0.5 million shares of its common stock at a total cost of $10 million. Year-to-date share repurchases totaled $30 million.
  • At quarter end, the company had deferred $5 million of revenue and $3 million of expenses associated with its SleepIQ product, which will be recognized over the product’s estimated five-year life.
  • As of the end of the quarter, the company had cash, cash equivalents and marketable debt securities, less customer prepayments, of $148 million. The third quarter is a seasonal high point for cash and marketable debt securities.

Share Repurchase Authorization
The company also announced an increase in the outstanding share repurchase authorization to $250 million effective at the end of the fiscal third quarter. “We are committed to delivering superior shareholder returns through execution of our strategy combined with increased share repurchases,” said Ibach. “We intend to increase share repurchase activity by as much as 50 percent beginning in the fourth quarter.” Over the past ten quarters, the company has returned $100 million to shareholders through the repurchase of shares, representing nearly 100 percent of free cash flow during that period.

Financial Outlook
The company is increasing its outlook for full-year 2014 earnings per diluted share to $1.12, compared with its prior outlook of $1.07. The company expects to end the year with 463 stores, an increase of 23 net stores from the prior year-end. It expects full-year 2014 capital expenditures of approximately $80 million, including $30 million related to the ERP platform implementation expected to be operational in late 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(R) beds. Only the Sleep Number bed offers SleepIQ(R) technology – proprietary sensor technology that works directly with the bed’s DualAirTM feature 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 FlexFitTM adjustable bases and Sleep Number(R) 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(R) 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 general and industry economic trends; consumer confidence; the effectiveness of the company’s marketing messages; the efficiency of its advertising and promotional efforts; consumer acceptance of its products, product quality, innovation and brand image; availability of attractive and cost-effective consumer credit options; execution of the company’s retail store distribution strategy; the company’s dependence on significant suppliers, and its 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; industry competition; the company’s ability to continue to improve its product line; warranty expenses; risks of pending and potentially unforeseen litigation; increasing government regulations, which have added or will add cost pressures and process changes to ensure compliance; the adequacy of the company’s management information systems to meet the evolving needs of its business and to protect sensitive data from potential cyber threats; the costs, distractions and potential disruptions to the company’s business that may result from the implementation of upgrades and improvements to the company’s management information systems; the company’s ability to attract and retain senior leadership and other key employees, including qualified sales professionals; 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
September 27, % of September 28, % of
2014 Net Sales 2013 Net Sales
Net sales $ 323,366 100.0 % $ 263,689 100.0 %
Cost of sales 124,782 38.6 % 97,269 36.9 %
Gross profit 198,584 61.4 % 166,420 63.1 %
Operating expenses:
Sales and marketing 137,863 42.6 % 118,307 44.9 %
General and administrative 23,022 7.1 % 15,055 5.7 %
Research and development 2,353 0.7 % 2,359 0.9 %
Total operating expenses 163,238 50.5 % 135,721 51.5 %
Operating income 35,346 10.9 % 30,699 11.6 %
Other income, net 96 0.0 % 74 0.0 %
Income before income taxes 35,442 11.0 % 30,773 11.7 %
Income tax expense 11,888 3.7 % 10,514 4.0 %
Net income $ 23,554 7.3 % $ 20,259 7.7 %
Net income per share – basic $ 0.44 $ 0.37
Net income per share – diluted $ 0.44 $ 0.36

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding 53,271 54,854
Effect of dilutive securities:
Options 383 531
Restricted shares 317 363
Diluted weighted-average shares outstanding 53,971 55,748
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited – in thousands, except per share amounts)
Nine Months Ended
September 27, % of September 28, % of
2014 Net Sales 2013 Net Sales
Net sales $ 834,541 100.0 % $ 729,317 100.0 %
Cost of sales 322,177 38.6 % 268,083 36.8 %
Gross profit 512,364 61.4 % 461,234 63.2 %
Operating expenses:
Sales and marketing 369,597 44.3 % 326,477 44.8 %
General and administrative 63,183 7.6 % 46,249 6.3 %
Research and development 5,725 0.7 % 7,475 1.0 %
Total operating expenses 438,505 52.5 % 380,201 52.1 %
Operating income 73,859 8.9 % 81,033 11.1 %
Other income, net 276 0.0 % 243 0.0 %
Income before income taxes 74,135 8.9 % 81,276 11.1 %
Income tax expense 25,108 3.0 % 27,620 3.8 %
Net income $ 49,027 5.9 % $ 53,656 7.4 %
Net income per share – basic $ 0.91 $ 0.98
Net income per share – diluted $ 0.90 $ 0.96

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding 53,677 54,992
Effect of dilutive securities:
Options 368 589
Restricted shares 313 409
Diluted weighted-average shares outstanding 54,358 55,990
SELECT COMFORT CORPORATION
AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except per share amounts)
subject to reclassification
(unaudited)
September 27, December 28,
2014 2013
Assets
Current assets:
Cash and cash equivalents $ 78,426 $ 58,223
Marketable debt securities – current 55,317 52,159

Accounts receivable, net of allowance for doubtful accounts of $641 and $425, respectively

29,154 14,979
Inventories 48,704 40,152
Prepaid expenses 9,250 9,216
Deferred income taxes 6,939 6,936
Other current assets 10,254 7,874
Total current assets 238,044 189,539
Non-current assets:
Marketable debt securities – non-current 43,376 34,632
Property and equipment, net 159,475 129,542
Goodwill and intangible assets, net 16,194 16,823
Deferred income taxes 9,249 4,943
Other assets 8,513 6,286
Total assets $ 474,851 $ 381,765
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable $ 85,597 $ 73,391
Customer prepayments 29,239 15,392
Accrued sales returns 14,406 9,433
Compensation and benefits 29,023 15,242
Taxes and withholding 26,540 12,517
Other current liabilities 15,579 11,207
Total current liabilities 200,384 137,182
Non-current liabilities:
Warranty liabilities 2,253 1,567
Other long-term liabilities 23,182 17,796
Total non-current liabilities 25,435 19,363
Total liabilities 225,819 156,545
Shareholders’ equity:

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

Common stock, $0.01 par value; 142,500 shares authorized, 53,289 and 54,901 shares issued and outstanding, respectively

533 549
Additional paid-in capital 5,382
Retained earnings 248,491 219,276
Accumulated other comprehensive income 8 13
Total shareholders’ equity 249,032 225,220
Total liabilities and shareholders’ equity $ 474,851 $ 381,765
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited – in thousands)
subject to reclassification
Nine Months Ended
September 27, September 28,
2014 2013
Cash flows from operating activities:
Net income $ 49,027 $ 53,656

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

Depreciation and amortization 29,579 22,199
Stock-based compensation 4,294 3,058
Net loss (gain) on disposals and impairments of assets 115 (10 )
Excess tax benefits from stock-based compensation (754 ) (3,088 )
Deferred income taxes (4,306 ) 4,288
Changes in operating assets and liabilities, net of effect of acquisition:
Accounts receivable (14,195 ) 1,717
Inventories (8,552 ) (5,069 )
Income taxes 9,883 7,114
Prepaid expenses and other assets (4,146 ) (5,144 )
Accounts payable 27,359 11,029
Customer prepayments 13,847 97
Accrued compensation and benefits 17,318 (5,607 )
Other taxes and withholding 4,484 1,504
Warranty liabilities 953 (1,218 )
Other accruals and liabilities 10,929 5,556
Net cash provided by operating activities 135,835 90,082
Cash flows from investing activities:
Purchases of property and equipment (58,377 ) (57,820 )
Proceeds from sales of property and equipment 5 117
Investments in marketable debt securities (58,403 ) (26,041 )
Proceeds from maturities of marketable debt securities 38,237 31,973
Acquisition of business (15,500 )
Investment in non-marketable equity securities (3,000 )
Increase in restricted cash (500 )
Net cash used in investing activities (79,038 ) (70,271 )
Cash flows from financing activities:
Net decrease in short-term borrowings (7,499 ) (4,567 )
Repurchases of common stock (31,480 ) (32,054 )
Proceeds from issuance of common stock 1,631 7,108
Excess tax benefits from stock-based compensation 754 3,088
Net cash used in financing activities (36,594 ) (26,425 )
Net increase (decrease) in cash and cash equivalents 20,203 (6,614 )
Cash and cash equivalents, at beginning of period 58,223 87,915
Cash and cash equivalents, at end of period $ 78,426 $ 81,301
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)
Three Months Ended Nine Months Ended
September 27, September 28, September 27, September 28,
2014 2013 2014 2013
Percent of sales:
Retail 92.2 % 90.7 % 90.8 % 89.2 %
Direct and E-Commerce 5.8 % 6.1 % 6.1 % 6.7 %
Wholesale/other 2.0 % 3.2 % 3.1 % 4.1 %
Total 100.0 % 100.0 % 100.0 % 100.0 %
Sales change rates:
Retail comparable-store sales 16 % (1 %) 9 % (5 %)
Direct and E-Commerce 18 % (6 %) 5 % (8 %)
Company-Controlled comparable sales change 16 % (1 %) 9 % (5 %)
Net opened/closed stores 8 % 7 % 7 % 6 %
Total Company-Controlled Channel 24 % 6 % 16 % 1 %
Wholesale/other (23 %) 55 % (14 %) 31 %
Total 23 % 7 % 14 % 2 %
Stores open:
Beginning of period 451 413 440 410
Opened 13 16 46 43
Closed (4 ) (6 ) (26 ) (30 )
End of period 460 423 460 423
Other metrics:
Average sales per store ($ in 000’s) 1 $ 2,216 $ 2,102
Average sales per square foot 1 $ 1,007 $ 1,131
Stores > $1 million net sales 1 98 % 97 %
Stores > $2 million net sales 1 50 % 47 %
Average revenue per mattress unit 2 $ 3,733 $ 3,304 $ 3,600 $ 3,207

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.

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
September 27, September 28, September 27, September 28,
2014 2013 2014 2013
Net income $ 23,554 $ 20,259 $ 55,452 $ 66,151
Income tax expense 11,888 10,514 28,418 34,629
Interest expense 10 14 40 53
Depreciation and amortization 10,125 7,774 37,095 26,932
Stock-based compensation 2,259 1,067 5,467 3,796
Asset impairments 28 48 153 126
Adjusted EBITDA $ 47,864 $ 39,676 $ 126,625 $ 131,687
Free Cash Flow
(in thousands)
Three Months Ended Trailing-Twelve Months Ended
September 27, September 28, September 27, September 28,
2014 2013 2014 2013
Net cash provided by operating activities $ 86,257 $ 53,939 $ 133,858 $ 93,072
Subtract: Purchases of property and equipment 18,611 20,724 77,368 72,597
Free cash flow $ 67,646 $ 33,215 $ 56,490 $ 20,475

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
SELECT COMFORT CORPORATION AND SUBSIDIARIES
Reported to Adjusted Statements of Operations Data Reconciliations
(in thousands, except per share amounts)
Three Months Ended

September 27,
2014

September 28, 2013
CEO
Transition
As Reported As Reported Benefit(1) As Adjusted
Operating income $ 35,346 $ 30,699 $ (143 ) $ 30,556
Other income, net 96 74 74
Income before income taxes 35,442 30,773 (143 ) 30,630
Income tax expense(2) 11,888 10,514 (49 ) 10,465
Net income $ 23,554 $ 20,259 $ (94 ) $ 20,165
Net income per share –
Basic $ 0.44 $ 0.37 $ 0.00 $ 0.37
Diluted $ 0.44 $ 0.36 $ 0.00 $ 0.36
Basic shares 53,271 54,854 54,854 54,854
Diluted shares 53,971 55,748 55,748 55,748
Nine Months Ended

September 27,
2014

September 28, 2013
CEO
Transition
As Reported As Reported Benefit(1) As Adjusted
Operating income $ 73,859 $ 81,033 $ (534 ) $ 80,499
Other income, net 276 243 243
Income before income taxes 74,135 81,276 (534 ) 80,742
Income tax expense(2) 25,108 27,620 (183 ) 27,437
Net income $ 49,027 $ 53,656 $ (351 ) $ 53,305
Net income per share –
Basic $ 0.91 $ 0.98 $ (0.01 ) $ 0.97
Diluted $ 0.90 $ 0.96 $ (0.01 ) $ 0.95
Basic Shares 53,677 54,992 54,992 54,992
Diluted Shares 54,358 55,990 55,990 55,990

(1) In February 2012, we announced that William R. McLaughlin, then President and CEO, would retire from the Company effective June 1, 2012. In recognition of Mr. McLaughlin’s contributions, the Compensation Committee approved the modification of Mr. McLaughlin’s currently unvested stock awards, including performance-based stock awards. The performance-based stock awards are subject to applicable adjustments through 2014 based on actual performance versus performance targets. For the three months and nine months ended September 28, 2013, we recorded non-cash compensation benefits of $0.1 million and $0.5 million, respectively, resulting from performance-based stock award adjustments.

(2) Reflects effective income tax rate, before discrete adjustments of 34.3% for 2013.

Note – Our “as adjusted” data is considered a non-GAAP financial measure and is not in accordance with, or preferable to, “as reported,” or GAAP financial data. However, we are providing this information as we believe it facilitates year-over-year comparisons for investors and financial analysts.

GAAP – generally accepted accounting principles

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