Select Comfort Announces Fourth-Quarter and Full-Year 2015 Results

  • Enterprise Resource Planning (ERP) system implementation impacts
    Q4 results by $0.43 per share
  • Reports fourth-quarter net loss of $0.42 per share and full-year
    earnings of $0.97 per share
  • Repurchased $98 million of the company’s common stock in 2015
    versus $45 million in 2014
  • Provides 2016 outlook

MINNEAPOLIS–(BUSINESS WIRE)–Select Comfort Corporation (NASDAQ: SCSS) today reported fourth- quarter
and full-year 2015 results for the period ended Jan. 2, 2016.

“The transition from our 20-year-old legacy systems to a fully
integrated ERP platform has been more challenging with far greater
customer and financial impacts than we anticipated. Many of our
customers endured delays and delivery reschedules as we ramped up the
new system. These results are not acceptable to us,” said Shelly Ibach,
president and chief executive officer of Select Comfort. “We have made
major progress resolving technical and operational issues. Plants have
increased production levels ahead of current demand and operational and
customer service levels have significantly improved. We expect to
leverage this critical investment for improved profitability in the
back-half of 2016 as planned. Our competitive advantages and strategic
direction remain on track to achieve our commitment of earnings per
share of $2.75 by 2019.”

Please refer to the last table in this news release for supplemental
financial information that summarizes discrete items affecting 2015
fourth-quarter results and our 2016 outlook.

Fourth-quarter Results Overview

  • Net sales decreased 33% to $215 million, with comparable sales
    down 30%, reflecting approximately $84 million in sales disruption
    from the ERP system implementation. Note that the prior year’s fourth
    quarter also included an extra week of sales
  • Net loss per diluted share of $0.42, including $0.43 per share
    for lost sales and operational inefficiencies related to the ERP
    system implementation, compared with earnings per share of $0.35 last
    year

Full-year Results Overview

  • Net sales in 2015 were $1.21 billion, an increase of 5%, or 7%
    when excluding the extra week from 2014
  • Earnings per diluted share of $0.97, compared to $1.25 in 2014.
    Note that 2014 fourth-quarter earnings per share included 10 cents of
    combined one-time benefits from the extra week and legal settlement
  • Generated $133 million of EBITDA, invested $86 million in
    capital projects, $57 million to acquire BAM Labs and returned $98
    million to shareholders through share repurchases, up from $45 million
    in 2014

Financial Outlook
The company expects to generate full-year
2016 GAAP earnings per diluted share of between $1.25 and $1.45, a 29%
to 49% increase versus full-year 2015 earnings per diluted share of
$0.97. The outlook assumes low-teen sales growth for the full-year, with
low-single digit growth in the first half of the year, followed by
stronger growth in the back-half of the year. Our 2016 outlook includes
an estimated $0.25 to $0.30 EPS reduction related to the ERP transition
(largely in the first quarter), including $40 to $50 million of
estimated sales impact. The outlook assumes a 10% increase in store
count in 2016, compared with 5% store count growth in 2015. The company
anticipates 2016 capital expenditures will be approximately $70 million.
The outlook does not contemplate a worsening of the consumer spending
environment.

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
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 3,300
employees are improving lives with innovative sleep solutions. To find
better quality sleep visit one of our more than 490 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 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
January 2, % of January 3, % of
2016 Net Sales 2015 Net Sales
 
Net sales $ 214,682 100.0 % $ 322,216 100.0 %
Cost of sales   93,939   43.8 %   127,730 39.6 %
Gross profit   120,743   56.2 %   194,486 60.4 %
Operating expenses:
Sales and marketing 126,446 58.9 % 142,410 44.2 %
General and administrative 19,258 9.0 % 21,681 6.7 %
Research and development   5,696   2.7 %   2,508 0.8 %
Total operating expenses   151,400   70.5 %   166,599 51.7 %
Operating (loss) income (30,657 ) (14.3 %) 27,887 8.7 %
Other (expense) income, net   (30 ) 0.0 %   86 0.0 %
(Loss) income before income taxes (30,687 ) (14.3 %) 27,973 8.7 %
Income tax (benefit) expense   (9,515 ) (4.4 %)   9,026 2.8 %
Net (loss) income $ (21,172 ) (9.9 %) $ 18,947 5.9 %
 
Net (loss) income per share – basic $ (0.42 ) $ 0.36
 
Net (loss) income per share – diluted $ (0.42 ) $ 0.35
 
 

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding 50,045 52,825

Dilutive effect of stock-based awards 1

      846
Diluted weighted-average shares outstanding 1   50,045     53,671

 

1

  For the three months ended January 2, 2016, potentially dilutive
stock-based awards have been excluded from the calculation of
diluted weighted-average shares outstanding, as their inclusion
would have had an anti-dilutive effect on our net loss per diluted
share.
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations

(unaudited – in thousands, except per share amounts)

           
Twelve Months Ended
January 2, % of January 3, % of
2016 Net Sales 2015 Net Sales
 
Net sales $ 1,213,699 100.0 % $ 1,156,757 100.0 %
Cost of sales   472,948 39.0 %   449,907 38.9 %
Gross profit   740,751 61.0 %   706,850 61.1 %
Operating expenses:
Sales and marketing 550,475 45.4 % 512,007 44.3 %
General and administrative 99,209 8.2 % 84,864 7.3 %
Research and development   15,971 1.3 %   8,233 0.7 %
Total operating expenses   665,655 54.8 %   605,104 52.3 %
Operating income 75,096 6.2 % 101,746 8.8 %
Other income, net   334 0.0 %   362 0.0 %
Income before income taxes 75,430 6.2 % 102,108 8.8 %
Income tax expense   24,911 2.1 %   34,134 3.0 %
Net income $ 50,519 4.2 % $ 67,974 5.9 %
 
Net income per share – basic $ 0.99 $ 1.27
 
Net income per share – diluted $ 0.97 $ 1.25
 
 

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding 51,252 53,452
Dilutive effect of stock-based awards   849   741
Diluted weighted-average shares outstanding   52,101   54,193
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets

(unaudited – in thousands, except per share amounts)

subject to reclassification
       
January 2, January 3,
2016 2015
Assets
Current assets:
Cash and cash equivalents $ 20,994 $ 51,995
Marketable debt securities – current 6,567 69,609

Accounts receivable, net of allowance for doubtful accounts of
$1,039 and $739, respectively

29,002 19,693
Inventories 86,600 53,535
Income taxes receivable 15,284
Prepaid expenses 10,207 17,792
Deferred income taxes 15,535 8,786
Other current assets   13,737     11,185  
Total current assets 197,926 232,595
 
Non-current assets:
Marketable debt securities – non-current 8,553 44,441
Property and equipment, net 204,376 165,453
Goodwill and intangible assets, net 83,344 15,986
Deferred income taxes 3,433
Other assets   19,197     12,279  
Total assets $ 513,396   $ 474,187  
 
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable $ 103,941 $ 84,197
Customer prepayments 51,473 28,726
Accrued sales returns 20,562 15,262
Compensation and benefits 15,670 33,066
Taxes and withholding 9,856 10,207
Other current liabilities   23,447     15,594  
Total current liabilities 224,949 187,052
 
Non-current liabilities:
Warranty liabilities 4,942 2,722
Deferred income taxes 12,499
Other long-term liabilities   48,667     27,506  
Total non-current liabilities   66,108     30,228  
Total liabilities 291,057 217,280
 
Shareholders’ equity:

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

Common stock, $0.01 par value; 142,500 shares authorized, 49,402
and 52,798 shares issued and outstanding, respectively

494 528
Additional paid-in capital
Retained earnings 221,859 256,413
Accumulated other comprehensive loss   (14 )   (34 )
Total shareholders’ equity   222,339     256,907  
Total liabilities and shareholders’ equity $ 513,396   $ 474,187  
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows

(unaudited – in thousands)

subject to reclassification
           
Twelve Months Ended
January 2, January 3,
2016 2015
 
Cash flows from operating activities:
Net income $ 50,519 $ 67,974

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

Depreciation and amortization 47,630 39,809
Stock-based compensation 10,290 6,798
Net loss on disposals and impairments of assets 190 492
Excess tax benefits from stock-based compensation (2,182 ) (1,163 )
Deferred income taxes 11,924 (311 )
Gain on sale of non-marketable equity securities (6,891 )
Changes in operating assets and liabilities, net of effect of
acquisition:
Accounts receivable (9,259 ) (4,717 )
Inventories (33,065 ) (13,383 )
Income taxes (13,943 ) (4,314 )
Prepaid expenses and other assets 8,680 (9,973 )
Accounts payable 19,130 14,340
Customer prepayments 22,735 13,334
Accrued compensation and benefits (17,493 ) 17,735
Other taxes and withholding 135 2,584
Warranty liabilities 4,204 1,671
Other accruals and liabilities   15,338     13,592  
Net cash provided by operating activities   107,942     144,468  
 
Cash flows from investing activities:
Purchases of property and equipment (85,586 ) (76,594 )
Proceeds from sales of property and equipment 72 5
Investments in marketable debt securities (29,299 ) (90,349 )
Proceeds from marketable debt securities 127,664 54,506
Acquisition of business (70,018 )
Proceeds from (investment in) non-marketable equity securities 12,891 (1,500 )
Increase in restricted cash       (500 )
Net cash used in investing activities   (44,276 )   (114,432 )
 
Cash flows from financing activities:
Net increase in short-term borrowings 1,097 6,192
Repurchases of common stock (100,201 ) (46,492 )
Proceeds from issuance of common stock 2,976 2,873
Excess tax benefits from stock-based compensation 2,182 1,163
Debt issuance costs   (721 )    
Net cash used in financing activities   (94,667 )   (36,264 )
 
Net decrease in cash and cash equivalents (31,001 ) (6,228 )
Cash and cash equivalents, at beginning of period   51,995     58,223  
Cash and cash equivalents, at end of period $ 20,994   $ 51,995  
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)
           
Three Months Ended Twelve Months Ended
January 2, January 3, January 2, January 3,
2016 2015 2016 2015
 
Percent of sales:
Retail 92.8 % 91.1 % 91.8 % 90.8 %
Direct and E-Commerce 6.0 % 7.1 % 5.8 % 6.5 %
Wholesale/other   1.2 %   1.8 %   2.4 %   2.7 %
Total   100.0 %   100.0 %   100.0 %   100.0 %
 
Sales change rates:
Retail comparable-store sales 3 (29 %) 23 % 3 % 12 %
Direct and E-Commerce 3   (40 %)   19 %   (4 %)   9 %
Company-Controlled comparable sales change 3 (30 %) 22 % 3 % 12 %
Net opened/closed stores and 53rd week   (3 %)   19 %   2 %   10 %
Total Company-Controlled Channel (33 %) 41 % 5 % 22 %
Wholesale/other   (55 %)   (7 %)   (9 %)   (13 %)
Total   (33 %)   40 %   5 %   20 %
 
Stores open:
Beginning of period 475 460 463 440
Opened 14 11 38 57
Closed   (1 )   (8 )   (13 )   (34 )
End of period   488     463     488     463  
 
Other metrics:
Average sales per store ($ in 000’s) 1, 3 $ 2,377 $ 2,327
Average sales per square foot 1, 3 $ 980 $ 1,025
Stores > $1 million net sales 1, 3 99 % 98 %
Stores > $2 million net sales 1, 3 62 % 59 %
Average revenue per mattress unit 2 $ 4,204 $ 3,866 $ 4,028 $ 3,671
 
 

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
January 2,   January 3, January 2,   January 3,
2016 2015 2016 2015
 
Net (loss) income $ (21,172 ) $ 18,947 $ 50,519 $ 67,974
Income tax (benefit) expense (9,515 ) 9,026 24,911 34,134
Interest expense 96 23 160 53
Depreciation and amortization 13,808 9,992 46,916 38,767
Stock-based compensation 1,337 2,504 10,290 6,798
Asset impairments   20     378   261   497
Adjusted EBITDA $ (15,426 ) $ 40,870 $ 133,057 $ 148,223
 
 
Free Cash Flow
(in thousands)
 
Three Months Ended Trailing-Twelve Months Ended
January 2, January 3, January 2, January 3,
2016 2015 2016 2015
 
Net cash (used in) provided by operating activities $ (23,645 ) $ 8,633 $ 107,942 $ 144,468
Subtract: Purchases of property and equipment   24,151     18,217   85,586   76,594
Free cash flow $ (47,796 ) $ (9,584 ) $ 22,356 $ 67,874
 

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
January 2,   January 3,
2016 2015

Net operating profit after taxes (NOPAT)

Operating income $ 75,096 $ 101,746
Add: Rent expense 1 62,369 57,605
Add: Interest income 494 415
Less: Depreciation on capitalized operating leases 2 (16,203 ) (14,265 )
Less: Income taxes 3   (40,384 )   (48,900 )
NOPAT $ 81,372 $ 96,601
 

Average invested capital

Total equity $ 222,339 $ 256,907
Less: Cash greater than target 4 (37,319 )
Add: Long-term debt 5
Add: Capitalized operating lease obligations 6   498,952     460,840  
Total invested capital at end of period $ 721,291 $ 680,428
 
Average invested capital 7 $ 726,756 $ 639,118
 
Return on invested capital (ROIC) 8   11.2 %   15.1 %
 
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 33.2% and 33.6% 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 Actuals and 2016 Outlook – Supplemental Information
             
Diluted Earnings Per Share
     

      Q4-2015      

Full-Year 2016
Actual Outlook
 

Select discrete items of note (not all
inclusive)

Estimated lost sales1 ($0.16)
Elevated cancellations, appeasements and returns2 ($0.14)
Higher than normal level of undelivered orders at end of fiscal 20153 ($0.11)
Other, net ($0.02)
ERP implementation inefficiencies (sales & costs) from systems
cutover4
($0.43) ($0.25) to ($0.30)
ERP implementation data conversion and training costs5 ($0.03)
Incremental information technology depreciation in G&A6 ($0.03) ($0.12)
 
SleepIQ LABS (formerly known as BAM Labs, Inc.)7 ($0.04) ($0.13)
Accelerated shipments into Q3 from Q4 ($10M sales estimate)8 ($0.04)
 

ERP related impacts

 

Net sales impact (traffic and conversion) tied to greater than
anticipated challenges early in the fiscal fourth quarter (estimated
$34 million net sales impact)
 
2 Incremental order cancellation rates, customer appeasements (product
discounts) and product returns related to delivery and fulfillment
challenges (estimated $26 million net sales impact)
 
3 Undelivered orders at year-end 2015 were higher than historical
levels (estimated $23 million net sales impact)
 
4 For 2016, estimated lost net sales and cost inefficiencies
(estimated $40 to $50 million net sales impact largely in the first
quarter)
 
5 Costs to convert data from our prior legacy systems to our new ERP
system, and enterprise-wide training expenses
 
6 Includes incremental depreciation related to our new ERP system and
other technology system enhancements
 

Other discrete items of note

 
7 Includes Q3-2015 reported gain on our minority equity investment in
BAM Labs, Inc. (~18% ownership of BAM Labs, Inc. prior to the
acquisition) based on the remeasured fair value less acquisition
related expenses; 2016 represents estimated operating income impact
of including SleepIQ LABS financial results in our consolidated
operating income and EPS, including amortization of acquired
definite-lived intangible assets. Note: acquisition expected to be
accretive to EPS in 2017
 
8 In advance of our ERP system implementation, an estimated $10
million of net sales were accelerated into Q3-2015 from Q4-2015

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