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

	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
		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
1	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