Select Comfort Announces Second Quarter 2016 Results

20 Jul 2016, 00:00 AM EDT

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