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Select Comfort Announces Second Quarter 2014 Results

July 16, 2014
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  • Net sales increased 13% to a record $235 million, including a 7% company-controlled comp sales increase
  • Reports EPS of $0.16
  • Reiterates full-year 2014 outlook of $1.07 per share

MINNEAPOLIS--(BUSINESS WIRE)--Jul. 16, 2014-- Select Comfort Corporation (NASDAQ:SCSS) today reported second-quarter 2014 results for the period ended June 28, 2014.

Second-quarter Financial Summary

  • Net sales increased 13% to $235 million, compared to $207 million in the second quarter of 2013.
  • Company-controlled comparable sales increased 7% year-over-year.
  • Operating income totaled $12.7 million, or 5.4% of net sales.
  • Earnings per diluted share were $0.16.

“Our second quarter results reflect the important role of product innovation in our strategy. Customers responded positively to our introductions, including our breakthrough SleepIQ technology,” said Shelly Ibach, president and CEO of Select Comfort. “We remain dedicated to our customer as we continue to transition the business through our growth initiatives. We know that when we focus on our customer, we deliver value for them and for our shareholders.”

Cash flows from operating activities were $50 million for the first six months of the year, compared with $36 million for the same period last year. Capital expenditures for the first six months of 2014 increased to $40 million as compared to $37 million in 2013. During the second quarter, the company repurchased 0.5 million shares of its common stock at a total cost of $10 million. As of the end of the quarter, cash, cash equivalents and marketable-debt securities totaled $121 million, inventories totaled $43 million and the company had no borrowings under its revolving credit facility.

Financial Outlook
The company reiterates its outlook for 2014 earnings per diluted share of $1.07. The company also plans to add 20 to 30 net new stores during 2014, ending the year with between 460 and 470 stores. It continues to expect full-year 2014 capital expenditures of $70-$80 million, with approximately one-half related to systems infrastructure, one-third related to market development and the remainder to support product innovations and other initiatives.

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® beds. Only the Sleep Number bed offers SleepIQ™ technology – proprietary sensor technology that works directly with the bed’s DualAir™ 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 FlextFit™ adjustable bases and Sleep Number® pillows, sheets and other bedding products. Consumers also benefit from a unique, value-added retail experience at one of the more than 450 Sleep Number® 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
June 28, % of June 29, % of
2014 Net Sales 2013 Net Sales
 
Net sales $ 234,763 100.0 % $ 207,391 100.0 %
Cost of sales   92,366 39.3 %   75,993 36.6 %
Gross profit   142,397 60.7 %   131,398 63.4 %
 
Operating expenses:
Sales and marketing 106,712 45.5 % 98,357 47.4 %
General and administrative 21,265 9.1 % 15,374 7.4 %
Research and development   1,709 0.7 %   2,560 1.2 %
Total operating expenses   129,686 55.2 %   116,291 56.1 %
Operating income 12,711 5.4 % 15,107 7.3 %
Other income, net   78 0.0 %   78 0.0 %
Income before income taxes 12,789 5.4 % 15,185 7.3 %
Income tax expense   4,308 1.8 %   5,259 2.5 %
Net income $ 8,481 3.6 % $ 9,926 4.8 %
 
Net income per share – basic $ 0.16 $ 0.18
 
Net income per share – diluted $ 0.16 $ 0.18
 
 

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding 53,648 55,029
Effect of dilutive securities:
Options 365 539
Restricted shares   311   419
Diluted weighted-average shares outstanding   54,324   55,987
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited – in thousands, except per share amounts)
           
 
Six Months Ended
June 28, % of June 29, % of
2014 Net Sales 2013 Net Sales
 
Net sales $ 511,175 100.0 % $ 465,628 100.0 %
Cost of sales   197,395 38.6 %   170,814 36.7 %
Gross profit   313,780 61.4 %   294,814 63.3 %
 
Operating expenses:
Sales and marketing 231,734 45.3 % 208,170 44.7 %
General and administrative 40,161 7.9 % 31,194 6.7 %
Research and development   3,372 0.7 %   5,116 1.1 %
Total operating expenses   275,267 53.8 %   244,480 52.5 %
Operating income 38,513 7.5 % 50,334 10.8 %
Other income, net   180 0.0 %   169 0.0 %
Income before income taxes 38,693 7.6 % 50,503 10.8 %
Income tax expense   13,220 2.6 %   17,106 3.7 %
Net income $ 25,473 5.0 % $ 33,397 7.2 %
 
Net income per share – basic $ 0.47 $ 0.61
 
Net income per share – diluted $ 0.47 $ 0.60
 
 

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding 53,880 55,062
Effect of dilutive securities:
Options 359 613
Restricted shares   331   426
Diluted weighted-average shares outstanding   54,570   56,101
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share amounts)
subject to reclassification
      (unaudited)  
June 28, December 28,
2014 2013
Assets
Current assets:
Cash and cash equivalents $ 37,107 $ 58,223
Marketable debt securities – current 45,831 52,159

Accounts receivable, net of allowance for doubtful accounts of $478 and $425, respectively

14,334 14,979
Inventories 43,156 40,152
Prepaid expenses 12,097 9,216
Deferred income taxes 6,910 6,936
Other current assets   9,494   7,874
Total current assets 168,929 189,539
 
Non-current assets:
Marketable debt securities – non-current 37,822 34,632
Property and equipment, net 151,479 129,542
Goodwill and intangible assets, net 16,403 16,823
Deferred income taxes 6,953 4,943
Other assets   6,831   6,286
Total assets $ 388,417 $ 381,765
 
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable $ 59,368 $ 73,391
Customer prepayments 18,087 15,392
Accrued sales returns 9,194 9,433
Compensation and benefits 24,632 15,242
Taxes and withholding 11,281 12,517
Other current liabilities   11,103   11,207
Total current liabilities 133,665 137,182
 
Non-current liabilities:
Warranty liabilities 1,822 1,567
Other long-term liabilities   19,963   17,796
Total non-current liabilities   21,785   19,363
Total liabilities 155,450 156,545
 
Shareholders’ equity:

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

- -

Common stock, $0.01 par value; 142,500 shares authorized, 53,743 and 54,901 shares issued and outstanding, respectively

537 549
Additional paid-in capital - 5,382
Retained earnings 232,387 219,276
Accumulated other comprehensive income   43   13
Total shareholders’ equity   232,967   225,220
Total liabilities and shareholders’ equity $ 388,417 $ 381,765
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited - in thousands)
subject to reclassification
           
Six Months Ended
June 28, June 29,
2014 2013
 
Cash flows from operating activities:
Net income $ 25,473 $ 33,397

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

Depreciation and amortization 19,213 14,153
Stock-based compensation 2,035 1,992
Net loss (gain) on disposals and impairments of assets 87 (58 )
Excess tax benefits from stock-based compensation (720 ) (2,837 )
Deferred income taxes (2,003 ) 4,072
Changes in operating assets and liabilities, net of effect of acquisition:
Accounts receivable 651 2,541
Inventories (3,004 ) 1,769
Income taxes (394 ) (3,084 )
Prepaid expenses and other assets (4,355 ) (3,933 )
Accounts payable (1,042 ) (1,708 )
Customer prepayments 2,695 (2,857 )
Accrued compensation and benefits 9,724 (4,802 )
Other taxes and withholding (529 ) (1,156 )
Warranty liabilities 281 (571 )
Other accruals and liabilities   1,466     (775 )
Net cash provided by operating activities   49,578     36,143  
 
Cash flows from investing activities:
Purchases of property and equipment (39,766 ) (37,096 )
Proceeds from sales of property and equipment 5 117
Investments in marketable debt securities (28,405 ) (16,504 )
Proceeds from maturities of marketable debt securities 23,548 23,463
Acquisition of business - (15,500 )
Investment in non-marketable equity securities - (3,000 )
Increase in restricted cash   (500 )   -  
Net cash used in investing activities   (45,118 )   (48,520 )
 
Cash flows from financing activities:
Net decrease in short-term borrowings (6,192 ) (4,750 )
Repurchases of common stock (21,470 ) (22,031 )
Proceeds from issuance of common stock 1,366 6,595
Excess tax benefits from stock-based compensation   720     2,837  
Net cash used in financing activities   (25,576 )   (17,349 )
 
Net decrease in cash and cash equivalents (21,116 ) (29,726 )
Cash and cash equivalents, at beginning of period   58,223     87,915  
Cash and cash equivalents, at end of period $ 37,107   $ 58,189  
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)
           
 
Three Months Ended Six Months Ended
June 28, June 29, June 28, June 29,
2014 2013 2014 2013
 
Percent of sales:
Retail 90.0% 88.5% 89.9% 88.3%
Direct and E-Commerce 6.4% 7.6% 6.4% 7.1%
Wholesale/other   3.6%   3.9%   3.7%   4.6%
Total   100.0%   100.0%   100.0%   100.0%
 
Sales change rates:
Retail comparable-store sales 8% (7%) 5% (7%)
Direct and E-Commerce   (5%)   4%   (2%)   (9%)
Company-Controlled comparable sales change 7% (6%) 4% (8%)
Net opened/closed stores   6%   7%   7%   7%
Total Company-Controlled Channel 13% 1% 11% (1%)
Wholesale/other   6%   7%   (11%)   23%
Total   13%   1%   10%   0%
 
Stores open:
Beginning of period 443 411 440 410
Opened 16 17 33 27
Closed   (8)   (15)   (22)   (24)
End of period   451   413   451   413
 
Other metrics:
Average sales per store ($ in 000's) 1 $ 2,144 $ 2,094
Average sales per square foot 1 $ 1,009 $ 1,197
Stores > $1 million net sales 1 97% 98%
Stores > $2 million net sales 1 46% 46%
Average revenue per mattress unit2 $ 3,709 $ 3,182 $ 3,520 $ 3,154
 
 

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
June 28,   June 29, June 28,   June 29,
2014 2013 2014 2013
 
Net income $ 8,481 $ 9,926 $ 52,157 $ 72,101
Income tax expense 4,308 5,259 27,044 38,204
Interest expense 10 13 44 55
Depreciation and amortization 9,765 7,172 34,744 24,284
Stock-based compensation 2,143 1,560 4,275 3,929
Asset impairments 88 15 173 186
       
Adjusted EBITDA $ 24,795   $ 23,945   $ 118,437 $ 138,759
 
Free Cash Flow
(in thousands)
 
Three Months Ended Trailing-Twelve Months Ended
June 28, June 29, June 28, June 29,
2014 2013 2014 2013
 
Net cash provided by (used in) operating activities $ 10,714 $ (8,879 ) $ 101,540 $ 93,536
Subtract: Purchases of property and equipment 23,106 22,787 79,481 66,190
       
Free cash flow $ (12,392 ) $ (31,666 ) $ 22,059 $ 27,346
 
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 Reconciliation
(in thousands, except per share amounts)
       
 
Six Months Ended
June 28, 2014 June 29, 2013
CEO
Transition
As Reported As Reported

Benefit(1)

 As Adjusted
Operating income $ 38,513 $ 50,334 $ (391 ) $ 49,943
Other income, net   180   169     -       169
 
Income before income taxes 38,693 50,503 (391 ) 50,112
Income tax expense(2)   13,220   17,106     (135 )     16,971
Net income $ 25,473 $ 33,397   $ (256 )   $ 33,141
 
Net income per share –
Basic $ 0.47 $ 0.61 $ 0.00 $ 0.60
Diluted $ 0.47 $ 0.60 $ 0.00 $ 0.59
 
Basic Shares 53,880 55,062 55,062 55,062
Diluted Shares 54,570 56,101 56,101 56,101
 
(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. In the first six months of 2013, we recorded a non-cash compensation benefit of $0.4 million resulting from performance-based stock award adjustments.
 
(2) Reflects effective income tax rate, before discrete adjustments of 34.4% 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

Source: Select Comfort Corporation

Select Comfort Corporation
Investor Contact:
Dave Schwantes, 763-551-7498
investorrelations@selectcomfort.com
or
Media Contact:
Becky Dvorak, 763-551-6862
publicrelations@selectcomfort.com

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