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FOR IMMEDIATE RELEASE
Media Contact: | Investor Relations Contact: |
Tammy Nystuen | Frank Milano |
(763) 551-7496 | (763) 551-6908 |
tammy.nystuen@selectcomfort.com | frank.milano@selectcomfort.com |
SELECT COMFORT REPORTS 25 PERCENT INCREASE IN THIRD QUARTER EARNINGS PER SHARE
Company raises full year earnings guidance to between $0.95 and $0.97 per diluted share;
establishes 2007 earnings guidance of between $1.18 and $1.25 per diluted share
MINNEAPOLIS - (October 24, 2006) - Select Comfort Corporation (NASDAQ: SCSS), the nation’s leading bed retailer and creator of the Sleep Number® bed, today announced results for the fiscal third quarter ended September 30, 2006. Third quarter earnings per share totaled $0.25 per diluted share, an increase of 25 percent over the $0.20 per diluted share in the third quarter of 2005. Net sales increased 18 percent to $208.3 million, and net income increased 22 percent to $13.9 million, compared to net sales of $175.8 million and net income of $11.4 million in the third quarter of 2005. Net income and earnings per share in 2005 did not include stock option expense. If third quarter 2005 results had included stock option expense, earnings would have been $0.18 per diluted share in the prior year, and third quarter 2006 earnings of $0.25 per diluted share would represent earnings growth of 39 percent. A reconciliation of this 2005 pro forma measure accompanies this press release.
“Overall, we had a solid third quarter, with earnings growth of 25 percent and 39 percent on a like-for-like comparison basis. This performance would have been even stronger if not for asset impairment charges this quarter. Our efforts to control costs and improve product quality are progressing and are making a significant contribution to our sustained performance,” said Bill McLaughlin, Select Comfort chairman and chief executive officer. “Though our 18 percent
Select Comfort Reports 25 Percent Increase in Earnings per Share - Page 2 of 11
revenue growth, led by 17 percent growth in our company-owned retail stores, continued to be strong relative to industry growth rates, sales did not meet our expectations following a record Labor Day holiday. Despite this slowdown, we are confident and committed to achieving our long-term goals.”
Third Quarter Highlights
· | Diluted earnings per share increased 25 percent, the seventh consecutive quarter of earnings growth at or above the high end of the company’s long-term growth targets |
· | Net sales increased 18 percent, including same-store sales growth of 7 percent |
· | Operating profit margin expanded to 10.5 percent after absorbing a $1.8 million asset impairment charge |
· | Generated record cash flows from operating activities of $50.7 million, increasing the year-to-date total to $56.4 million |
· | Invested $25.8 million to repurchase an additional 1.3 million shares, increasing the year-to-date total to $49.5 million to repurchase 2.3 million shares |
The company’s distribution expansion strategy continues to be a significant contributor to sales growth. Select Comfort opened 13 net new company-owned stores in the third quarter, increasing the total to 425 stores at September 30. New stores contributed 10 points toward retail store sales growth of 17 percent in the third quarter, with average first year sales per store achieving new records and exceeding planned levels. The company expanded its retail partner distribution by an additional 119 doors in the third quarter, increasing the total to 727 doors in the U.S. and Canada at September 30. Retail partner sales increased 179 percent compared to the third quarter a year ago, leading to record-level performance by the company’s wholesale channel. The company now expects to end 2006 with 440 company-owned stores and a total of 800 retail partner doors.
As a result of the company’s ongoing purchasing efficiencies, logistics and delivery improvements and by leveraging scale in manufacturing, operating margins improved to 10.5 percent of revenue, from 10.3 percent in the third quarter of 2005. These results include a $1.8 million asset impairment charge for retail stores and software development, and stock option expense of $1.7 million, both of which penalized operating margin gains in the quarter.
Select Comfort Reports 25 Percent Increase in Earnings per Share - Page 3 of 11
Gross margins improved 270 basis points to 62.3 percent of revenue, from 59.6 percent in the third quarter of 2005. Gross margins in company-owned channels - which includes retail, e-commerce and direct - improved to 64.2 percent, from 62.1 percent in the third quarter of 2005 and 62.3 percent in the second quarter of 2006. The sequential increase over the second quarter reflects productivity improvements in both manufacturing and logistics and improvements in operating scale from higher sales levels.
Sales and marketing expenses, which includes retail store expenses as well as media and marketing, totaled $87.7 million, or 42.1 percent of net sales, compared to 41.3 percent of net sales in the third quarter of 2005. Media spending totaled $27.7 million, an increase of 25 percent compared to $22.1 million in the third quarter of 2005. On a year-to-date basis, media spending totaled $82.1 million, an increase of 22 percent compared to $67.1 million last year. For the full year, the company expects media expenditures will total approximately $110 million.
Cash and investments totaled $112.7 million at the end of the quarter, an increase of $0.6 million compared to the balance at December 31. Cash flows from operating activities totaled $50.7 million in the third quarter, increasing the year-to-date total to $56.4 million. On a year-to-date basis, the company has invested $49.5 million to repurchase 2.3 million shares of common stock and $21.0 million to fund capital expenditures.
Earnings for the nine months ended September 30, 2006 totaled $0.65 per diluted share, a 35 percent increase over the $0.48 per diluted share for nine months ended October 1, 2005. Net sales for the nine months ended September 30, 2006 increased 21 percent to $609.7 million and net income increased 30 percent to $36.4 million, compared to net sales of $503.2 million and net income of $28.0 million for the nine months ended October 1, 2005. If 2005 results had included stock option expense, earnings would have been $0.44 per diluted share in the prior year, and 2006 earnings of $0.65 per diluted share would represent earnings growth of 48 percent. A reconciliation of this 2005 pro-forma measure accompanies this press release.
Select Comfort Reports 25 Percent Increase in Earnings per Share - Page 4 of 11
Outlook
The company reiterated its long-term growth targets, which extend beyond 2006:
· | Sales growth of between 15 percent and 20 percent; |
· | Earnings growth of between 20 percent and 25 percent, and |
· | Same-store sales growth of between 7 percent and 12 percent. |
Full year sales guidance remains unchanged at or above the high-end of the company’s long-term sales growth targets and earnings per share guidance was increased to between $0.95 and $0.97 per diluted share. The company’s previously stated full year earnings guidance was between $0.93 and $0.97 per diluted share. The revised earnings guidance reflects growth rates of between 25 percent and 28 percent, compared to 2005 full year earnings of $0.76 per diluted share. If 2005 results had included stock option expense, full year earnings would have been $0.69 per diluted share, and the company’s revised 2006 earnings per share guidance would represent growth rates of between 38 percent and 41 percent.
The company established 2007 guidance for sales growth of between 15 percent and 20 percent and earnings of between $1.18 and $1.25 per diluted share. Based on the company’s revised earnings guidance for 2006, earnings growth is expected to be between 22 percent and 32 percent in 2007.
Conference Call
Management will host its regularly scheduled conference call to discuss the company’s results and 2006 outlook at 5:00 p.m. Eastern Time (4:00 p.m. Central; 2:00 p.m. Pacific) on Tuesday, October 24, 2006. To listen to the call, please dial 888-889-1954, passcode: SLEEP. International participants may dial 210-839-8500, passcode: SLEEP. To listen to the webcast, please access the investor relations area of the company’s website at: www.selectcomfort.com.
A replay will remain available until midnight Eastern Time on November 10, 2006, by dialing 203-369-1547. The webcast replay will remain available in the investor relations area of the company’s website for approximately 60 days.
Select Comfort Reports 25 Percent Increase in Earnings per Share - Page 5 of 11
About Select Comfort
Founded in 1987, Select Comfort Corporation is the nation's leading bed retailer(1), holding 30 U.S. issued or pending patents for its personalized sleep products. The company designs, manufactures and markets a line of adjustable-firmness mattresses featuring air-chamber technology, branded the Sleep Number® bed, as well as foundations and sleep accessories. Select Comfort's products are sold through more than 400 company-owned retail stores located nationwide; through selected furniture retailers and specialty bedding retailers; through its national direct marketing operations; and on the Internet at www.selectcomfort.com.
Forward-Looking Statements
Statements used in this press release that relate to future plans, events, financial results or performance are forward-looking statements that are subject to certain risks and uncertainties including, among others, such factors as general and industry economic trends; uncertainties arising from global events; consumer confidence; effectiveness of our advertising and promotional efforts; our ability to secure suitable retail locations; our ability to attract and retain qualified sales professionals and other key employees; our ability to successfully expand distribution through independent retailers; consumer acceptance of our products, product quality, innovation and brand image; our ability to continue to expand and improve our product line; industry competition; warranty expenses; risks of potential litigation; our dependence on significant suppliers, and the vulnerability of any suppliers to commodity shortages, inflationary pressures, labor negotiations, liquidity concerns or other factors; rising commodity costs; the capability of our information systems to meet our business requirements and our ability to upgrade our systems on a cost-effective basis without disruptions to our business; and increasing government regulations, including new flammability standards for the bedding industry and our ability to successfully implement systems and manufacturing process changes to ensure compliance with these requirements. Additional information concerning these and other risks and uncertainties is contained in our filings with the Securities and Exchange Commission, including our 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 that may be in this news release.
# # #
(1) Top Bedding Specialists, Furniture Today, August 14, 2006.
Select Comfort Reports 25 Percent Increase in Earnings per Share - Page 6 of 11
SELECT COMFORT CORPORATION | |||||||||||||
AND SUBSIDIARIES | |||||||||||||
Consolidated Statements of Operations | |||||||||||||
(unaudited - in thousands, except per share amounts) | |||||||||||||
Three Months Ended | |||||||||||||
September 30, | % of | October 1, | % of | ||||||||||
2006 | Net Sales | 2005 | Net Sales | ||||||||||
Net sales | $ | 208,314 | 100.0% | $ | 175,833 | 100.0% | |||||||
Cost of sales | 78,610 | 37.7% | 71,041 | 40.4% | |||||||||
Gross profit | 129,704 | 62.3% | 104,792 | 59.6% | |||||||||
Operating expenses: | |||||||||||||
Sales and marketing | 87,708 | 42.1% | 72,704 | 41.3% | |||||||||
General and administrative | 18,327 | 8.8% | 13,791 | 7.8% | |||||||||
Asset impairment charges | 1,763 | 0.8% | 162 | 0.1% | |||||||||
Operating income | 21,906 | 10.5% | 18,135 | 10.3% | |||||||||
Other income: | |||||||||||||
Interest income | 618 | 0.3% | 405 | 0.2% | |||||||||
Income before income taxes | 22,524 | 10.8% | 18,540 | 10.5% | |||||||||
Income tax expense | 8,583 | 4.1% | 7,094 | 4.0% | |||||||||
Net income | $ | 13,941 | 6.7% | $ | 11,446 | 6.5% | |||||||
Net income per share – basic | $ | 0.26 | $ | 0.21 | |||||||||
Net income per share – diluted | $ | 0.25 | $ | 0.20 | |||||||||
Reconciliation of weighted average | |||||||||||||
shares outstanding: | |||||||||||||
Basic weighted average shares outstanding | 52,766 | 53,457 | |||||||||||
Effect of dilutive securities: | |||||||||||||
Options | 2,350 | 2,359 | |||||||||||
Warrants | 3 | 1,363 | |||||||||||
Restricted shares | 185 | 313 | |||||||||||
Dilutive weighted average shares outstanding | 55,304 | 57,492 | |||||||||||
Select Comfort Reports 25 Percent Increase in Earnings per Share - Page 7 of 11
SELECT COMFORT CORPORATION | |||||||||||||
AND SUBSIDIARIES | |||||||||||||
Consolidated Statements of Operations | |||||||||||||
(unaudited - in thousands, except per share amounts) | |||||||||||||
Nine Months Ended | |||||||||||||
September 30, | % of | October 1, | % of | ||||||||||
2006 | Net Sales | 2005 | Net Sales | ||||||||||
Net sales | $ | 609,685 | 100.0% | $ | 503,185 | 100.0% | |||||||
Cost of sales | 235,763 | 38.7% | 206,806 | 41.1% | |||||||||
Gross profit | 373,922 | 61.3% | 296,379 | 58.9% | |||||||||
Operating expenses: | |||||||||||||
Sales and marketing | 257,848 | 42.3% | 211,777 | 42.1% | |||||||||
General and administrative | 57,638 | 9.5% | 40,476 | 8.0% | |||||||||
Asset impairment charges | 1,763 | 0.3% | 162 | 0.0% | |||||||||
Operating income | 56,673 | 9.3% | 43,964 | 8.7% | |||||||||
Other income: | |||||||||||||
Interest income | 2,248 | 0.4% | 1,543 | 0.3% | |||||||||
Income before income taxes | 58,921 | 9.7% | 45,507 | 9.0% | |||||||||
Income tax expense | 22,505 | 3.7% | 17,557 | 3.5% | |||||||||
Net income | $ | 36,416 | 6.0% | $ | 27,950 | 5.6% | |||||||
Net income per share - basic | $ | 0.68 | $ | 0.52 | |||||||||
Net income per share - diluted | $ | 0.65 | $ | 0.48 | |||||||||
Reconciliation of weighted average | |||||||||||||
shares outstanding: | |||||||||||||
Basic weighted average shares outstanding | 53,201 | 53,631 | |||||||||||
Effect of dilutive securities: | |||||||||||||
Options | 2,639 | 2,541 | |||||||||||
Warrants | 35 | 1,760 | |||||||||||
Restricted shares | 193 | 291 | |||||||||||
Dilutive weighted average shares outstanding | 56,068 | 58,223 | |||||||||||
Select Comfort Reports 25 Percent Increase in Earnings per Share - Page 8 of 11
SELECT COMFORT CORPORATION | |||||||
AND SUBSIDIARIES | |||||||
Consolidated Balance Sheets | |||||||
(unaudited - in thousands, except per share amounts) | |||||||
September 30, | December 31, | ||||||
2006 | 2005 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 26,029 | $ | 32,863 | |||
Marketable securities - current | 35,994 | 24,122 | |||||
Accounts receivable, net of allowance for doubtful accounts | |||||||
of $521 and $552, respectively | 17,120 | 10,109 | |||||
Inventories | 26,030 | 21,982 | |||||
Prepaid expenses | 9,658 | 9,841 | |||||
Deferred tax assets | 6,641 | 6,139 | |||||
Total current assets | 121,472 | 105,056 | |||||
Marketable securities – non-current | 50,699 | 55,102 | |||||
Property and equipment, net | 58,778 | 53,866 | |||||
Deferred tax assets | 15,551 | 11,256 | |||||
Other assets | 3,533 | 3,554 | |||||
Total assets | $ | 250,033 | $ | 228,834 | |||
Liabilities and Shareholders’ Equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 47,225 | $ | 31,655 | |||
Customer prepayments | 10,489 | 14,718 | |||||
Accruals: | |||||||
Sales returns | 4,168 | 5,403 | |||||
Compensation and benefits | 24,814 | 24,839 | |||||
Taxes and withholding | 8,273 | 9,624 | |||||
Other | 10,912 | 8,659 | |||||
Total current liabilities | 105,881 | 94,898 | |||||
Other long-term accrued liabilities | 15,132 | 12,589 | |||||
Total liabilities | 121,013 | 107,487 | |||||
Common shareholders' equity: | |||||||
Undesignated preferred stock; 7,500 shares authorized, no | |||||||
shares issues and outstanding | - | - | |||||
Common stock, $.01 par value; 142,500 shares authorized, | |||||||
52,680 and 53,598 shares issued and outstanding, respectively | 527 | 536 | |||||
Additional paid-in capital | 28,120 | 56,854 | |||||
Retained earnings | 100,373 | 63,957 | |||||
Total shareholders’ equity | 129,020 | 121,347 | |||||
Total liabilities and shareholders’ equity | $ | 250,033 | $ | 228,834 |
Select Comfort Reports 25 Percent Increase in Earnings per Share - Page 9 of 11
SELECT COMFORT CORPORATION | |||||||
AND SUBSIDIARIES | |||||||
Consolidated Statements of Cash Flows | |||||||
(unaudited - in thousands) | |||||||
Nine Months Ended | |||||||
September 30, | October 1, | ||||||
2006 | 2005 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 36,416 | $ | 27,950 | |||
Adjustments to reconcile net income to net cash provided by | |||||||
operating activities: | |||||||
Depreciation and amortization | 14,261 | 11,586 | |||||
Share-based compensation | 6,115 | 549 | |||||
Loss on disposal and impairment of assets | 1,806 | 165 | |||||
Excess tax benefits from stock option exercises | - | 2,391 | |||||
Changes in deferred tax assets | (4,797 | ) | (3,010 | ) | |||
Change in operating assets and liabilities: | |||||||
Accounts receivable | (7,011 | ) | (2,110 | ) | |||
Inventories | (4,048 | ) | (1,542 | ) | |||
Prepaid expenses and other assets | 178 | (2,629 | ) | ||||
Accounts payable | 15,570 | 2,809 | |||||
Accrued sales returns | (1,235 | ) | 210 | ||||
Accrued compensation and benefits | (25 | ) | 8,421 | ||||
Accrued taxes and withholding | (1,351 | ) | 2,096 | ||||
Consumer prepayments | (4,229 | ) | 3,920 | ||||
Other accruals and liabilities | 4,796 | 5,014 | |||||
Net cash provided by operating activities | 56,446 | 55,820 | |||||
Cash flows from investing activities: | |||||||
Purchases of property and equipment | (20,953 | ) | (19,860 | ) | |||
Investments in marketable securities | (28,369 | ) | (22,615 | ) | |||
Proceeds from maturity of marketable securities | 20,900 | 27,125 | |||||
Net cash used in investing activities | (28,422 | ) | (15,350 | ) | |||
Cash flows from financing activities: | |||||||
Repurchases of common stock | (49,512 | ) | (46,201 | ) | |||
Proceeds from issuance of common stock | 7,163 | 6,887 | |||||
Excess tax benefits from stock option exercises | 7,491 | - | |||||
Net cash used in financing activities | (34,858 | ) | (39,314 | ) | |||
(Decrease) increase in cash and cash equivalents | (6,834 | ) | 1,156 | ||||
Cash and cash equivalents, at beginning of period | 32,863 | 15,066 | |||||
Cash and cash equivalents, at end of period | $ | 26,029 | $ | 16,222 | |||
Select Comfort Reports 25 Percent Increase in Earnings per Share - Page 10 of 11
SELECT COMFORT CORPORATION | |||||||||||||
AND SUBSIDIARIES | |||||||||||||
Reconciliation of GAAP Net Income to Pro Forma Net Income | |||||||||||||
(unaudited - in thousands, except per share amounts) | |||||||||||||
The financial measures used in this press release quantify the impact of adopting Financial Accounting Standards Board (FASB) Statement of Accounting Standards No. 123 (Revised 2004), Share-Based Payments (SFAS No. 123R) related to the expensing of stock option compensation and are referred to as Pro Forma reporting. We view these financial measures to be helpful in assessing the Company's ongoing operating results and the same as those required to be included in our Form 10-Q quarterly financial statements. We include these financial measures in our earnings announcement because we believe they are useful to investors in allowing greater transparency related to supplemental information we use in our financial and operational analysis. | |||||||||||||
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | October 1, | September 30, | October 1, | ||||||||||
2006 * | 2005 | 2006 * | 2005 | ||||||||||
Net income, as reported | $ | 13,941 | $ | 11,446 | $ | 36,416 | $ | 27,950 | |||||
Stock-based compensation cost, net of tax, | |||||||||||||
included in net income | - | 155 | - | 338 | |||||||||
Stock-based compensation cost, net of tax, | |||||||||||||
if fair value method had been applied | - | (1,039 | ) | - | (2,823 | ) | |||||||
Adjusted net income, pro forma | $ | 13,941 | $ | 10,562 | $ | 36,416 | $ | 25,465 | |||||
Earnings per share: | |||||||||||||
Basic – as reported | $ | 0.26 | $ | 0.21 | $ | 0.68 | $ | 0.52 | |||||
Basic – pro forma | 0.26 | 0.20 | 0.68 | 0.47 | |||||||||
Diluted – as reported | $ | 0.25 | $ | 0.20 | $ | 0.65 | $ | 0.48 | |||||
Diluted – pro forma | 0.25 | 0.18 | 0.65 | 0.44 | |||||||||
Weighted average shares outstanding: | |||||||||||||
Basic – as reported | 52,766 | 53,457 | 53,201 | 53,631 | |||||||||
Diluted – as reported | 55,304 | 57,492 | 56,068 | 58,223 | |||||||||
* Net income and earnings per share in 2006 include stock option expense |
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AND SUBSIDIARIES | |||||||||||||
Supplemental Financial Information | |||||||||||||
(unaudited - in thousands) | |||||||||||||
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | October 1, | September 30, | October 1, | ||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||
Percent of sales: | |||||||||||||
Retail | 76.0% | 77.1% | 76.4% | 75.7% | |||||||||
Direct | 8.6% | 9.9% | 9.7% | 11.4% | |||||||||
E-Commerce | 5.3% | 5.0% | 5.4% | 4.8% | |||||||||
Wholesale | 10.1% | 8.0% | 8.5% | 8.1% | |||||||||
Total | 100.0% | 100.0% | 100.0% | 100.0% | |||||||||
Sales growth rates: | |||||||||||||
Same-store sales growth | 7% | 15% | 13% | 14% | |||||||||
Net new stores | 10% | 5% | 9% | 7% | |||||||||
Retail total | 17% | 20% | 22% | 21% | |||||||||
Direct | 4% | 10% | 3% | 17% | |||||||||
E-Commerce | 26% | 41% | 35% | 32% | |||||||||
Wholesale | 49% | 48% | 27% | 56% | |||||||||
Total | 18% | 22% | 21% | 23% | |||||||||
Stores open: | |||||||||||||
Beginning of period | 412 | 369 | 396 | 370 | |||||||||
Opened | 15 | 19 | 33 | 32 | |||||||||
Closed | (2 | ) | - | (4 | ) | (14 | ) | ||||||
End of period | 425 | 388 | 425 | 388 | |||||||||
Retail partner doors | 727 | 264 | 727 | 264 | |||||||||
Other metrics: | |||||||||||||
Average sales per store ($000s) * | $ | 1,546 | $ | 1,375 | |||||||||
Average sales per square foot ($s) * | $ | 1,319 | $ | 1,238 | |||||||||
Stores > $1 million sales * | 84% | 73% | |||||||||||
Average sales per mattress unit | |||||||||||||
(Q3 Company-owned channels; $s) | $ | 2,232 | $ | 2,064 | |||||||||
Average mattress sales per mattress unit | |||||||||||||
(Q3 Company-owned channels; $s) | $ | 1,712 | $ | 1,619 | |||||||||
Return on equity (trailing twelve months) | 44.5% | 35.7% | |||||||||||
Cash and investments | $ | 112,722 | $ | 88,389 | |||||||||
* trailing twelve months for stores open at least one year |