Sleep Number (SNBR) 8-K Results of Operations and Financial Condition

FOR IMMEDIATE RELEASE

Media Contact: Gabby Nelson (763) 551-7460 gabby.nelson@selectcomfort.com Investor Contact: Edwin Boon (763) 551-7498 investorrelations@selectcomfort.com

SELECT COMFORT ANNOUNCES SECOND-QUARTER 2012 RESULTS

· Reports Record Second-quarter Net Sales of $205 Million and Comparable-sales Growth of 25 Percent

· Achieves 14th Consecutive Quarter of Double-digit Year-over-year Operating Income Growth

· Reports Record Second-quarter Earnings per Diluted Share of $0.30, a 50 Percent Year-over-year Increase

· Raises Full-year 2012 Guidance

MINNEAPOLIS – (July 18, 2012) – Select Comfort Corporation (NASDAQ: SCSS) today reported second-quarter results for the period ended June 30, 2012. Net sales for the quarter increased 27 percent to a second-quarter record of $205 million, compared to $161 million in the second quarter of 2011. Results were driven by company-controlled comparable sales growth of 25 percent. The company reported second-quarter earnings per diluted share of $0.30, a 50 percent increase versus $0.20 per diluted share in the second quarter of 2011.

“Delivering record sales, record operating margin and record earnings per share in a more challenged consumer environment is the direct result of our customer-centric strategies and unique business model,” said Shelly Ibach, president and CEO, Select Comfort. “Specifically, we executed well against our integrated growth formula designed to increase brand awareness, grow exclusive distribution, and advance proprietary product offerings that provide meaningful benefits for our customers.”

Ibach continued, “Going forward, we will continue to innovate across our end-to-end customer experience to further differentiate the Sleep Number brand as we advance towards our goal of exceeding $1.5 billion in revenue and 15 percent operating margin by 2015.”

Second-quarter Summary

In the second quarter, net sales increased by 27 percent as compared to the prior-year period. The increase was driven by company-controlled comparable sales growth of 25 percent,

Select Comfort Announces Second-quarter 2012 Results – Page 2 of 11

with average retail sales-per-comparable-store during the past 12 months exceeding $2.0 million for the first time in company history.

Operating income for the second quarter was $25.9 million, and operating margin during the quarter was 12.6 percent of net sales, a 170 basis-point improvement from 10.9 percent in 2011. Operating income and operating margin were both second-quarter records for the company. The 170 basis-point operating margin growth was driven by a 70 basis-point improvement in sales and marketing expenses, a 60 basis-point increase in gross-profit margin, and a 40 basis-point improvement in general and administrative costs plus research and development expenses.

Gross-profit margin in the second quarter of 2012 was 64.1 percent of net sales, an increase of 60 basis points versus 63.5 percent in the prior-year period. The year-over-year increase was primarily driven by a variety of pricing increases executed over the past 12 months.

Sales and marketing costs were $88.2 million in the second quarter, or 43.0 percent of net sales. This compares to $70.5 million, or 43.7 percent of net sales in the prior-year period, reflecting continued leverage from the company’s sales growth. Media spending during the quarter was $27 million, a 37 percent increase versus the prior-year period.

General and administrative expenses were $16.2 million in the second quarter, or 7.9 percent of net sales. This compares to $13.1 million, or 8.1 percent of net sales, during the same period last year, again reflecting continued leverage of the company’s fixed-cost base.

Cash flows from operating activities were $43 million for the first six months of 2012 compared to $34 million in the prior year. Capital expenditures for the first six months of 2012 increased to $22.5 million as compared to $9.6 million in 2011, driven by increased investment in stores and information systems. The company reinitiated its share-repurchase program in April, and during the second quarter, returned $10 million to shareholders through the repurchase of 0.4 million shares of its common stock. As of the end of the quarter, cash, cash equivalents and marketable-debt securities totaled $155 million, and the company had no borrowings under its revolving credit agreement.

Select Comfort Announces Second-quarter 2012 Results – Page 3 of 11

Fiscal 2012 Outlook

The company is raising its outlook for 2012 GAAP earnings per diluted share, including the $5.6 million non-recurring charge in the first quarter of 2012, from between $1.32 and $1.40 to between $1.35 and $1.41, a 26 to 32 percent increase versus prior year. Excluding the charge, this represents non-GAAP guidance of between $1.41 and $1.47, a 32 to 37 percent increase versus prior year. This outlook continues to assume company-controlled comparable sales growth for the remainder of the year of at least 15 percent and a year-over-year increase in full-year operating margin of at least 100 basis points.

The company is increasing its estimate for year-end 2012 store count from the previous range of between 400 and 410 stores to a new range of between 408 to 412 stores, a 7 to 8 percent increase from the 381 stores at year-end 2011. Capital expenditures for 2012 are estimated to be approximately $50 million, reflecting new stores, repositioned stores and remodels, along with continued investment in information systems. The company also plans to continue share repurchases in the second half of 2012, with the objective of maintaining share count.

Conference Call

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 in the investor relations area of the company’s website for approximately 60 days.

About Select Comfort Corporation

Select Comfort Corporation (NASDAQ: SCSS) is leading the industry in delivering an unparalleled sleep experience by offering consumers high-quality, innovative and individualized sleep solutions and services, which include a complete line of SLEEP NUMBER® beds and bedding. The company is the exclusive manufacturer, retailer and servicer of the revolutionary Sleep Number bed, which allows individuals to adjust the firmness and support of each side at the touch of a button. The company offers further personalization through its solutions-focused line of Sleep Number pillows, sheets and other bedding products. And as the only national specialty-mattress retailer, consumers can take advantage of an enhanced mattress-buying

Select Comfort Announces Second-quarter 2012 Results – Page 4 of 11

experience at one of the approximately 400 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 evolving regulatory standards applicable to data privacy and security; 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 Announces Second-quarter 2012 Results – Page 5 of 11

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited – in thousands, except per share amounts)

	Three Months Ended
	June 30,		% of			July 2,			% of
	2012		Net Sales			2011			Net Sales
Net sales	$	205,219		100.0	%	$	161,462			100.0	%
Cost of sales		73,648		35.9	%		58,958			36.5	%
Gross profit		131,571		64.1	%		102,504			63.5	%
Operating expenses:
Sales and marketing		88,240		43.0	%		70,517			43.7	%
General and administrative		16,220		7.9	%		13,120			8.1	%
Research and development		1,256		0.6	%		1,223			0.8	%
Asset impairment charges		3		0.0	%		18			0.0	%
Total operating expenses		105,719		51.5	%		84,878			52.6	%
Operating income		25,852		12.6	%		17,626			10.9	%
Other income (expense), net		48		0.0	%		(30	)		0.0	%
Income before income taxes		25,900		12.6	%		17,596			10.9	%
Income tax expense		8,927		4.3	%		6,307			3.9	%
Net income	$	16,973		8.3	%	$	11,289			7.0	%
Net income per share – basic	$	0.30				$	0.21
Net income per share – diluted	$	0.30				$	0.20
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding		55,719					54,958
Effect of dilutive securities:
Options		1,129					911
Restricted shares		546					538
Diluted weighted-average shares outstanding		57,394					56,407

Select Comfort Announces Second-quarter 2012 Results – Page 6 of 11

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited – in thousands, except per share amounts)

	Six Months Ended
	June 30,		% of			July 2,			% of
	2012		Net Sales			2011			Net Sales
Net sales	$	467,602		100.0	%	$	354,530			100.0	%
Cost of sales		171,732		36.7	%		128,925			36.4	%
Gross profit		295,870		63.3	%		225,605			63.6	%
Operating expenses:
Sales and marketing		194,425		41.6	%		150,788			42.5	%
General and administrative		33,149		7.1	%		28,743			8.1	%
Research and development		2,546		0.5	%		1,954			0.6	%
CEO transition costs		5,595		1.2	%		-			0.0	%
Asset impairment charges		7		0.0	%		96			0.0	%
Total operating expenses		235,722		50.4	%		181,581			51.2	%
Operating income		60,148		12.9	%		44,024			12.4	%
Other income (expense), net		55		0.0	%		(60	)		0.0	%
Income before income taxes		60,203		12.9	%		43,964			12.4	%
Income tax expense		20,813		4.5	%		16,092			4.5	%
Net income	$	39,390		8.4	%	$	27,872			7.9	%
Net income per share – basic	$	0.71				$	0.51
Net income per share – diluted	$	0.69				$	0.50
Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding		55,680					54,842
Effect of dilutive securities:
Options		1,099					762
Restricted shares		588					553
Diluted weighted-average shares outstanding		57,367					56,157

Select Comfort Announces Second-quarter 2012 Results – Page 7 of 11

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except per share amounts)

subject to reclassification

	(unaudited)
	June 30,			December 31,
	2012			2011
Assets
Current assets:
Cash and cash equivalents	$	90,324		$	116,255
Marketable debt securities – current		32,772			20,020
Accounts receivable, net of allowance for doubtful accounts of $391 and $397, respectively		10,908			13,844
Inventories		27,301			24,851
Prepaid expenses		6,905			5,778
Deferred income taxes		4,489			4,443
Other current assets		7,008			6,004
Total current assets		179,707			191,195
Marketable debt securities – non-current		32,367			10,042
Property and equipment, net		60,311			43,850
Deferred income taxes		15,373			12,964
Other assets		4,583			4,606
Total assets	$	292,341		$	262,657
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	49,644		$	50,141
Customer prepayments		11,637			13,529
Compensation and benefits		20,470			29,806
Taxes and withholding		8,596			9,883
Other current liabilities		18,315			15,691
Total current liabilities		108,662			119,050
Non-current liabilities:
Warranty liabilities		2,343			2,714
Other long-term liabilities		12,328			11,502
Total non-current liabilities		14,671			14,216
Total liabilities		123,333			133,266
Shareholders’ equity:
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding		-			-
Common stock, $0.01 par value; 142,500 shares authorized, 56,263 and 56,397 shares issued and outstanding, respectively		563			564
Additional paid-in capital		47,967			47,701
Retained earnings		120,491			81,101
Accumulated other comprehensive (loss) income		(13	)		25
Total shareholders’ equity		169,008			129,391
Total liabilities and shareholders’ equity	$	292,341		$	262,657

Select Comfort Announces Second-quarter 2012 Results – Page 8 of 11

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited - in thousands)

subject to reclassification

	Six Months Ended
	June 30,			July 2,
	2012			2011
Cash flows from operating activities:
Net income	$	39,390		$	27,872
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,049			6,386
Stock-based compensation		8,370			2,256
Net (gain) loss on disposals and impairments of assets		(12	)		89
Excess tax benefits from stock-based compensation		(4,120	)		(1,132	)
Deferred income taxes		(2,431	)		2,819
Changes in operating assets and liabilities:
Accounts receivable		3,055			2,775
Inventories		(2,450	)		(932	)
Income taxes		3,614			1,181
Prepaid expenses and other assets		(2,474	)		(3,212	)
Accounts payable		202			(682	)
Customer prepayments		(1,892	)		(2,451	)
Accrued compensation and benefits		(9,085	)		(2,716	)
Other taxes and withholding		(920	)		(320	)
Warranty liabilities		(453	)		(314	)
Other accruals and liabilities		3,390			2,066
Net cash provided by operating activities		43,233			33,685
Cash flows from investing activities:
Purchases of property and equipment		(22,499	)		(9,585	)
Proceeds from sales of property and equipment		30			7
Investments in marketable debt securities		(45,351	)		(40,021	)
Proceeds from maturities of marketable debt securities		10,018			-
Increase in restricted cash		-			(2,650	)
Net cash used in investing activities		(57,802	)		(52,249	)
Cash flows from financing activities:
Net decrease in short-term borrowings		(3,349	)		(1,500	)
Repurchases of common stock		(14,023	)		(309	)
Proceeds from issuance of common stock		1,937			870
Excess tax benefits from stock-based compensation		4,120			1,132
Debt issuance costs		(47	)		-
Net cash (used in) provided by financing activities		(11,362	)		193
Net decrease in cash and cash equivalents		(25,931	)		(18,371	)
Cash and cash equivalents, at beginning of period		116,255			76,016
Cash and cash equivalents, at end of period	$	90,324		$	57,645

Select Comfort Announces Second-quarter 2012 Results – Page 9 of 11

SELECT COMFORT CORPORATION

AND SUBSIDIARIES

Supplemental Financial Information

(unaudited)

	Three Months Ended						Six Months Ended
	June 30,			July 2,			June 30,			July 2,
	2012			2011			2012			2011
Percent of sales:
Retail		88.9	%		87.1	%		88.5	%		86.8	%
Direct and E-Commerce		7.5	%		8.7	%		7.8	%		9.1	%
Wholesale		3.6	%		4.2	%		3.7	%		4.1	%
Total		100.0	%		100.0	%		100.0	%		100.0	%
Sales growth rates:
Retail comparable-store sales		27	%		25	%		32	%		28	%
Direct and E-Commerce		8	%		(13	%)		13	%		(8	%)
Company-Controlled comparable sales change		25	%		20	%		30	%		23	%
Net new/(closed) stores		3	%		(2	%)		2	%		(2	%)
Total Company-Controlled Channels		28	%		18	%		32	%		21	%
Wholesale		11	%		(19	%)		19	%		(8	%)
Total		27	%		16	%		32	%		19	%
Stores open:
Beginning of period		380			375			381			386
Opened		12			5			22			6
Closed		(11	)		(5	)		(22	)		(17	)
End of period		381			375			381			375
Other metrics:
Average sales per store ($ in 000's)1	$	2,012		$	1,492
Average sales per square foot1	$	1,281		$	998
Stores > $1 million net sales1		98	%		85	%
Stores > $2 million net sales1		42	%		13	%
Average mattress sales per mattress unit - Company Controlled Channels	$	2,540		$	2,223		$	2,397		$	2,157

1Trailing twelve months for stores open at least one year.

Select Comfort Announces Second-quarter 2012 Results – Page 10 of 11

SELECT COMFORT CORPORATION AND SUBSIDIARIES

Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA)

(in thousands)

The Company defines earnings before interest, taxes, depreciation and amortization (EBITDA) as net income plus: income tax expense, interest expense, depreciation and amortization, stock-based compensation and asset impairments. Management believes EBITDA is a useful indicator of the Company's financial performance.  Our definition of EBITDA may not be comparable to similarly titled definitions used by other companies.

The tables below reconcile EBITDA, which is a non-GAAP financial measure, to comparable GAAP financial measures:

	Three Months Ended				Trailing-Twelve Months Ended
	June 30,		July 2,		June 30,		July 2,
	2012		2011		2012		2011
Net income	$	16,973	$	11,289	$	71,996	$	45,478
Income tax expense		8,927		6,307		34,663		26,625
Interest expense		20		64		130		279
Depreciation and amortization		4,726		3,210		16,090		12,815
Stock-based compensation		1,405		1,122		11,084		4,727
Asset impairments		3		18		19		356
EBITDA	$	32,054	$	22,010	$	133,982	$	90,280

Note - Our EBITDA calculation is considered a non-GAAP financial measure and is not in accordance with, or preferable to, "as reported," or GAAP financial data.However, the Company is providing this information as they believe it facilitates analysis of the Company's financial performance by investors and financial analysts.

GAAP - generally accepted accounting principles

Select Comfort Announces Second-quarter 2012 Results – Page 11 of 11

SELECT COMFORT CORPORATION AND SUBSIDIARIES

Reported to Adjusted Statements of Operations Data Reconciliation

(in thousands, except per share amounts)

	Six Months Ended
	June 30, 2012						July 2, 2011
			CEO
			Transition
	As Reported		Costs(1)		As Adjusted		As Reported
Operating income	$	60,148	$	5,595	$	65,743	$	44,024
Other income (expense), net		55		-		55		(60	)
Income before income taxes		60,203		5,595		65,798		43,964
Income tax expense(2)		20,813		1,919		22,732		16,092
Net income	$	39,390	$	3,676	$	43,066	$	27,872
Net income per share –
Basic	$	0.71	$	0.07	$	0.77	$	0.51
Diluted	$	0.69	$	0.06	$	0.75	$	0.50
Basic Shares		55,680		55,680		55,680		54,842
Diluted Shares		57,367		57,367		57,367		56,157

(1) In February 2012, the company 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. As a result of these modifications, the company recorded incremental non-cash compensation of $5.6 million.

 (2) Reflects effective income tax rate, before discrete adjustments, of 34.3% for 2012.

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, the company is providing this information as they believe it facilitates year-over-year comparisons for investors and financial analysts.

GAAP - generally accepted accounting principles