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ITEM 2.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in seven sections:
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•
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Liquidity and Capital Resources
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•
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Non-GAAP Data Reconciliations
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•
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Off-Balance-Sheet Arrangements and Contractual Obligations
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•
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Critical Accounting Policies
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Risk Factors
The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and the Notes thereto included herein. This quarterly report on Form 10-Q contains certain forward-looking statements that relate to future plans, events, financial results or performance. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “predict,” “intend,” “potential,” “continue” or the negative of these or similar terms. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections.
These risks and uncertainties include, among others:
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•
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Current and future general and industry economic trends and consumer confidence;
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•
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The effectiveness of our marketing messages;
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•
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The efficiency of our advertising and promotional efforts;
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•
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Our ability to execute our Company-Controlled distribution strategy;
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•
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Our ability to achieve and maintain acceptable levels of product and service quality, and acceptable product return and warranty claims rates;
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•
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Our ability to continue to improve and expand our product line, and consumer acceptance of our products, product quality, innovation and brand image;
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•
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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;
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•
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Availability of attractive and cost-effective consumer credit options;
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•
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Pending and unforeseen litigation and the potential for adverse publicity associated with litigation;
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•
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Our “just-in-time” manufacturing processes with minimal levels of inventory, which may leave us vulnerable to shortages in supply;
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•
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Our dependence on significant suppliers and our ability to maintain relationships with key suppliers, including several sole-source suppliers;
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•
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Rising commodity costs and other inflationary pressures;
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•
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Risks inherent in global sourcing activities;
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•
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Risks of disruption in the operation of either of our two primary manufacturing facilities;
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•
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Increasing government regulation;
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•
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The adequacy of our management information systems to meet the evolving needs of our business and existing and evolving regulatory standards applicable to data privacy and security;
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•
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The costs and potential disruptions to our business related to upgrading our management information systems;
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•
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Our ability to attract, retain and motivate qualified management, executive and other key employees, including qualified retail sales professionals and managers; and
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•
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Uncertainties arising from global events, such as terrorist attacks or a pandemic outbreak, or the threat of such events.
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Additional information concerning these and other risks and uncertainties is contained under the caption “Risk Factors” in our Annual Report on Form 10-K.
We have no obligation to publicly update or revise any of the forward-looking statements contained in this quarterly report on Form 10-Q.
Overview
Business Overview
We are leading the industry in delivering unparalleled sleep experiences by offering consumers high-quality and individualized sleep solutions and services, which include a complete line of Sleep Number® beds and bedding. We are the exclusive designer, manufacturer, marketer, retailer and servicer of the revolutionary Sleep Number bed. We offer further individualization through our new sleep tracking technology, SleepIQ
TM
, and a solutions-focused line of Sleep Number pillows, sheets, FlexFit
TM
adjustable bases, and other bedding products, including the innovative DualTemp
TM
temperature-balancing layer.
We generate revenue by selling products through two distribution channels. Our vertical, direct to consumer business model is our primary source of revenue with exclusive distribution through our Company-Controlled channel, which includes Retail, Direct Marketing and E-Commerce. In addition, we operate a small wholesale business in the United States and Australia.
Mission, Vision and Goals
Our mission is to improve lives by
Individualizing Sleep Experiences
.
Our vision is to become one of the world’s most beloved brands by delivering an
Unparalleled Sleep Experience
. We expect our customer-focused strategies and goals will build our competitive advantages and deliver sustainable, profitable growth.
Our long-term goals are:
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Everyone will know Sleep Number®;
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•
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Innovative Sleep Number products will deliver meaningful benefits;
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•
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Customers will easily find and interact with Sleep Number;
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•
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Customers will enthusiastically recommend Sleep Number; and
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•
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We will leverage our business model to fund innovation and growth.
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Results of Operations
Quarterly and Annual Results
Quarterly and annual operating results may fluctuate significantly as a result of a variety of factors, including increases or decreases in sales, the timing, amount and effectiveness of advertising expenditures, changes in sales return rates or warranty experience, timing of store openings/closings and related expenses, changes in net sales resulting from changes in our store base, the timing of promotional offerings, competitive factors, changes in commodity costs, any disruptions in supplies or third-party service providers, seasonality of retail and bedding industry sales, timing and volume of QVC shows, consumer confidence and general economic conditions. Therefore, our historical results of operations may not be indicative of the results that may be achieved for any future period.
Highlights
Financial highlights for the
three months ended
June 28, 2014
were as follows:
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•
|
Net sales
increased
13%
to
$234.8 million
, compared with
$207.4 million
for the same period one year ago. Strong sales of our innovative new products contributed to the 13% net sales increase. The 13% net sales increase was driven by sales from
38
net new stores opened in the past 12 months and a 7% comparable sales increase in our Company-Controlled channel.
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•
|
Retail sales-per-store (for stores open at least one year), on a trailing twelve-month basis, of
$2.1 million
increased 2% compared with the prior-year trailing twelve-month period.
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•
|
Operating income decreased to
$12.7 million
, or
5.4%
of net sales, compared with
$15.1 million
, or
7.3%
of net sales, for the same period one year ago. The decline in operating income was primarily due to a
2.7
percentage point (ppt.) decrease in our gross profit rate, partially offset by the additional operating income generated by the 13% increase in net sales. See page 19 for additional details on our gross profit rate.
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•
|
Net income
decreased
15%
to
$8.5 million
, or
$0.16
per diluted share, compared with net income of
$9.9 million
, or
$0.18
per diluted share, for the same period one year ago.
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|
•
|
Cash provided by operating activities totaled
$49.6 million
for the
six months ended
June 28, 2014
, compared with
$36.1 million
for the same period one year ago.
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•
|
At
June 28, 2014
, cash, cash equivalents and marketable debt securities totaled
$120.8 million
and we had no borrowings under our revolving credit facility. In the
second
quarter of
2014
, we repurchased
531,943
shares of our common stock under our Board-approved share repurchase program at a cost of
$10.0 million
(an average of
$18.82
per share). As of
June 28, 2014
, the remaining authorization under our Board-approved share repurchase program was
$116.7 million
.
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The following table sets forth our results of operations expressed as dollars and percentages of net sales. Figures are in millions, except percentages and per share amounts. Amounts may not add due to rounding differences.
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Three Months Ended
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|
Six Months Ended
|
|
|
June 28,
2014
|
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June 29,
2013
|
|
June 28, 2014
|
|
June 29,
2013
|
Net sales
|
|
$
|
234.8
|
|
|
100.0
|
%
|
|
$
|
207.4
|
|
|
100.0
|
%
|
|
$
|
511.2
|
|
|
100.0
|
%
|
|
$
|
465.6
|
|
|
100.0
|
%
|
Cost of sales
|
|
92.4
|
|
|
39.3
|
%
|
|
76.0
|
|
|
36.6
|
%
|
|
197.4
|
|
|
38.6
|
%
|
|
170.8
|
|
|
36.7
|
%
|
Gross profit
|
|
142.4
|
|
|
60.7
|
%
|
|
131.4
|
|
|
63.4
|
%
|
|
313.8
|
|
|
61.4
|
%
|
|
294.8
|
|
|
63.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
106.7
|
|
|
45.5
|
%
|
|
98.4
|
|
|
47.4
|
%
|
|
231.7
|
|
|
45.3
|
%
|
|
208.2
|
|
|
44.7
|
%
|
General and administrative
|
|
21.3
|
|
|
9.1
|
%
|
|
15.4
|
|
|
7.4
|
%
|
|
40.2
|
|
|
7.9
|
%
|
|
31.2
|
|
|
6.7
|
%
|
Research and development
|
|
1.7
|
|
|
0.7
|
%
|
|
2.6
|
|
|
1.2
|
%
|
|
3.4
|
|
|
0.7
|
%
|
|
5.1
|
|
|
1.1
|
%
|
Total operating expenses
|
|
129.7
|
|
|
55.2
|
%
|
|
116.3
|
|
|
56.1
|
%
|
|
275.3
|
|
|
53.8
|
%
|
|
244.5
|
|
|
52.5
|
%
|
Operating income
|
|
12.7
|
|
|
5.4
|
%
|
|
15.1
|
|
|
7.3
|
%
|
|
38.5
|
|
|
7.5
|
%
|
|
50.3
|
|
|
10.8
|
%
|
Operating income – as adjusted
(1)
|
|
12.7
|
|
|
5.4
|
%
|
|
15.1
|
|
|
7.3
|
%
|
|
38.5
|
|
|
7.5
|
%
|
|
49.9
|
|
|
10.7
|
%
|
Other income, net
|
|
0.1
|
|
|
0.0
|
%
|
|
0.1
|
|
|
0.0
|
%
|
|
0.2
|
|
|
0.0
|
%
|
|
0.2
|
|
|
0.0
|
%
|
Income before income taxes
|
|
12.8
|
|
|
5.4
|
%
|
|
15.2
|
|
|
7.3
|
%
|
|
38.7
|
|
|
7.6
|
%
|
|
50.5
|
|
|
10.8
|
%
|
Income tax expense
|
|
4.3
|
|
|
1.8
|
%
|
|
5.3
|
|
|
2.5
|
%
|
|
13.2
|
|
|
2.6
|
%
|
|
17.1
|
|
|
3.7
|
%
|
Net income
|
|
$
|
8.5
|
|
|
3.6
|
%
|
|
$
|
9.9
|
|
|
4.8
|
%
|
|
$
|
25.5
|
|
|
5.0
|
%
|
|
$
|
33.4
|
|
|
7.2
|
%
|
Net income – as adjusted
(1)
|
|
$
|
8.5
|
|
|
3.6
|
%
|
|
$
|
9.9
|
|
|
4.8
|
%
|
|
$
|
25.5
|
|
|
5.0
|
%
|
|
$
|
33.1
|
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic
|
|
$
|
0.16
|
|
|
|
|
|
$
|
0.18
|
|
|
|
|
$
|
0.47
|
|
|
|
|
$
|
0.61
|
|
|
|
|
Diluted
|
|
$
|
0.16
|
|
|
|
|
|
$
|
0.18
|
|
|
|
|
$
|
0.47
|
|
|
|
|
$
|
0.60
|
|
|
|
|
Diluted – as adjusted
(1)
|
|
$
|
0.16
|
|
|
|
|
$
|
0.18
|
|
|
|
|
$
|
0.47
|
|
|
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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Weighted-average number of common shares:
|
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|
|
|
|
|
|
|
|
|
|
|
|
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Basic
|
|
53.6
|
|
|
|
|
|
55.0
|
|
|
|
|
53.9
|
|
|
|
|
55.1
|
|
|
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Diluted
|
|
54.3
|
|
|
|
|
|
56.0
|
|
|
|
|
54.6
|
|
|
|
|
56.1
|
|
|
|
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|
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(1)
|
This non-GAAP measure is not in accordance with, or preferable to, GAAP financial data. However, we are providing this information as we believe it facilitates annual and year-over-year comparisons for investors and financial analysts. See page 22 for a reconciliation of this non-GAAP measure to the appropriate GAAP measure.
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GAAP – generally accepted accounting principles
The percentage of our total net sales, by dollar volume, from each of our channels was as follows:
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Three Months Ended
|
|
Six Months Ended
|
|
|
June 28,
2014
|
|
June 29,
2013
|
|
June 28,
2014
|
|
June 29,
2013
|
Company-Controlled channel
|
|
96.4
|
%
|
|
96.1
|
%
|
|
96.3
|
%
|
|
95.4
|
%
|
Wholesale/Other channel
|
|
3.6
|
%
|
|
3.9
|
%
|
|
3.7
|
%
|
|
4.6
|
%
|
Total
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
The components of total net sales change, including comparable net sales changes, were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 28,
2014
|
|
June 29,
2013
|
|
June 28,
2014
|
|
June 29,
2013
|
Sales change rates:
|
|
|
|
|
|
|
|
|
|
|
Retail comparable-store sales
(1)
|
|
8
|
%
|
|
(7
|
%)
|
|
5
|
%
|
|
(7
|
%)
|
Direct and E-Commerce
|
|
(5
|
%)
|
|
4
|
%
|
|
(2
|
%)
|
|
(9
|
%)
|
Company-Controlled comparable sales change
|
|
7
|
%
|
|
(6
|
%)
|
|
4
|
%
|
|
(8
|
%)
|
Net store openings/closings
|
|
6
|
%
|
|
7
|
%
|
|
7
|
%
|
|
7
|
%
|
Total Company-Controlled channel
|
|
13
|
%
|
|
1
|
%
|
|
11
|
%
|
|
(1
|
%)
|
Wholesale/Other channel
|
|
6
|
%
|
|
7
|
%
|
|
(11
|
%)
|
|
23
|
%
|
Total net sales change
|
|
13
|
%
|
|
1
|
%
|
|
10
|
%
|
|
0
|
%
|
(1)
Stores are included in the comparable-store calculations in the 13th full month of operations. Stores that have been remodeled or repositioned within the same shopping center remain in the comparable-store base.
Other sales metrics were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 28,
2014
|
|
June 29,
2013
|
|
June 28,
2014
|
|
June 29,
2013
|
Average sales per store
(1)
($ in thousands)
|
|
$
|
2,144
|
|
|
$
|
2,094
|
|
|
|
|
|
Average sales per square foot
(1)
|
|
$
|
1,009
|
|
|
$
|
1,197
|
|
|
|
|
|
Stores > $1 million in net sales
(1)
|
|
97
|
%
|
|
98
|
%
|
|
|
|
|
Stores > $2 million in net sales
(1)
|
|
46
|
%
|
|
46
|
%
|
|
|
|
|
Average revenue per mattress unit
(2)
|
|
$
|
3,709
|
|
|
$
|
3,182
|
|
|
$
|
3,520
|
|
|
$
|
3,154
|
|
(1)
Trailing twelve months for stores included in our comparable-store calculations.
(2)
Represents Company-Controlled channel total net sales divided by Company-Controlled channel mattress units.
The number of retail stores operating was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 28,
2014
|
|
June 29,
2013
|
|
June 28,
2014
|
|
June 29,
2013
|
Beginning of period
|
|
443
|
|
|
411
|
|
|
440
|
|
|
410
|
|
Opened
|
|
16
|
|
|
17
|
|
|
33
|
|
|
27
|
|
Closed
|
|
(8
|
)
|
|
(15
|
)
|
|
(22
|
)
|
|
(24
|
)
|
End of period
|
|
451
|
|
|
413
|
|
|
451
|
|
|
413
|
|
Comparison of Three Months Ended
June 28, 2014
with Three Months Ended
June 29, 2013
Net sales
Net sales
increased
13%
to
$234.8 million
for the three months ended
June 28, 2014
, compared with
$207.4 million
for the same period one year ago. Strong sales of our innovative new products contributed to the 13% net sales increase. The net sales increase was primarily driven by sales from
38
net stores opened in the past 12 months and a
7%
comparable sales increase in our Company-Controlled channel.
The
$27.4 million
net sales increase compared with the same period one year ago was comprised of the following: (i) a $14.7 million sales increase resulting from net store openings; (ii) a $13.0 million increase in sales from our Company-Controlled comparable retail stores; and (iii) a $0.5 million increase in Wholesale/Other channel sales, partially offset by (iv) a $0.8 million decrease in Direct and E-Commerce sales. Company-Controlled mattress units decreased 3% compared to the prior-year period. Average revenue per mattress unit in our Company-Controlled channel increased by
17%
. The
17%
increase reflects our highly effective selling process and the strong sales of our innovative new products, including our new FlexFit adjustable bases.
Gross profit
Gross profit of
$142.4 million
increased
by
$11.0 million
, or
8%
, compared with the same period one year ago. The gross profit rate decreased to
60.7%
of net sales for the three months ended
June 28, 2014
, compared with
63.4%
for the prior-year period. The
2.7
ppt. decrease in the gross profit rate was primarily due to: (i) a higher sales mix of lower-margin rate products, including FlexFit adjustable bases; (ii) increased sales return and exchange costs resulting from the second quarter 2013 change in our 30-night trial policy to 100 nights; and (iii) certain supply chain inefficiencies related to the strong demand for our new products. In addition, our gross profit rate can fluctuate from quarter to quarter due to a variety of other factors, including manufacturing and logistics efficiencies, warranty expenses and performance-based incentive compensation.
Sales and marketing expenses
The sales and marketing expense rate for the three months ended
June 28, 2014
decreased to
45.5%
of net sales, compared with
47.4%
of net sales for the same period one year ago. The
1.9
ppt. decrease in the sales and marketing expense rate in the current period was mainly due to leveraging our media spending which was consistent with last year, while net sales increased 13%.
General and administrative expenses
General and administrative (“G&A”) expenses
increased
$5.9 million
to
$21.3 million
for the three months ended
June 28, 2014
, compared with
$15.4 million
in the same period one year ago, and increased to
9.1%
of net sales, compared with
7.4%
of net sales last year. The
$5.9 million
increase in G&A expenses was primarily due to: (i) a $2.1 million increase in performance-based incentive compensation; (ii) a $1.3 million increase in employee compensation to support business growth initiatives; (iii) $0.8 million of additional depreciation expense resulting from the increase in capital expenditures to support the growth of the business, including our new digital website which was launched in the second quarter of 2014; and (iv) a $1.7 million increase in miscellaneous other expenses. The G&A expense rate increased by
1.7
ppt. in the current period compared with the same period one year ago due to the increase in expenses, partially offset by the 13% increase in net sales.
Research and development expenses
Research and development expenses for the three months ended
June 28, 2014
were
$1.7 million
, or
0.7%
of net sales, compared with
$2.6 million
, or
1.2%
of net sales, for the same period one year ago.
Other income, net
Other income, net was
$0.1 million
for the three months ended
June 28, 2014
, consistent with the comparable period one year ago.
Income tax expense
Income tax expense was
$4.3 million
for the three months ended
June 28, 2014
compared with
$5.3 million
for the same period one year ago. The effective tax rate for the three months ended
June 28, 2014
was
33.7%
, compared with the prior-year period rate of
34.6%
.
Comparison of
Six Months Ended
June 28, 2014
with
Six Months Ended
June 29, 2013
Net sales
Net sales increased
10%
to
$511.2 million
for the
six months ended
June 28, 2014
, compared with
$465.6 million
for the same period one year ago. The net sales increase was primarily driven by sales from
38
net new stores opened in the past 12 months and a
4%
comparable sales increase in our Company-Controlled channel.
The
$45.5 million
net sales increase compared with the same period one year ago was comprised of the following: (i) a $31.1 million sales increase resulting from net new store openings; and (ii) a $17.3 million increase in sales from our Company-Controlled comparable retail stores; partially offset by (iii) a $2.3 million decrease in Wholesale/Other channel sales; and (iv) a $0.6 million decrease in Direct and E-Commerce sales. Company-Controlled mattress units decreased 1% compared to the prior-year period. Average revenue per mattress unit in our Company-Controlled channel increased by
12%
. The
12%
increase reflects our highly effective selling process and the strong sales of our innovative new products, including our new FlexFit adjustable bases.
Gross profit
Gross profit of
$313.8 million
increased
by
$19.0 million
, or
6%
, compared with the same period one year ago.The gross profit rate decreased to
61.4%
of net sales for the
six months ended
June 28, 2014
, compared with
63.3%
for the prior-year period. The
1.9
ppt. decrease in the gross profit rate was primarily due to: (i) a higher sales mix of lower-margin rate products, including FlexFit adjustable bases; (ii) increased sales return and exchange costs resulting from the second quarter 2013 change in our 30-night trial policy to 100 nights; and (iii) certain supply chain inefficiencies related to the strong demand for our new products. In addition, our gross profit rate can fluctuate from quarter to quarter due to a variety of other factors, including manufacturing and logistics efficiencies, warranty expenses and performance-based incentive compensation.
Sales and marketing expenses
The sales and marketing expense rate for the
six months ended
June 28, 2014
increased
to
45.3%
of net sales, compared with
44.7%
of net sales, for the same period one year ago. The 0.6 ppt. increase in the sales and marketing expense rate in the current period was primarily due to an increase in fixed selling expenses related to new, repositioned and remodeled stores, partially offset by leveraging our media spending which increased 2% compared with the prior year period, while net sales increased 10%.
General and administrative expenses
General and administrative (“G&A”) expenses
increased
$9.0 million
to
$40.2 million
for the
six months ended
June 28, 2014
, compared with
$31.2 million
in the prior year, and increased to
7.9%
of net sales, compared with
6.7%
of net sales one year ago. The
$9.0 million
increase in G&A expenses was primarily due to: (i) a $4.6 million increase in performance-based incentive compensation; (ii) a $1.5 million increase in employee compensation resulting from headcount increases to support business growth initiatives; (iii) $1.1 million of additional depreciation expense resulting from the increase in capital expenditures to support the growth of the business, including our new digital website which was launched in the second quarter of 2014; and (iv) a $1.8 million net increase in miscellaneous other expenses. The G&A expense rate increased by 1.2 ppt. in the current period compared with the same period one year ago due to the increase in expenses.
Research and development expenses
Research and development ("R&D") expenses for the
six months ended
June 28, 2014
were
$3.4 million
, or
0.7%
of net sales, compared with
$5.1 million
, or
1.1%
of net sales, for the same period one year ago.
Other income, net
Other income, net was
$0.2 million
for the
six months ended
June 28, 2014
, consistent with the comparable period one year ago.
Income tax expense
Income tax expense was
$13.2 million
for the
six months ended
June 28, 2014
, compared with
$17.1 million
for the same period one year ago. The effective tax rate for the
six months ended
June 28, 2014
increased to
34.2%
compared with
33.9%
for the prior-year period. The 2013 effective tax rate was favorably impacted by the retroactive reinstatement of the 2012 R&D tax credit in the first quarter of 2013. In addition, the R&D tax credit expired at the end of 2013 and has not yet been extended by Congress. As a result, our 2014 effective tax rate does not include any benefit from the R&D tax credit.
Liquidity and Capital Resources
As of
June 28, 2014
, cash, cash equivalents and marketable debt securities totaled
$120.8 million
compared with
$145.0 million
as of
December 28, 2013
. The
$24.3 million
decrease
was primarily due to
$49.6 million
of cash provided by operating activities which was more than offset by
$39.8 million
of cash used to purchase property and equipment,
$21.5 million
of cash used to repurchase our common stock (
$20.0 million
under our Board-approved share repurchase program and
$1.4 million
in connection with the vesting of employee restricted stock grants), and a
$6.2 million
decrease in short-term borrowings. The
$83.7 million
of marketable debt securities held as of
June 28, 2014
are all highly liquid and include U.S. government and agency securities, corporate debt securities and municipal bonds.
The following table summarizes our cash flows (dollars in millions). Amounts may not add due to rounding differences:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
June 28,
2014
|
|
June 29,
2013
|
Total cash provided by (used in):
|
|
|
|
|
Operating activities
|
|
$
|
49.6
|
|
|
$
|
36.1
|
|
Investing activities
|
|
(45.1
|
)
|
|
(48.5
|
)
|
Financing activities
|
|
(25.6
|
)
|
|
(17.3
|
)
|
Net decrease in cash and cash equivalents
|
|
$
|
(21.1
|
)
|
|
$
|
(29.7
|
)
|
Cash provided by operating activities for the
six months ended
June 28, 2014
was
$49.6 million
compared with
$36.1 million
for the
six months ended
June 29, 2013
. The
$13.4 million
year-over-year
increase
in cash from operating activities was comprised of a
$20.1 million
increase
in cash from changes in operating assets and liabilities and a
$1.3 million
increase
in adjustments to reconcile net income to net cash provided by operating activities, partially offset by a
$7.9 million
decrease
in net income for the
six months ended
June 28, 2014
compared with the same period one year ago.
Net cash
used in
investing activities was
$45.1 million
for the
six months ended
June 28, 2014
, compared with
$48.5 million
for the same period one year ago. Investing activities for the current-year period included
$39.8 million
of property and equipment purchases, compared with
$37.1 million
for the same period one year ago. On a net basis, we increased our investments in marketable debt securities by
$4.9 million
during the
six months ended
June 28, 2014
compared with a net reduction of
$7.0 million
during the comparable period one year ago.
Net cash
used in
financing activities was
$25.6 million
for the
six months ended
June 28, 2014
, compared with
$17.3 million
for the same period one year ago. During the
six months ended
June 28, 2014
, we repurchased
$21.5 million
of our stock (
$20.0 million
under our Board-approved share repurchase program and
$1.4 million
in connection with the vesting of employee restricted stock grants) compared with
$22.0 million
(
$20.0 million
under our Board-approved share repurchase program and
$2.0 million
in connection with the vesting of employee restricted stock grants) during the same period one year ago. Changes in book overdrafts are included in the net change in short-term borrowings. Financing activities for both periods reflect the vesting of employee restricted stock awards and exercise of employee stock options along with the associated excess tax benefits.
Under the Board-approved $290 million share repurchase program, we repurchased
1,098,486
shares at a cost of
$20.0 million
(an average of
$18.23
per share) during the
six months ended
June 28, 2014
. During the
six months ended
June 29, 2013
, we repurchased
930,369
shares at a cost of
$20.0 million
(an average of
$21.52
per share). As of
June 28, 2014
, the remaining authorization under our Board-approved share repurchase program was
$116.7 million
. There is no expiration date governing the period over which we can repurchase shares.
Our $20.0 million Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as amended, is an unsecured revolving credit facility that matures August 31, 2016. The Credit Agreement contains an accordion feature that allows us to increase the amount of the line from $20.0 million to up to $50.0 million in total availability, subject to lender approval. As of
June 28, 2014
we were in compliance with all financial covenants.
Our business model, which can operate with minimal working capital, does not require additional capital from external sources to fund operations or organic growth. The
$120.8 million
of cash, cash equivalents and marketable debt securities, cash generated from ongoing operations, and cash available under our revolving credit facility are expected to be adequate to maintain operations and fund anticipated expansion and strategic initiatives for the foreseeable future.
We have an agreement with Synchrony Bank (formerly GE Capital Retail Bank) to offer qualified customers revolving credit arrangements to finance purchases from us (“Synchrony Agreement”). The Synchrony Agreement contains certain financial covenants, including a minimum tangible net worth requirement and a minimum working capital requirement. As of
June 28, 2014
we were in compliance with all financial covenants.
Under the terms of the Synchrony Agreement, Synchrony Bank sets the minimum acceptable credit ratings, the interest rates, fees and all other terms and conditions of the customer accounts, including collection policies and procedures, and is the owner of the accounts.
Non-GAAP Data Reconciliations
Reported to Adjusted Statements of Operations Data (in thousands, except per share amounts)
In addition to disclosing results that are determined in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), we also disclose non-GAAP results that exclude certain significant charges or credits. 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 believe that the disclosure of results excluding certain significant charges or credits provides additional insights into underlying business performance and facilitates year-over-year comparisons. Below are our reconciliations of our non-GAAP financial measures to the most comparable GAAP financial measures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
June 28, 2014
|
|
June 29, 2013
|
|
As Reported
|
|
As Reported
|
|
CEO
Transition
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 (benefit)
(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 Chief Executive Officer 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 performance 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
(
$0.3 million
, net of income tax) resulting from performance-based stock award adjustments.
(2)
Reflects effective income tax rate, before discrete adjustments, of 34.4% for 2013.
GAAP - generally accepted accounting principles
Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)
We define earnings before interest, taxes, depreciation and amortization as net income plus: income tax expense, interest expense, depreciation and amortization, stock-based compensation and asset impairments (“Adjusted EBITDA”). 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.
Our Adjusted EBITDA calculations are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Trailing-Twelve
Months Ended
|
|
|
June 28,
2014
|
|
June 29,
2013
|
|
June 28,
2014
|
|
June 29,
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
Our “free cash flow” data is considered a non-GAAP financial measure and is not in accordance with, or preferable to, “net cash provided by operating activities,” or GAAP financial data. However, we are providing this information as we believe it facilitates analysis for investors and financial analysts.
The following table summarizes our free cash flow calculations (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Trailing-Twelve
Months Ended
|
|
|
June 28,
2014
|
|
June 29,
2013
|
|
June 28,
2014
|
|
June 29,
2013
|
Net cash provided by operating activities
|
|
$
|
49,578
|
|
|
$
|
36,143
|
|
|
$
|
101,540
|
|
|
$
|
93,536
|
|
Subtract: Purchases of property and equipment
|
|
39,766
|
|
|
37,096
|
|
|
79,481
|
|
|
66,190
|
|
Free cash flow
|
|
$
|
9,812
|
|
|
$
|
(953
|
)
|
|
$
|
22,059
|
|
|
$
|
27,346
|
|
Off-Balance-Sheet Arrangements and Contractual Obligations
As of
June 28, 2014
, we were not involved in any unconsolidated special purpose entity transactions. Other than our operating leases, we do not have any off-balance-sheet financing. There were no outstanding letters of credit at
June 28, 2014
.
There has been no material change in our contractual obligations since the end of
fiscal 2013
. See Note 6,
Credit Agreement
,
of the Notes to our Condensed Consolidated Financial Statements for information regarding our credit agreement. See our Annual Report on Form 10-K for the fiscal year ended
December 28, 2013
for additional information regarding our other contractual obligations.
Critical Accounting Policies
We discuss our critical accounting policies and estimates in
Management’s Discussion and Analysis of Financial Condition and Results of Operations
in our Annual Report on Form 10-K for the fiscal year ended
December 28, 2013
. There were no significant changes in our critical accounting policies since the end of
fiscal 2013
.