SCSS Sleep Number Corporation Com USD0.01

• Reported net sales increase of 3% to $285 million
• While demand exceeded expectations, inventory shortage shifted a week of deliveries ($25 million) to third quarter
• Year-to-date net sales increased 8% and EPS 83%
• Generated record operating cash flow of $89 million for the first six months of the year
• Reiterates full-year 2017 EPS outlook of $1.25 to $1.50 per share

Select Comfort Corporation (NASDAQ: SCSS) today reported second quarter 2017 results for the period ended July 1, 2017.

“We are pleased with traffic and sales in the second quarter, including strong demand for our revolutionary new innovation, the Sleep Number 360™ smart bed,” said Shelly Ibach, president and chief executive officer of Select Comfort. “As we worked through an inventory shortage from one of our new suppliers during the quarter, about a week’s worth of deliveries shifted into the third quarter. Our underlying demand trends in the second quarter exceeded our expectations. With our growth initiatives delivering consistent traffic and sales performance, we are reiterating our full-year EPS outlook.”

Second Quarter Review

• Net sales increased 3% to $285 million. Second quarter net sales reflected a $25 million net sales shift to the third quarter as a result of an inventory shortage from one of our suppliers that is now resolved
• Gross profit increased 3% to $177 million, with our gross margin rate of 62.0% up 10 basis points versus the prior year
• Loss per diluted share of $0.02, compared with earnings per share of $0.03 in the prior year’s quarter; second quarter earnings per share included an estimated 12 cent per share negative impact related to the shift of deliveries to the third quarter

Cash Flows and Balance Sheet Review

• Generated $89 million in net cash from operating activities for the first six months of 2017, compared with $47 million for the same period last year
• Invested $27 million in capital expenditures and returned $75 million of cash to shareholders through share repurchases during the first six months of 2017 compared with $24 million and $70 million, respectively, for the same period last year
• Ended the quarter with $14 million of borrowings against the $153 million revolving credit facility, as planned
• Return on invested capital (ROIC) was 13.6% for the trailing-twelve month period, well above our cost of capital

Financial OutlookThe company reiterates its outlook for 2017 earnings per diluted share of $1.25 to $1.50. The outlook continues to include an estimated $0.15 to $0.22 EPS impact from incremental costs related to the launch of the Sleep Number 360™ smart bed line and the evolution of our supply chain. The outlook assumes high single-digit sales growth, including 4 to 6 percentage points from net new store openings and low single-digit comp store growth. The company anticipates 2017 capital expenditures to be approximately $55 million.

Conference Call InformationManagement 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 CorporationThirty years ago, Sleep Number transformed the mattress industry with the idea that ‘one size does not fit all’ when it comes to sleep. Today, the company is the leader in sleep innovation and ranked “Highest in Customer Satisfaction with Mattresses” by J.D. Power in 2015 and 2016. As the pioneer in biometric sleep tracking and adjustability, Sleep Number is proving the connection between quality sleep and health and wellbeing. Dedicated to individualizing sleep experiences, the company’s 3,800 employees are improving lives with innovative sleep solutions. To find better quality sleep visit one of the more than 540 Sleep Number® stores located in 49 states or SleepNumber.com.

Forward-looking StatementsStatements used in this news release relating to future plans, events, financial results or performance are forward-looking statements subject to certain risks and uncertainties including, among others, such factors as current and future general and industry economic trends and consumer confidence; the effectiveness of our marketing messages; the efficiency of our advertising and promotional efforts; our ability to execute our company-controlled distribution strategy; our ability to achieve and maintain acceptable levels of product and service quality, and acceptable product return and warranty claims rates; our ability to continue to improve and expand our product line; consumer acceptance of our products, product quality, innovation and brand image; industry competition, the emergence of additional competitive products, and the adequacy of our intellectual property rights to protect our products and brand from competitive or infringing activities; the potential for claims that our products, processes or trademarks infringe the intellectual property rights of others; availability of attractive and cost-effective consumer credit options; pending and unforeseen litigation and the potential for adverse publicity associated with litigation; our “just-in-time” manufacturing processes with minimal levels of inventory, which may leave us vulnerable to shortages in supply; our dependence on significant suppliers and our ability to maintain relationships with key suppliers, including several sole-source suppliers; the vulnerability of key suppliers to recessionary pressures, labor negotiations, liquidity concerns or other factors; rising commodity costs and other inflationary pressures; risks inherent in global sourcing activities, including the potential for shortages in supply of key components; risks of disruption in the operation of either of our two primary manufacturing facilities; increasing government regulations, which have added or may add cost pressures and process changes to ensure compliance; the adequacy of our management information systems to meet the evolving needs of our business and to protect sensitive data from potential cyber threats; the costs, distractions and potential disruptions to our business related to upgrading our management information systems; our ability to attract, retain and motivate qualified management, executive and other key employees, including qualified retail sales professionals and managers; and uncertainties arising from global events, such as terrorist attacks, political unrest or a pandemic outbreak, or the threat of such events. Additional information concerning these and other risks and uncertainties is contained in the company’s filings with the Securities and Exchange Commission (SEC), including the Annual Report on Form 10-K, and other periodic reports filed with the SEC. The company has no obligation to publicly update or revise any of the forward-looking statements in this news release.

  SELECT COMFORT CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (unaudited – in thousands, except per share amounts)                   Three Months Ended July 1, % of July 2, % of 2017 Net Sales   2016 Net Sales   Net sales $ 284,673 100.0 % $ 276,878 100.0 % Cost of sales   108,054   38.0 %   105,617   38.1 % Gross profit   176,619   62.0 %   171,261   61.9 % Operating expenses: Sales and marketing 144,498 50.8 % 134,785 48.7 % General and administrative 28,819 10.1 % 27,018 9.8 % Research and development   6,363   2.2 %   7,062   2.6 % Total operating expenses   179,680   63.1 %   168,865   61.0 % Operating (loss) income (3,061 ) (1.1 %) 2,396 0.9 % Other expense, net   (282 ) (0.1 %)   (229 ) (0.1 %) (Loss) income before income taxes (3,343 ) (1.2 %) 2,167 0.8 % Income tax (benefit) expense   (2,565 ) (0.9 %)   751   0.3 % Net (loss) income $ (778 ) (0.3 %) $ 1,416   0.5 %   Net (loss) income per share – basic $ (0.02 ) $ 0.03     Net (loss) income per share – diluted $ (0.02 ) $ 0.03      

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding 41,716 46,394 Dilutive effect of stock-based awards 1   -     650   Diluted weighted-average shares outstanding 1   41,716     47,044  

 

1     For the three months ended July 1, 2017, potentially dilutive stock-based awards have been excluded from the calculation of diluted weighted-average shares outstanding, as their inclusion would have had an anti-dilutive effect on our net loss per diluted share.     SELECT COMFORT CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (unaudited – in thousands, except per share amounts)                   Six Months Ended July 1, % of July 2, % of 2017     Net Sales     2016     Net Sales   Net sales $ 678,572 100.0 % $ 629,858 100.0 % Cost of sales   255,494   37.7 %   249,523   39.6 % Gross profit   423,078   62.3 %   380,335   60.4 % Operating expenses: Sales and marketing 313,764 46.2 % 285,453 45.3 % General and administrative 62,588 9.2 % 57,924 9.2 % Research and development   13,959   2.1 %   14,664   2.3 % Total operating expenses   390,311   57.5 %   358,041   56.8 % Operating income 32,767 4.8 % 22,294 3.5 % Other expense, net   (420 ) (0.1 %)   (326 ) (0.1 %) Income before income taxes 32,347 4.8 % 21,968 3.5 % Income tax expense   8,664   1.3 %   7,583   1.2 % Net income $ 23,683   3.5 % $ 14,385   2.3 %   Net income per share – basic $ 0.56   $ 0.30     Net income per share – diluted $ 0.55   $ 0.30      

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding 42,233 47,247 Dilutive effect of stock-based awards   847     698   Diluted weighted-average shares outstanding   43,080     47,945       SELECT COMFORT CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (unaudited – in thousands, except per share amounts) subject to reclassification         July 1, December 31, 2017 2016 Assets Current assets: Cash and cash equivalents $ 2,082 $ 11,609

Accounts receivable, net of allowance for doubtful accounts of $856 and $884, respectively

24,486 19,705 Inventories 69,856 75,026 Income taxes receivable 3,681 - Prepaid expenses 10,686 8,705 Other current assets   18,397   23,282 Total current assets 129,188 138,327   Non-current assets: Property and equipment, net 205,621 208,367 Goodwill and intangible assets, net 78,678 80,817 Deferred income taxes - 4,667 Other non-current assets   27,243   24,988 Total assets $ 440,730 $ 457,166   Liabilities and Shareholders’ Equity Current liabilities: Borrowings under revolving credit facility $ 13,950 $ - Accounts payable 105,593 105,375 Customer prepayments 45,725 26,207 Accrued sales returns 12,602 15,222 Compensation and benefits 29,051 19,455 Taxes and withholding 6,547 23,430 Other current liabilities   39,195   35,628 Total current liabilities 252,663 225,317   Non-current liabilities: Deferred income taxes 307 - Other non-current liabilities   73,321   71,529

Total liabilities

326,291 296,846   Shareholders’ equity:

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

- -

Common stock, $0.01 par value; 142,500 shares authorized, 41,066 and 43,569 shares issued and outstanding, respectively

411 436 Additional paid-in capital - - Retained earnings   114,028   159,884 Total shareholders’ equity   114,439   160,320 Total liabilities and shareholders’ equity $ 440,730 $ 457,166     SELECT COMFORT CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited - in thousands) subject to reclassification         Six Months Ended July 1, July 2, 2017 2016   Cash flows from operating activities: Net income $ 23,683 $ 14,385

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

Depreciation and amortization 31,177 27,960 Stock-based compensation 7,876 7,606 Net loss on disposals and impairments of assets 2 7 Excess tax benefits from stock-based compensation - (472 ) Deferred income taxes 4,974 985 Changes in operating assets and liabilities: Accounts receivable (4,781 ) 5,489 Inventories 5,170 12,904 Income taxes (14,532 ) 15,324 Prepaid expenses and other assets 2,110 (6,838 ) Accounts payable 11,858 (15,282 ) Customer prepayments 19,518 (26,885 ) Accrued compensation and benefits 9,834 9,249 Other taxes and withholding (6,032 ) 1,654 Other accruals and liabilities   (2,050 )   1,034   Net cash provided by operating activities   88,807     47,120     Cash flows from investing activities: Purchases of property and equipment (27,132 ) (23,764 ) Proceeds from sales of property and equipment - 67 Proceeds from marketable debt securities - 15,090 Decrease in restricted cash   3,150     -   Net cash used in investing activities   (23,982 )   (8,607 )   Cash flows from financing activities: Net increase in short-term borrowings 3,098 12,574 Repurchases of common stock (80,094 ) (71,366 ) Proceeds from issuance of common stock 2,654 1,623 Excess tax benefits from stock-based compensation - 472 Debt issuance costs   (10 )   (409 ) Net cash used in financing activities   (74,352 )   (57,106 )   Net decrease in cash and cash equivalents (9,527 ) (18,593 ) Cash and cash equivalents, at beginning of period   11,609     20,994   Cash and cash equivalents, at end of period $ 2,082   $ 2,401       SELECT COMFORT CORPORATION AND SUBSIDIARIES Supplemental Financial Information (unaudited)                   Three Months Ended Six Months Ended July 1, July 2, July 1, July 2, 2017 2016 2017 2016   Percent of sales: Retail 90.4 % 90.6 % 91.0 % 90.8 % Online and phone 7.3 % 6.0 % 7.0 % 6.2 % Wholesale/other   2.3 %   3.4 %   2.0 %   3.0 % Total   100.0 %   100.0 %   100.0 %   100.0 %   Sales change rates: Retail comparable-store sales (6 %) (7 %) (1 %) (5 %) Online and phone   26 %   (2 %)   22 %   3 % Company-Controlled comparable sales change (4 %) (6 %) 0 % (5 %) Net opened/closed stores   8 %   6 %   9 %   5 % Total Company-Controlled Channel 4 % 0 % 9 % 0 % Wholesale/other   (31 %)   21 %   (27 %)   15 % Total   3 %   1 %   8 %   1 %   Stores open: Beginning of period 546 497 540 488 Opened 8 19 24 33 Closed   (5 )   (10 )   (15 )   (15 ) End of period   549     506     549     506     Other metrics: Average sales per store ($ in 000's) 1 $ 2,335 $ 2,333 Average sales per square foot 1 $ 906 $ 937 Stores > $1 million net sales 1 97 % 98 % Stores > $2 million net sales 1 58 % 59 % Average revenue per mattress unit 2 $ 4,306 $ 4,206 $ 4,155 $ 4,074    

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 July 1, July 2, July 1, July 2, 2017 2016 2017 2016   Net (loss) income $ (778 ) $ 1,416 $ 60,715 $ 25,067 Income tax (benefit) expense (2,565 ) 751 25,597 11,691 Interest expense 288 251 924 497 Depreciation and amortization 14,918 14,053 60,170 53,261 Stock-based compensation 4,172 3,840 12,231 12,068 Asset impairments 2 14 47 66         Adjusted EBITDA $ 16,037   $ 20,325   $ 159,684 $ 102,650   Free Cash Flow (in thousands)   Three Months Ended Trailing-Twelve Months Ended July 1, July 2, July 1, July 2, 2017 2016 2017 2016   Net cash provided by (used in) operating activities $ 1,938 $ (16,861 ) $ 193,332 $ 110,008 Subtract: Purchases of property and equipment 13,921 11,475 61,220 70,412         Free cash flow $ (11,983 ) $ (28,336 ) $ 132,112 $ 39,596   Note -     Our Adjusted EBITDA calculation and our "free cash flow" data are considered non-GAAP financial measures and are not in accordance with, or preferable to, "as reported," or GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the Company's financial performance by investors and financial analysts.   GAAP - generally accepted accounting principles in the U.S.    

SELECT COMFORT CORPORATION AND SUBSIDIARIES

Calculation of Return on Invested Capital (ROIC)

(in thousands)

   

ROIC is a financial measure we use to determine how efficiently we deploy our capital. It quantifies the return we earn on our invested capital. Management believes ROIC is also a useful metric for investors and financial analysts. We compute ROIC as outlined below. Our definition and calculation of ROIC may not be comparable to similarly titled definitions and calculations used by other companies. The tables below reconcile net operating profit after taxes (NOPAT) and total invested capital, which are non-GAAP financial measures, to the comparable GAAP financial measures:

        Trailing-Twelve Months Ended July 1, July 2, 2017 2016

Net operating profit after taxes (NOPAT)

Operating income $ 87,124 $ 37,035 Add: Rent expense 1 70,815 64,232 Add: Interest income 112 219 Less: Depreciation on capitalized operating leases 2 (17,956 ) (16,749 ) Less: Income taxes 3   (46,095 )   (27,055 ) NOPAT $ 94,000 $ 57,682  

Average invested capital

Total equity $ 114,439 $ 173,807 Less: Cash greater than target 4 - - Add: Long-term debt 5 - - Add: Capitalized operating lease obligations 6   566,520     513,856   Total invested capital at end of period $ 680,959 $ 687,663   Average invested capital 7 $ 690,524 $ 724,593  

Return on invested capital (ROIC) 8

  13.6 %   8.0 %   1     Rent expense is added back to operating income to show the impact of owning versus leasing the related assets.  

2

Depreciation is based on the average of the last five fiscal quarters' ending capitalized operating lease obligations (see note 6) for the respective reporting periods with an assumed thirty-year useful life. This is subtracted from operating income to illustrate the impact of owning versus leasing the related assets.

 

3

Reflects annual effective income tax rates, before discrete adjustments, of 32.9% and 31.9% for 2017 and 2016, respectively.

 

4

Cash greater than target is defined as cash, cash equivalents and marketable debt securities less customer prepayments in excess of $100 million.

 

5

Long-term debt includes existing capital lease obligations, if applicable.

 

6

A multiple of eight times annual rent expense is used as an estimate of capitalizing our operating lease obligations. The methodology utilized aligns with the methodology of a nationally recognized credit rating agency.

 

7

Average invested capital represents the average of the last five fiscal quarters' ending invested capital balances.

 

8

ROIC equals NOPAT divided by average invested capital.

  Note -     Our ROIC calculation and data are considered non-GAAP financial measures and are not in accordance with, or preferable to, GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the Company's financial performance by investors and financial analysts. GAAP - generally accepted accounting principles in the U.S.  

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Select Comfort CorporationInvestor Contact:Dave Schwantes, 763-551-7498investorrelations@selectcomfort.comorMedia Contact:Susan Eich, 763-551-6934Susan.Eich@selectcomfort.com