Select Comfort Announces First Quarter 2016 Results

  • Reported net sales of $353 million and EPS of $0.27
  • Generated $52 million in operating free cash flow and
    repurchased $50 million of the company’s common stock
  • Reiterates full-year 2016 EPS outlook of $1.25 to $1.45 per share

MINNEAPOLIS–(BUSINESS WIRE)–Select Comfort Corporation (NASDAQ: SCSS) today reported first quarter
2016 results for the period ended April 2, 2016.

“We are pleased with our first quarter results, which were on track with
our expectations. We have completed our ERP system implementation – the
last piece of our transformation – and have returned to normalized
customer service levels,” said Shelly Ibach, president and chief
executive officer of Select Comfort. “The system is already improving
our customer experience and we expect to realize operating efficiencies
in the back half of this year. Our competitive advantages are stronger
than they have ever been and we are now well positioned for accelerated
long-term earnings growth.”

First Quarter Overview

  • Net sales increased 1% to $353 million, including a 4%
    comparable sales decline
  • Earnings per diluted share were $0.27, compared with $0.54 in
    the prior year’s quarter, including an estimated $0.25 impact from
    lost sales and inefficiencies related to our ERP implementation
  • Cash provided by operations of $64 million, up from $49 million
    in the prior year, funded the repurchase of $50 million of company
    stock (2.6 million shares) and $12 million of capital spending during
    the quarter

Financial Outlook
The company reiterates its outlook for
2016 earnings per diluted share of $1.25 to $1.45, compared with
full-year 2015 earnings per diluted share of $0.97. The outlook assumes
low-teen sales growth for the full year, with low single-digit growth in
the first half of the year. Our 2016 outlook includes an estimated $0.30
earnings per share reduction related to the ERP transition (primarily in
the first quarter), including $40 to $50 million of estimated sales
impact. The outlook assumes a 10% increase in store count in 2016 and
anticipates 2016 capital expenditures will be approximately $70 million.
The outlook does not contemplate a worsening consumer spending
environment.

Conference Call Information
Management will host its
regularly scheduled conference call to discuss the company’s results at
5 p.m. EDT (4 p.m. CDT; 2 p.m. PDT) today. To listen to the call, please
dial 800-593-9959 (international participants dial 517-308-9340) and
reference the passcode “Sleep.” To access the webcast, please visit the
investor relations area of the Sleep Number website at http://www.sleepnumber.com/eng/aboutus/InvestorRelations.cfm.
The webcast replay will remain available for approximately 60 days.

Investor Presentation
The company has posted its updated
Investor Presentation on the investor relations area of the Sleep Number
website at http://www.sleepnumber.com/eng/aboutus/InvestorRelations.cfm.

About Select Comfort Corporation
Nearly 30 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” in 2015 by J.D. Power. As the
pioneer in biometric sleep monitoring and adjustability, Sleep Number is
proving the connection between quality sleep and health and wellbeing.
Dedicated to individualizing sleep experiences, the company’s more than
3,400 employees are improving lives with innovative sleep solutions. To
find better quality sleep visit one of our more than 490 U.S. Sleep
Number® stores or SleepNumber.com.

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 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; 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; risks of disruption in the operation of
either of our two primary manufacturing facilities; increasing
government regulations, which have added or will 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
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
April 2, % of April 4, % of
2016 Net Sales 2015 Net Sales
 
Net sales $ 352,980 100.0 % $ 349,809 100.0 %
Cost of sales   143,906   40.8 %   133,976 38.3 %
Gross profit   209,074   59.2 %   215,833 61.7 %
 
Operating expenses:
Sales and marketing 150,668 42.7 % 140,503 40.2 %
General and administrative 30,906 8.8 % 28,254 8.1 %
Research and development   7,602   2.2 %   3,351 1.0 %
Total operating expenses   189,176   53.6 %   172,108 49.2 %
Operating income 19,898 5.6 % 43,725 12.5 %
Other (expense) income, net   (97 ) 0.0 %   153 0.0 %
Income before income taxes 19,801 5.6 % 43,878 12.5 %
Income tax expense   6,832   1.9 %   15,079 4.3 %
Net income $ 12,969   3.7 % $ 28,799 8.2 %
 
Net income per share – basic $ 0.27   $ 0.55
 
Net income per share – diluted $ 0.27   $ 0.54
 
 

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding 48,100 52,346
Dilutive effect of stock-based awards   745     980
Diluted weighted-average shares outstanding   48,845     53,326
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share amounts)
subject to reclassification
      (unaudited)  
April 2, January 2,
2016 2016
Assets
Current assets:
Cash and cash equivalents $ 29,520 $ 20,994
Marketable debt securities – current 6,567

Accounts receivable, net of allowance for doubtful accounts of
$1,115 and $1,039, respectively

20,186 29,002
Inventories 80,967 86,600
Income taxes receivable 15,284
Prepaid expenses 12,019 10,207
Deferred income taxes 15,521 15,535
Other current assets   14,116   13,737  
Total current assets 172,329 197,926
 
Non-current assets:
Marketable debt securities – non-current 8,553
Property and equipment, net 203,500 204,376
Goodwill and intangible assets, net 82,711 83,344
Other assets   22,463   19,197  
Total assets $ 481,003 $ 513,396  
 
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable $ 96,608 $ 103,941
Customer prepayments 30,936 51,473
Accrued sales returns 22,910 20,562
Compensation and benefits 26,345 15,670
Taxes and withholding 19,294 9,856
Other current liabilities   24,124   23,447  
Total current liabilities 220,217 224,949
 
Non-current liabilities:
Warranty liabilities 4,907 4,942
Deferred income taxes 14,116 12,499
Other long-term liabilities   54,579   48,667  
Total non-current liabilities   73,602   66,108  
Total liabilities 293,819 291,057
 
Shareholders’ equity:

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

Common stock, $0.01 par value; 142,500 shares authorized, 46,686
and 49,402 shares issued and outstanding, respectively

467 494
Additional paid-in capital
Retained earnings 186,717 221,859
Accumulated other comprehensive loss     (14 )
Total shareholders’ equity   187,184   222,339  
Total liabilities and shareholders’ equity $ 481,003 $ 513,396  
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited – in thousands)
subject to reclassification
           
Three Months Ended
April 2, April 4,
2016 2015
 
Cash flows from operating activities:
Net income $ 12,969 $ 28,799

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

Depreciation and amortization 13,854 10,783
Stock-based compensation 3,766 2,782
Net loss on disposals and impairments of assets 1 177
Excess tax benefits from stock-based compensation (26 ) (858 )
Deferred income taxes 1,622 (3,415 )
Changes in operating assets and liabilities:
Accounts receivable 8,816 1,780
Inventories 5,633 (2,469 )
Income taxes 16,558 15,453
Prepaid expenses and other assets (1,272 ) (1,661 )
Accounts payable (495 ) 7,458
Customer prepayments (20,537 ) (2,591 )
Accrued compensation and benefits 10,677 (8,977 )
Other taxes and withholding 7,493 (58 )
Warranty liabilities (261 ) 900
Other accruals and liabilities   5,183     761  
Net cash provided by operating activities   63,981     48,864  
 
Cash flows from investing activities:
Purchases of property and equipment (12,289 ) (17,796 )
Proceeds from sales of property and equipment 14 33
Investments in marketable debt securities (18,195 )
Proceeds from marketable debt securities   15,090     16,244  
Net cash provided by (used in) investing activities   2,815     (19,714 )
 
Cash flows from financing activities:
Net decrease in short-term borrowings (6,661 ) (16,530 )
Repurchases of common stock (51,240 ) (20,475 )
Proceeds from issuance of common stock 6 1,353
Excess tax benefits from stock-based compensation 26 858
Debt issuance costs   (401 )    
Net cash used in financing activities   (58,270 )   (34,794 )
 
Net increase (decrease) in cash and cash equivalents 8,526 (5,644 )
Cash and cash equivalents, at beginning of period   20,994     51,995  
Cash and cash equivalents, at end of period $ 29,520   $ 46,351  
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)
       
 
Three Months Ended
April 2, April 4,
2016 2015
 
Percent of sales:
Retail 91.0 % 91.6 %
Direct and E-Commerce 6.3 % 5.9 %
Wholesale/other   2.7 %   2.5 %
Total   100.0 %   100.0 %
 
Sales change rates:
Retail comparable-store sales (4 %) 22 %
Direct and E-Commerce   8 %   17 %
Company-Controlled comparable sales change (4 %) 22 %
Net opened/closed stores   5 %   6 %
Total Company-Controlled Channel 1 % 28 %
Wholesale/other   10 %   (19 %)
Total   1 %   27 %
 
Stores open:
Beginning of period 488 463
Opened 14 8
Closed   (5 )   (8 )
End of period   497     463  
 
Other metrics:
Average sales per store ($ in 000’s) 1, 3 $ 2,363 $ 2,424
Average sales per square foot 1, 3 $ 960 $ 1,038
Stores > $1 million net sales 1, 3 98 % 99 %
Stores > $2 million net sales 1, 3 61 % 63 %
Average revenue per mattress unit 2 $ 3,978 $ 3,923
 
 

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.

3

Fiscal 2014 included 53 weeks, as compared to 52 weeks in fiscal
2016 and 2015. The additional week in 2014 was in the fiscal fourth
quarter. Company-Controlled comparable sales metrics have been
adjusted to remove the estimated impact of the additional week on
those metrics.
 

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
April 2,   April 4, April 2,   April 4,
2016 2015 2016 2015
 
Net income $ 12,969 $ 28,799 $ 34,689 $ 79,781
Income tax expense 6,832 15,079 16,664 40,301
Interest expense 106 10 256 53
Depreciation and amortization 13,757 10,544 50,129 40,426
Stock-based compensation 3,766 2,782 11,274 9,688
Asset impairments   15   209   67   703
Adjusted EBITDA $ 37,445 $ 57,423 $ 113,079 $ 170,952
 
 
Free Cash Flow
(in thousands)
 
Three Months Ended Trailing-Twelve Months Ended
April 2, April 4, April 2, April 4,
2016 2015 2016 2015
 
Net cash provided by operating activities $ 63,981 $ 48,864 $ 123,059 $ 154,468
Subtract: Purchases of property and equipment   12,289   17,796   80,079   77,730
Free cash flow $ 51,692 $ 31,068 $ 42,980 $ 76,738
 
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
April 2,   April 4,
2016 2015

Net operating profit after taxes (NOPAT)

Operating income $ 51,270 $ 119,669
Add: Rent expense 1 63,204 59,592
Add: Interest income 340 466
Less: Depreciation on capitalized operating leases 2 (16,501 ) (14,761 )
Less: Income taxes 3   (31,992 )   (55,697 )
NOPAT $ 66,321 $ 109,269
 

Average invested capital

Total equity $ 187,184 $ 270,254
Less: Cash greater than target 4 (36,125 )
Add: Long-term debt 5
Add: Capitalized operating lease obligations 6   505,632     476,736  
Total invested capital at end of period $ 692,816 $ 710,865
 
Average invested capital 7 $ 729,234 $ 661,708
 
Return on invested capital (ROIC) 8   9.1 %   16.5 %
 
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 32.5% and 33.8% for 2016 and 2015, 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.

Contacts

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

Susan Eich, 763-551-6934
Susan.Eich@selectcomfort.com