Select Comfort Announces Second-quarter 2013 Results

Select Comfort Corporation (NASDAQ: SCSS) today reported second-quarter 2013 results for the period ended June 29, 2013.

Second-quarter Financial Summary
  • Net sales increased 1% to $207 million, compared to $205 million in the second quarter of 2012.
  • Company-controlled comparable sales declined 6% year-over-year.
  • Operating income was $15.1 million, compared with $25.9 million in the second quarter of 2012. As a percentage of net sales, operating income was 7.3% compared to 12.6% in the second quarter of 2012.
  • Earnings per diluted share were $0.18, compared to $0.30 in the second quarter of 2012.
  • During the quarter, the company opened 17 stores and closed 15, ending the quarter with 413 stores.

“During the quarter, we experienced sequential monthly sales improvement and strengthened performance as we re-established our proven media-buying formula,” said Shelly Ibach, president and CEO, Select Comfort. “We also made progress on our top priorities, product innovation and local-market development, as we position the company for short- and long-term growth.”

Ibach continued, “Specifically in June, we launched the Sleep Number DualTemp layer, which solves temperature balancing – one of consumers’ most common sleep issues. This product can be used with any mattress brand, which is bringing new customers into our Sleep Number stores.”

Cash flows from operating activities were $36 million for the first six months of 2013, compared with $43 million in the prior year. Capital expenditures for the first six months of 2013 increased to $37.1 million as compared to $22.5 million in 2012, driven by increased investment in stores, technology and product innovation. During the second quarter, the company repurchased 0.5 million shares of its common stock for a total cost of $10 million. As of the end of the quarter, cash, cash equivalents and marketable-debt securities totaled $140 million, and the company had no borrowings under its revolving credit facility.

Financial OutlookThe company is maintaining its outlook for full-year 2013 GAAP earnings per diluted share of between $1.30 and $1.45. This outlook assumes high-teens growth in total net sales for the remainder of the year, with a net increase in store count from 410 at year-end 2012 to between 435 and 445 by year-end 2013.

The company currently anticipates that 2013 capital expenditures will be $70-$80 million, reflecting continued investment in stores, technology and product innovation. While its first priority for capital deployment is investment in its high-return growth programs, the company currently plans to continue repurchasing shares in 2013 with the objective of maintaining share count at or below current levels.

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 CorporationSelect Comfort Corporation 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, marketer, 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 individualization 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 experience at one of more than 400 Sleep Number stores across the country, online at SleepNumber.com, or via phone at (800) Sleep Number or (800) 753-3768.

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 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 CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited – in thousands, except per share amounts)
             
Three Months Ended
June 29, % of June 30, % of
2013 Net Sales 2012 Net Sales
 
Net sales $ 207,391 100.0 % $ 205,219 100.0 %
Cost of sales   75,993 36.6 %   73,648 35.9 %
Gross profit   131,398 63.4 %   131,571 64.1 %
Operating expenses:
Sales and marketing 98,357 47.4 % 88,240 43.0 %
General and administrative 15,359 7.4 % 16,220 7.9 %
Research and development 2,560 1.2 % 1,256 0.6 %
Asset impairment charges   15 0.0 %   3 0.0 %
Total operating expenses   116,291 56.1 %   105,719 51.5 %
Operating income 15,107 7.3 % 25,852 12.6 %
Other income, net   78 0.0 %   48 0.0 %
Income before income taxes 15,185 7.3 % 25,900 12.6 %
Income tax expense   5,259 2.5 %   8,927 4.3 %
Net income $ 9,926 4.8 % $ 16,973 8.3 %
 
Net income per share – basic $ 0.18 $ 0.30
 
Net income per share – diluted $ 0.18 $ 0.30
 
 
Reconciliation of weighted-average
shares outstanding:
Basic weighted-average shares outstanding 55,029 55,719
Effect of dilutive securities:
Options 539 1,129
Restricted shares   419   546
Diluted weighted-average shares outstanding   55,987   57,394
 
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited - in thousands, except per share amounts)
               
Six Months Ended
June 29, % of June 30, % of
2013 Net Sales 2012 Net Sales
 
Net sales $ 465,628 100.0 % $ 467,602 100.0 %
Cost of sales   170,814   36.7 %   171,732 36.7 %
Gross profit   294,814   63.3 %   295,870 63.3 %
Operating expenses:
Sales and marketing 208,170 44.7 % 194,425 41.6 %
General and administrative 31,540 6.8 % 33,149 7.1 %
Research and development 5,116 1.1 % 2,546 0.5 %
CEO transition (benefit) costs (391 ) (0.1 %) 5,595 1.2 %
Asset impairment charges   45   0.0 %   7 0.0 %
Total operating expenses   244,480   52.5 %   235,722 50.4 %
Operating income 50,334 10.8 % 60,148 12.9 %
Other income, net   169   0.0 %   55 0.0 %
Income before income taxes 50,503 10.8 % 60,203 12.9 %
Income tax expense   17,106   3.7 %   20,813 4.5 %
Net income $ 33,397   7.2 % $ 39,390 8.4 %
 
Net income per share – basic $ 0.61   $ 0.71
 
Net income per share – diluted $ 0.60   $ 0.69
 
 
Reconciliation of weighted-average
shares outstanding:
Basic weighted-average shares outstanding 55,062 55,680
Effect of dilutive securities:
Options 613 1,099
Restricted shares   426     588
Diluted weighted-average shares outstanding   56,101     57,367
 
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share amounts)
subject to reclassification
       
(unaudited)
June 29, December 29,
2013 2012
Assets
Current assets:
Cash and cash equivalents $ 58,189 $ 87,915
Marketable debt securities – current 53,787 51,264

Accounts receivable, net of allowance for doubtful accounts of $459 and $348, respectively
14,385 16,613
Inventories 34,473 35,564
Prepaid expenses 9,052 4,299
Deferred income taxes 5,398 5,401
Other current assets   10,904     9,522
Total current assets 186,188 210,578
 
Non-current assets:
Marketable debt securities – non-current 28,502 38,642
Property and equipment, net 105,539 79,356
Goodwill and intangible assets, net 17,288 2,881
Deferred income taxes 4,470 8,511
Other assets   4,573     2,053
Total assets $ 346,560   $ 342,021
 
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable $ 63,335 $ 67,703
Customer prepayments 12,330 15,194
Compensation and benefits 15,990 21,597
Taxes and withholding 6,134 9,282
Other current liabilities   17,716     19,285
Total current liabilities 115,505 133,061
 
Non-current liabilities:
Warranty liabilities 1,673 1,457
Other long-term liabilities   15,293     13,806
Total non-current liabilities   16,966     15,263
Total liabilities 132,471 148,324
 
Shareholders’ equity:

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

Common stock, $0.01 par value; 142,500 shares authorized, 55,603 and 55,903 shares issued and outstanding, respectively
556 559
Additional paid-in capital 20,966 33,923
Retained earnings 192,592 159,195
Accumulated other comprehensive (loss) income   (25 )   20
Total shareholders’ equity   214,089     193,697
Total liabilities and shareholders’ equity $ 346,560   $ 342,021
 
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited - in thousands)
subject to reclassification
       
Six Months Ended
June 29, June 30,
2013 2012
 
Cash flows from operating activities:
Net income $ 33,397 $ 39,390

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 14,153 9,049
Stock-based compensation 1,992 8,370
Net gain on disposals and impairments of assets (58 ) (12 )
Excess tax benefits from stock-based compensation (2,837 ) (4,120 )
Deferred income taxes 4,072 (2,431 )
Changes in operating assets and liabilities, net of effect of acquisition:
Accounts receivable 2,541 3,055
Inventories 1,769 (2,450 )
Income taxes (3,084 ) 3,614
Prepaid expenses and other assets (3,933 ) (2,474 )
Accounts payable (1,708 ) 202
Customer prepayments (2,857 ) (1,892 )
Accrued compensation and benefits (4,802 ) (9,085 )
Other taxes and withholding (1,156 ) (920 )
Warranty liabilities (571 ) (453 )
Other accruals and liabilities   (775 )   3,390  
Net cash provided by operating activities   36,143     43,233  
 
Cash flows from investing activities:
Purchases of property and equipment (37,096 ) (22,499 )
Proceeds from sales of property and equipment 117 30
Investments in marketable debt securities (16,504 ) (45,351 )
Proceeds from maturities of marketable debt securities 23,463 10,018
Acquisition of business (15,500 ) -
Investment in non-marketable equity securities   (3,000 )   -  
Net cash used in investing activities   (48,520 )   (57,802 )
 
Cash flows from financing activities:
Net decrease in short-term borrowings (4,750 ) (3,349 )
Repurchases of common stock (22,031 ) (14,023 )
Proceeds from issuance of common stock 6,595 1,937
Excess tax benefits from stock-based compensation 2,837 4,120
Debt issuance costs   -     (47 )
Net cash used in financing activities   (17,349 )   (11,362 )
 
Net decrease in cash and cash equivalents (29,726 ) (25,931 )
Cash and cash equivalents, at beginning of period   87,915     116,255  
Cash and cash equivalents, at end of period $ 58,189   $ 90,324  
 
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)
               
Three Months Ended Six Months Ended
June 29, June 30, June 29, June 30,
2013 2012 2013 2012
Percent of sales:
Retail 88.5 % 88.9 % 88.3 % 88.5 %
Direct and E-Commerce 7.6 % 7.5 % 7.1 % 7.8 %
Wholesale/other   3.9 %   3.6 %   4.6 %   3.7 %
Total   100.0 %   100.0 %   100.0 %   100.0 %
 
Sales growth rates:
Retail comparable-store sales (7 %) 27 % (7 %) 32 %
Direct and E-Commerce   4 %   8 %   (9 %)   13 %
Company-Controlled comparable sales change (6 %) 25 % (8 %) 30 %
Net new/(closed) stores   7 %   3 %   7 %   2 %
Total Company-Controlled Channel 1 % 28 % (1 %) 32 %
Wholesale/other   7 %   11 %   23 %   19 %
Total   1 %   27 %   0 %   32 %
 
Stores open:
Beginning of period 411 380 410 381
Opened 17 12 27 22
Closed   (15 )   (11 )   (24 )   (22 )
End of period   413     381     413     381  
 
Other metrics:
Average sales per store ($ in 000's) 1 $ 2,094 $ 2,012
Average sales per square foot 1 $ 1,197 $ 1,281
Stores > $1 million net sales 1 98 % 98 %
Stores > $2 million net sales 1 46 % 42 %
Average net sales per mattress unit - Company-Controlled Channel 2 $ 3,182 $ 3,087 $ 3,154 $ 2,889

 

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. The previously reported metric "Average mattress sales per mattress unit - Company-Controlled Channel" included only net sales from mattresses and mattress bases. Previously reported amounts have been reclassified to conform to the current-year presentation.
 
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
June 29,     June 30, June 29,     June 30,
2013 2012 2013 2012
 
Net income $ 9,926 $ 16,973 $ 72,101 $ 71,996
Income tax expense 5,259 8,927 38,204 34,663
Interest expense 13 20 55 130
Depreciation and amortization 7,172 4,726 24,284 16,090
Stock-based compensation 1,560 1,405 3,929 11,084
Asset impairments 15 3 186 19
       
Adjusted EBITDA $ 23,945 $ 32,054 $ 138,759 $ 133,982
 

Note -
 

Our Adjusted 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, 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
 
 
SELECT COMFORT CORPORATION AND SUBSIDIARIES
Reported to Adjusted Statements of Operations Data Reconciliation
(in thousands, except per share amounts)
                       
Six Months Ended
June 29, 2013 June 30, 2012
CEO CEO
Transition Transition
As Reported Benefit (1) As Adjusted As Reported Costs (1) As Adjusted
Operating income $ 50,334 $ (391 ) $ 49,943 $ 60,148 $ 5,595 $ 65,743
Other income, net   169   -     169   55   -   55
Income before income taxes 50,503 (391 ) 50,112 60,203 5,595 65,798
Income tax expense (2)   17,106   (135 )   16,971   20,813   1,919   22,732
Net income $ 33,397 $ (256 ) $ 33,141 $ 39,390 $ 3,676 $ 43,066
 
Net income per share –
Basic $ 0.61 $ 0.00 $ 0.60 $ 0.71 $ 0.07 $ 0.77
Diluted $ 0.60 $ 0.00 $ 0.59 $ 0.69 $ 0.06 $ 0.75
 
Basic Shares 55,062 55,062 55,062 55,680 55,680 55,680
Diluted Shares 56,101 56,101 56,101 57,367 57,367 57,367
 
(1)   In February 2012, we 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, including performance-based stock awards. As a result of these modifications, we recorded incremental non-cash compensation of $5.6 million in the first six months of 2012. The performance-based stock awards are subject to applicable 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 resulting from performance-based stock award adjustments.
 
(2) Reflects effective income tax rate, before discrete adjustments, of 34.4% for 2013 and 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, we are providing this information as we believe it facilitates year-over-year comparisons for investors and financial analysts.
 
GAAP - generally accepted accounting principles
 

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