Select Comfort Announces Fourth-Quarter and Full-Year 2014 Results

Provides 2015 and long-term outlook

  • Fourth-quarter net sales increased 40% to $322 million, including a 22% company-controlled comparable sales gain
  • Fourth-quarter EPS increased 192% to $0.35 and full-year EPS increased 16% to $1.25
  • 2015 outlook of $1.30 per diluted share and 2019 outlook of $2.75 per diluted share

MINNEAPOLIS--()--Select Comfort Corporation (NASDAQ:SCSS) today reported fourth-quarter and full-year 2014 results for the period ended Jan. 3, 2015. Net sales increased 40% in the quarter, with 22% comparable sales growth and 10 percentage points (ppt.) of growth from the extra week in the fourth quarter. Fourth-quarter earnings of $0.35 per diluted share increased 192% compared to the prior year, including $0.06 related to the additional week in the quarter.

“Our fourth-quarter and full-year 2014 results reflect a strong consumer response to the combination of proprietary sleep innovations, effective marketing and exclusive distribution,” said Shelly Ibach, president and CEO of Select Comfort. “Our consumer-driven innovation strategy, advantaged business model and capital discipline position the company to deliver sustainable profitable growth and more than double earnings per share to $2.75 by fiscal 2019.”

Fourth Quarter Statement of Operations Overview

  • Net sales increased 40% to $322 million, compared to $231 million in the fourth quarter of 2013. Comparable sales increased 22%, new stores added 9 ppt. of growth, and the additional week in the fourth quarter added 10 ppt. of growth.
  • Gross profit increased 38% to $194 million. Gross margin was 60.4% compared to 60.9% last year, reflecting a higher mix of our new FlexFit™ adjustable bases and demand-driven logistics costs.
  • Operating expenses totaled $167 million, or 51.7% of net sales, compared to $131 million, or 56.7% of net sales, for the same period last year. The year-over-year expense increase included variable expenses on higher sales, spending to support growth initiatives, and expenses related to the additional week in the fourth quarter, partly offset by a $3.5 million legal settlement benefit.
  • Operating income totaled $28 million, compared to $10 million in the prior year.
  • Earnings per diluted share were $0.35, a 192% increase over the prior year. Excluding the benefit of $0.06 related to the additional week in the quarter and $0.04 related to a favorable legal settlement, earnings per diluted share grew 108%.

Full-year Statement of Operations Review

  • Net sales in 2014 were $1.16 billion, an increase of 20%, including 12% from comparable stores, compared to $960 million in 2013.
  • Earnings per diluted share increased 16% to $1.25, compared to $1.08 in 2013.

Cash Flows and Balance Sheet Review

  • Net cash provided by operating activities was $144 million for full-year 2014, compared to $88 million for the prior year.
  • Capital expenditures for 2014 were $77 million, consistent with the prior year.
  • The company repurchased $15 million, or 0.6 million shares, of its common stock in the fourth quarter. Since reinitiating share repurchases in April 2012, the company has repurchased 5.1 million shares at an average cost of $22.40 per share, returning $115 million or 124% of free cash flows to shareholders.
  • As of the end of the quarter, the company had cash, cash equivalents and marketable debt securities, less customer prepayments, of $137 million.

Financial Outlook
The company expects full-year 2015 earnings per diluted share of $1.30 on a GAAP basis. This outlook includes $11 million (pre-tax), or $0.13 per diluted share, of estimated launch costs related to the company’s ERP (Enterprise Resource Planning) system planned for implementation in the fourth quarter of 2015. The outlook implies earnings per share growth of 20% excluding the impacts of the extra week in 2014 and the 2015 ERP launch costs. The outlook assumes high-single-digit total net sales growth and a 6% increase in store count in 2015. The company anticipates 2015 capital expenditures will be approximately $80 million, including investments in information technology and new, relocated and remodeled stores.

The company has also established a long-range target of $2.75 earnings per diluted share for 2019, with returns on invested capital expected in the mid-teens.

Conference Call Information
Management will host its regularly scheduled conference call to discuss the company’s results at 5 p.m. EST (4 p.m. CST; 2 p.m. PST) 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
SLEEP NUMBER, a sleep innovation leader, delivers unparalleled sleep experiences by offering high-quality, innovative sleep products and services. The company is the exclusive designer, manufacturer, marketer, retailer and servicer of a complete line of Sleep Number® beds. Only the Sleep Number bed offers SleepIQ® technology – proprietary sensor technology that works directly with the bed’s DualAir™ feature to track and monitor each individual’s sleep. SleepIQ technology communicates how you slept and what adjustments you can make to optimize your sleep and improve your daily life. Sleep Number also offers a full line of exclusive sleep products including FlextFit™ adjustable bases and Sleep Number® pillows, sheets and other bedding products. Consumers also benefit from a unique, value-added retail experience at one of the more than 460 Sleep Number® stores across the country, online at SleepNumber.com, or via phone at (800) Sleep Number or (800) 753-3768.

Forward-looking Statements
Statements used in this news release relating to future plans, events, financial results or performance are forward-looking statements subject to certain risks and uncertainties including, among others, such factors as 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
January 3, % of December 28, % of
2015 Net Sales 2013 Net Sales
 
Net sales $ 322,216 100.0 % $ 230,854 100.0 %
Cost of sales   127,730 39.6 %   90,333 39.1 %
Gross profit   194,486 60.4 %   140,521 60.9 %
 
Operating expenses:
Sales and marketing 142,410 44.2 % 112,679 48.8 %
General and administrative 21,681 6.7 % 16,184 7.0 %
Research and development   2,508 0.8 %   2,003 0.9 %
Total operating expenses   166,599 51.7 %   130,866 56.7 %
Operating income 27,887 8.7 % 9,655 4.2 %
Other income, net   86 0.0 %   80 0.0 %
Income before income taxes 27,973 8.7 % 9,735 4.2 %
Income tax expense   9,026 2.8 %   3,310 1.4 %
Net income $ 18,947 5.9 % $ 6,425 2.8 %
 
Net income per share – basic $ 0.36 $ 0.12
 
Net income per share – diluted $ 0.35 $ 0.12
 

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding 52,825 54,497
Effect of dilutive securities:
Options 420 452
Restricted shares   426   371
Diluted weighted-average shares outstanding   53,671   55,320
 
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share amounts)
               
Twelve Months Ended
January 3, % of December 28, % of
2015 Net Sales 2013 Net Sales
 
Net sales $ 1,156,757 100.0 % $ 960,171 100.0 %
Cost of sales   449,907 38.9 %   358,416 37.3 %
Gross profit   706,850 61.1 %   601,755 62.7 %
 
Operating expenses:
Sales and marketing 512,007 44.3 % 439,156 45.7 %
General and administrative 84,864 7.3 % 62,433 6.5 %
Research and development   8,233 0.7 %   9,478 1.0 %
Total operating expenses   605,104 52.3 %   511,067 53.2 %
Operating income 101,746 8.8 % 90,688 9.4 %
Other income, net   362 0.0 %   323 0.0 %
Income before income taxes 102,108 8.8 % 91,011 9.5 %
Income tax expense   34,134 3.0 %   30,930 3.2 %
Net income $ 67,974 5.9 % $ 60,081 6.3 %
 
Net income per share – basic $ 1.27 $ 1.10
 
Net income per share – diluted $ 1.25 $ 1.08
 

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding 53,452 54,866
Effect of dilutive securities:
Options 387 554
Restricted shares   354   383
Diluted weighted-average shares outstanding   54,193   55,803
 
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share amounts)
subject to reclassification
       

 January 3, 

December 28,
2015 2013
Assets
Current assets:
Cash and cash equivalents $ 51,995 $ 58,223
Marketable debt securities – current 69,609 52,159

Accounts receivable, net of allowance for doubtful accounts of $739 and $425, respectively

19,693 14,979
Inventories 53,535 40,152
Prepaid expenses 17,792 9,216
Deferred income taxes 8,786 6,936
Other current assets   11,185     7,874
Total current assets 232,595 189,539
 
Non-current assets:
Marketable debt securities – non-current 44,441 34,632
Property and equipment, net 165,453 129,542
Goodwill and intangible assets, net 15,986 16,823
Deferred income taxes 3,433 4,943
Other assets   12,279     6,286
Total assets $ 474,187   $ 381,765
 
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable $ 84,197 $ 73,391
Customer prepayments 28,726 15,392
Accrued sales returns 15,262 9,433
Compensation and benefits 33,066 15,242
Taxes and withholding 10,207 12,517
Other current liabilities   15,594     11,207
Total current liabilities 187,052 137,182
 
Non-current liabilities:
Warranty liabilities 2,722 1,567
Other long-term liabilities   27,506     17,796
Total non-current liabilities   30,228     19,363
Total liabilities 217,280 156,545
 
Shareholders’ equity:

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

- -

Common stock, $0.01 par value; 142,500 shares authorized, 52,798 and 54,901 shares issued and outstanding, respectively

528 549
Additional paid-in capital - 5,382
Retained earnings 256,413 219,276
Accumulated other comprehensive (loss) income   (34 )   13
Total shareholders’ equity   256,907     225,220
Total liabilities and shareholders’ equity $ 474,187   $ 381,765
 
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
subject to reclassification
       
Twelve Months Ended

 January 3, 

December 28,
2015 2013
 
Cash flows from operating activities:
Net income $ 67,974 $ 60,081

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

Depreciation and amortization 39,809 30,811
Stock-based compensation 6,798 4,232
Net loss on disposals and impairments of assets 492 24
Excess tax benefits from stock-based compensation (1,163 ) (3,831 )
Deferred income taxes (311 ) 2,037
Changes in operating assets and liabilities, net of effect of acquisition:
Accounts receivable (4,717 ) 1,993
Inventories (13,383 ) (3,910 )
Income taxes (4,314 ) 4,395
Prepaid expenses and other assets (9,973 ) (3,169 )
Accounts payable 14,340 (3,477 )
Customer prepayments 13,334 198
Accrued compensation and benefits 17,735 (5,202 )
Other taxes and withholding 2,584 (153 )
Warranty liabilities 1,671 (1,236 )
Other accruals and liabilities   13,592     5,312  
Net cash provided by operating activities   144,468     88,105  
 
Cash flows from investing activities:
Purchases of property and equipment (76,594 ) (76,811 )
Proceeds from sales of property and equipment 5 117
Investments in marketable debt securities (90,349 ) (44,170 )
Proceeds from maturities of marketable debt securities 54,506 53,565
Acquisition of business - (15,500 )
Investment in non-marketable equity securities (1,500 ) (4,500 )
Increase in restricted cash   (500 )   -  
Net cash used in investing activities   (114,432 )   (87,299 )
 
Cash flows from financing activities:
Net increase (decrease) in short-term borrowings 6,192 (223 )
Repurchases of common stock (46,492 ) (42,072 )
Proceeds from issuance of common stock 2,873 7,966
Excess tax benefits from stock-based compensation   1,163     3,831  
Net cash used in financing activities   (36,264 )   (30,498 )
 
Net decrease in cash and cash equivalents (6,228 ) (29,692 )
Cash and cash equivalents, at beginning of period   58,223     87,915  
Cash and cash equivalents, at end of period $ 51,995   $ 58,223  
 
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)
               
Three Months Ended Twelve Months Ended

 January 3, 

December 28,

 January 3, 

December 28,
2015 2013 2015 2013
 
Percent of sales:
Retail 91.1 % 89.5 % 90.8 % 89.2 %
Direct and E-Commerce 7.1 % 7.8 % 6.5 % 7.0 %
Wholesale/other   1.8 %   2.7 %   2.7 %   3.8 %
Total   100.0 %   100.0 %   100.0 %   100.0 %
 
Sales change rates:
Retail comparable-store sales 3 23 % 0 % 12 % (4 %)
Direct and E-Commerce 3   19 %   6 %   9 %   (5 %)
Company-Controlled comparable sales change 3 22 % 0 % 12 % (4 %)
Net opened/closed stores and 53rd week   19 %   6 %   10 %   6 %
Total Company-Controlled Channel 41 % 6 % 22 % 2 %
Wholesale/other   (7 %)   (20 %)   (13 %)   18 %
Total   40 %   5 %   20 %   3 %
 
Stores open:
Beginning of period 460 423 440 410
Opened 11 28 57 71
Closed   (8 )   (11 )   (34 )   (41 )
End of period   463     440     463     440  
 
Other metrics:
Average sales per store ($ in 000's) 1, 3 $ 2,327 $ 2,093
Average sales per square foot 1, 3 $ 1,025 $ 1,077
Stores > $1 million net sales 1, 3 98 % 96 %
Stores > $2 million net sales 1, 3 59 % 46 %
Average revenue per mattress unit 2 $ 3,866 $ 3,369 $ 3,671 $ 3,245
 

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 2013. The additional week in 2014 was in the fiscal fourth quarter. Company-Controlled comparable sales have been adjusted to remove the estimated impact of the additional week on the three and twelve months ended January 3, 2015.

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

 January 3, 

    December 28,

 January 3, 

    December 28,
2015 2013 2015 2013
 
Net income $ 18,947 $ 6,425 $ 67,974 $ 60,081
Income tax expense 9,026 3,310 34,134 30,930
Interest expense 23 10 53 51
Depreciation and amortization 9,992 8,320 38,767 29,599
Stock-based compensation 2,504 1,173 6,798 4,232
Asset impairments   378     34     497   127
Adjusted EBITDA $ 40,870   $ 19,272   $ 148,223 $ 125,020
 
 
Free Cash Flow
(in thousands)
 
Three Months Ended Trailing-Twelve Months Ended

 January 3, 

December 28,

 January 3, 

December 28,
2015 2013 2015 2013
 
Net cash provided by operating activities $ 8,633 $ (1,977 ) $ 144,468 $ 88,105
Subtract: Purchases of property and equipment   18,217     18,991     76,594   76,811
Free cash flow $ (9,584 ) $ (20,968 ) $ 67,874 $ 11,294
 

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

SELECT COMFORT CORPORATION AND SUBSIDIARIES
Calculation of Return on Invested Capital (ROIC)
(in thousands)

ROIC is a financial measure that we use which quantifies the return we earn on our invested capital. We compute ROIC as outlined below. Management believes ROIC is a useful metric for investors and financial analysts. Our definition of ROIC may not be comparable to similarly titled definitions 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

 January 3, 

    December 28,
2015 2013

Net operating profit after taxes (NOPAT)

Operating income $ 101,746 $ 90,688
Add: Rent expense 1 57,605 50,289
Add: Interest income 415 375
Less: Depreciation on capitalized operating leases 2 (14,265 ) (13,095 )
Less: Income taxes 3   (48,900 )   (43,827 )
NOPAT $ 96,601 $ 84,430
 

Average invested capital

Total equity $ 256,907 $ 225,220
Less: Cash greater than target 4 (37,319 ) (29,622 )
Add: Long-term debt 5 - 2
Add: Capitalized operating lease obligations 6   460,840     402,312  
Total invested capital at end of period $ 680,428 $ 597,912
 
Average invested capital 7 $ 639,118 $ 560,133
 
Return on invested capital (ROIC) 8   15.1 %   15.1 %
 

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 of 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 33.6% and 34.2% for 2014 and 2013, 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.

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

Contacts

Select Comfort Corporation
Investor Contact:
Dave Schwantes, 763-551-7498
investorrelations@selectcomfort.com
or
Media Contact:
Becky Dvorak, 763-551-6862
publicrelations@selectcomfort.com

Contacts

Select Comfort Corporation
Investor Contact:
Dave Schwantes, 763-551-7498
investorrelations@selectcomfort.com
or
Media Contact:
Becky Dvorak, 763-551-6862
publicrelations@selectcomfort.com