Select Comfort Announces Third Quarter 2016 Results

  • Reported net sales of $368 million and EPS of $0.56
  • Reported record year-to-date operating cash flows of $145 million
  • Updated 2016 EPS outlook to $1.15 to $1.25 per share

MINNEAPOLIS--()--Select Comfort Corporation (NASDAQ: SCSS) today reported third quarter 2016 results for the period ended October 1, 2016.

“We delivered record operating cash flows for the first nine months of the year as our operational improvements exceeded our expectations and offset the effects of a worsening consumer environment,” said Shelly Ibach, president and chief executive officer of Select Comfort. “Our investments have strengthened our direct-to-consumer business model and we are making significant progress toward delivering a more convenient customer experience. We expect the digital capabilities we’re developing to succeed in the hyper-competitive digital marketplace.”

Third Quarter Review

  • Net sales were $368 million, including 7 percentage points of growth from stores opened in the last twelve months, offset by an 8% comparable sales decline
  • Gross profit rate increased by 60 basis points to 63.1% of net sales
  • Earnings per diluted share were $0.56, compared with $0.62 in the prior year’s quarter

Cash Flows and Balance Sheet Review

  • Generated $145 million in net cash from operating activities for the first nine months of 2016, compared with $132 million for the same period last year
  • Invested $39 million in capital expenditures and returned $95 million of cash to shareholders during the first nine months of 2016 compared with $61 million and $69 million, respectively, for the same period last year
  • Ended the quarter with $51 million of cash and securities and no borrowings under our revolving credit facility

Financial Outlook
The company updated its outlook for 2016 earnings per diluted share to $1.15 to $1.25 per share, compared with full-year 2015 earnings per diluted share of $0.97. The outlook assumes high single-digit sales growth for the full year. The outlook also assumes an 11% increase in store count in 2016 and capital expenditures of $65 million, compared with $86 million in 2015. Our outlook does not contemplate a further deterioration of the 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.

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 500 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 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
October 1, % of October 3, % of
2016 Net Sales 2015 Net Sales
 
Net sales $ 367,988 100.0 % $ 373,919 100.0 %
Cost of sales   135,645   36.9 %   140,283   37.5 %
Gross profit   232,343   63.1 %   233,636   62.5 %
 
Operating expenses:
Sales and marketing 158,024 42.9 % 156,899 42.0 %
General and administrative 28,278 7.7 % 27,817 7.4 %
Research and development   6,997   1.9 %   3,521   0.9 %
Total operating expenses   193,299   52.5 %   188,237   50.3 %
Operating income 39,044 10.6 % 45,399 12.1 %
Other (expense) income, net   (255 ) (0.1 %)   78   0.0 %
Income before income taxes 38,789 10.5 % 45,477 12.2 %
Income tax expense   13,044   3.5 %   13,623   3.6 %
Net income $ 25,745   7.0 % $ 31,854   8.5 %
 
Net income per share – basic $ 0.56   $ 0.63  
 
Net income per share – diluted $ 0.56   $ 0.62  
 

 

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding 45,621 50,945
Dilutive effect of stock-based awards   729     756  
Diluted weighted-average shares outstanding   46,350     51,701  
 
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited – in thousands, except per share amounts)
         
Nine Months Ended
October 1, % of October 3, % of
2016 Net Sales 2015 Net Sales
 
Net sales $ 997,846 100.0 % $ 999,017 100.0 %
Cost of sales   385,168   38.6 %   379,009   37.9 %
Gross profit   612,678   61.4 %   620,008   62.1 %
 
Operating expenses:
Sales and marketing 443,477 44.4 % 424,029 42.4 %
General and administrative 86,202 8.6 % 79,951 8.0 %
Research and development   21,661   2.2 %   10,275   1.0 %
Total operating expenses   551,340   55.3 %   514,255   51.5 %
Operating income 61,338 6.1 % 105,753 10.6 %
Other (expense) income, net   (581 ) (0.1 %)   364   0.0 %
Income before income taxes 60,757 6.1 % 106,117 10.6 %
Income tax expense   20,627   2.1 %   34,426   3.4 %
Net income $ 40,130   4.0 % $ 71,691   7.2 %
 
Net income per share – basic $ 0.86   $ 1.39  
 
Net income per share – diluted $ 0.85   $ 1.36  
 
 

Reconciliation of weighted-average shares outstanding:

Basic weighted-average shares outstanding 46,705 51,654
Dilutive effect of stock-based awards   708     870  
Diluted weighted-average shares outstanding   47,413     52,524  
 
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited – in thousands, except per share amounts)
subject to reclassification
   
October 1, January 2,
2016 2016
Assets
Current assets:
Cash and cash equivalents $ 45,383 $ 20,994
Marketable debt securities – current 5,963 6,567

Accounts receivable, net of allowance for doubtful accounts of $1,276 and $1,039, respectively

23,731 29,002
Inventories 70,609 86,600
Income taxes receivable - 15,284
Prepaid expenses 11,983 10,207
Deferred income taxes 15,537 15,535
Other current assets   17,525     13,737  
Total current assets 190,731 197,926
 
Non-current assets:
Marketable debt securities – non-current - 8,553
Property and equipment, net 203,660 204,376
Goodwill and intangible assets, net 81,448 83,344
Other assets   27,156     19,197  
Total assets $ 502,995   $ 513,396  
 
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable $ 106,868 $ 103,941
Customer prepayments 28,348 51,473
Accrued sales returns 18,038 20,562
Compensation and benefits 28,876 15,670
Taxes and withholding 33,234 9,856
Other current liabilities   29,552     23,447  
Total current liabilities 244,916 224,949
 
Non-current liabilities:
Deferred income taxes 11,837 12,499
Other long-term liabilities   69,730     53,609  
Total non-current liabilities   81,567     66,108  
Total liabilities 326,483 291,057
 
Shareholders’ equity:

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

- -

Common stock, $0.01 par value; 142,500 shares authorized, 44,941 and 49,402 shares issued and outstanding, respectively

449 494
Additional paid-in capital - -
Retained earnings 176,063 221,859
Accumulated other comprehensive loss   -     (14 )
Total shareholders’ equity   176,512     222,339  
Total liabilities and shareholders’ equity $ 502,995   $ 513,396  
 
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited - in thousands)
subject to reclassification
   
Nine Months Ended
October 1, October 3,
2016 2015
 
Cash flows from operating activities:
Net income $ 40,130 $ 71,691

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

Depreciation and amortization 42,555 33,694
Stock-based compensation 9,272 8,952
Net loss on disposals and impairments of assets 9 202
Excess tax benefits from stock-based compensation (516 ) (1,991 )
Deferred income taxes (673 ) (5,633 )
Gain on sale of non-marketable equity securities - (6,891 )
Changes in operating assets and liabilities, net of effect of acquisition:
Accounts receivable 5,271 (6,543 )
Inventories 15,991 (24,120 )
Income taxes 30,386 13,433
Prepaid expenses and other assets (3,458 ) 4,756
Accounts payable (1,043 ) 24,623
Customer prepayments (23,125 ) (3,351 )
Accrued compensation and benefits 12,441 (97 )
Other taxes and withholding 7,494 3,569
Other accruals and liabilities   10,527     19,293  
Net cash provided by operating activities   145,261     131,587  
 
Cash flows from investing activities:
Purchases of property and equipment (38,769 ) (61,435 )
Proceeds from sales of property and equipment 67 41
Investments in marketable debt securities (5,968 ) (29,299 )
Proceeds from marketable debt securities 15,090 101,087
Acquisition of business - (70,018 )
Proceeds from non-marketable equity securities   -     12,891  
Net cash used in investing activities   (29,580 )   (46,733 )
 
Cash flows from financing activities:
Net increase in short-term borrowings 3,062 2,119
Repurchases of common stock (96,410 ) (70,300 )
Proceeds from issuance of common stock 1,949 2,658
Excess tax benefits from stock-based compensation 516 1,991
Debt issuance costs   (409 )   (639 )
Net cash used in financing activities   (91,292 )   (64,171 )
 
Net increase in cash and cash equivalents 24,389 20,683
Cash and cash equivalents, at beginning of period   20,994     51,995  
Cash and cash equivalents, at end of period $ 45,383   $ 72,678  
 
 
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)
         
 
Three Months Ended Nine Months Ended
October 1, October 3, October 1, October 3,
2016 2015 2016 2015
 
Percent of sales:
Retail 91.3 % 92.2 % 91.0 % 91.7 %
Direct and E-Commerce 6.5 % 5.2 % 6.3 % 5.7 %
Wholesale/other   2.2 %   2.6 %   2.7 %   2.6 %
Total   100.0 %   100.0 %   100.0 %   100.0 %
 
Sales change rates:
Retail comparable-store sales (10 %) 12 % (7 %) 15 %
Direct and E-Commerce   23 %   3 %   10 %   11 %
Company-Controlled comparable sales change (8 %) 11 % (6 %) 15 %
Net opened/closed stores   7 %   4 %   6 %   5 %
Total Company-Controlled Channel (1 %) 15 % 0 % 20 %
Wholesale/other   (19 %)   51 %   3 %   2 %
Total   (2 %)   16 %   0 %   20 %
 

Stores open:

Beginning of period 506 467 488 463
Opened 24 11 57 24
Closed   (3 )   (3 )   (18 )   (12 )
End of period   527     475     527     475  
 
Other metrics:
Average sales per store ($ in 000's) 1, 3 $ 2,248 $ 2,559
Average sales per square foot 1, 3 $ 895 $ 1,063
Stores > $1 million net sales 1, 3 98 % 100 %
Stores > $2 million net sales 1, 3 54 % 69 %
Average revenue per mattress unit 2 $ 3,959 $ 3,992 $ 4,031 $ 3,991
 
 

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
October 1, October 3, October 1, October 3,
2016 2015 2016 2015
 
Net income $ 25,745 $ 31,854 $ 18,958 $ 90,638
Income tax expense 13,044 13,623 11,112 43,452
Interest expense 267 44 721 87
Depreciation and amortization 14,536 11,643 56,154

 

43,100
Stock-based compensation 1,666 3,125 10,609 11,457
Asset impairments   2     17     51     619  
Adjusted EBITDA $ 55,260   $ 60,306   $ 97,605   $ 189,353  
 
 
Free Cash Flow
(in thousands)
 
Three Months Ended Trailing-Twelve Months Ended
October 1, October 3, October 1, October 3,
2016 2015 2016 2015
 
Net cash provided by operating activities $ 98,141 $ 86,533 $ 121,616 $ 140,220
Subtract: Purchases of property and equipment   15,005

 

  22,497     62,920     79,652  
Free cash flow $ 83,136   $ 64,036   $ 58,696   $ 60,568  
 
 

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
October 1, October 3,
2016 2015

Net operating profit after taxes (NOPAT)

Operating income $ 30,681 $ 133,640
Add: Rent expense 1 64,994 63,078
Add: Interest income 109 537
Less: Depreciation on capitalized operating leases 2 (16,953 ) (15,809 )
Less: Income taxes 3   (29,805 )   (58,896 )
NOPAT $ 49,026 $ 122,550

 

Average invested capital

Total equity $ 176,512 $ 271,923
Less: Cash greater than target 4 - -
Add: Long-term debt 5 - -
Add: Capitalized operating lease obligations 6   519,952     504,624  
Total invested capital at end of period $ 696,464 $ 776,547
 
Average invested capital 7 $ 714,956 $ 710,701
 
Return on invested capital (ROIC) 8   6.9 %   17.2 %
 

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 37.8% and 32.5% 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

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