Select Comfort announces third-quarter 2016 results

MATTRESS INDUSTRY NEWS RELEASE

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–(BUSINESS WIRE)–Oct. 19, 2016– 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.


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.

View source version on businesswire.com: http://www.businesswire.com/news/home/20161019006346/en/

Source: Select Comfort Corporation

Select Comfort Corporation
Investor Contact:
Dave Schwantes, 763-551-7498
[email protected]
or
Media Contact:
Susan Eich, 763-551-6934
[email protected]

###

Select Comfort announces third-quarter 2016 results

MATTRESS INDUSTRY NEWS RELEASE

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

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