Select Comfort Net Sales Down 4 Percent

Furniture World Magazine

Select Comfort Corporation, a leading bed retailer and creator of the SLEEP NUMBER® bed, announced results for the fiscal fourth quarter ended Dec. 29, 2007. Net sales totaled $190.7 million, a decrease of 4 percent, compared to $198.0 million in the fourth quarter of 2006. Net income totaled $2.2 million, or $0.05 per diluted share, compared to $10.8 million, or $0.20 per diluted share in the fourth quarter of 2006. Net sales for 2007 totaled $799.2 million, a decrease of 1 percent, compared to $806.0 million in 2006. Net income for 2007 totaled $27.6 million, or $0.57 per diluted share, compared to $47.2 million, or $0.85 per diluted share in 2006. “Weaker-than-expected consumer spending following the Thanksgiving holiday offset positive sales trends during the first two months of the fourth quarter,” said Bill McLaughlin, chairman and chief executive officer of Select Comfort. “Given the outlook for economic softness in 2008, we are focused primarily on reducing costs and improving operational efficiencies, while continuing to execute our long-term strategies for profitable growth.” “During the fourth quarter, we made a number of decisions that will counteract the impact of softening sales,” continued McLaughlin. “Specifically, the company expanded distribution by opening seven net new stores and completing three high-return store remodels. We also increased prices on certain products in January to reflect the impact of higher raw-material costs. In addition, we eliminated approximately 20 corporate positions and froze headcount at current levels, which is expected to achieve annualized savings of approximately $4.0 million.” Fourth Quarter Summary Fourth quarter sales benefited from the 36 net new company-owned stores opened during the past 12 months. Broader product distribution partially offset a 13 percent decline in same-store sales, much of which occurred in December. Fourth quarter e-commerce revenues grew 4 percent and wholesale sales were up 6 percent, as compared to fourth quarter of 2006. Fourth quarter gross profit margin of 58.5 percent declined 2.4 percentage points from 60.9 percent in the prior-year period. The decline reflects a downward shift in sales mix and higher commodity costs. Fourth quarter operating margin of 1.5 percent declined 6.6 percentage points from 8.1 percent in the fourth quarter of 2006 due to lower sales, reductions in gross margins, higher fixed costs associated with the increased number of stores, and a 10 percent increase in media spending, which totaled $26.0 million in the quarter. Cash flows from operating activities for 2007 totaled $46.6 million, compared to $59.4 million in 2006. Capital expenditures totaled $46.1 million for the year, compared to $31.1 million in 2006. As of Dec. 29, 2007, cash and cash equivalents totaled $7.3 million and outstanding debt totaled $37.9 million. Current cash and debt balances reflect higher levels of accounts receivable and inventories, and the timing of payments on certain liabilities resulting in lower levels of current liabilities. “We expect 2008 to be a challenging year, so beyond the actions taken in the fourth quarter, the company is implementing additional initiatives to further address the current environment,” said McLaughlin. “We plan to slow the growth of new store openings, while investing in high-return store remodels. Moreover, we have focused our retail partner program on fewer regional mattress retailers, eliminating five partners and 140 doors during the first quarter. We also will introduce two new products to the line, beginning with a mid-range price point introduction in late February. Also, in March, we’ll launch a new marketing campaign to help increase consideration and purchase of Sleep Number products.” Fiscal 2008 Outlook The company will not provide specific earnings guidance for fiscal 2008. However, the company currently anticipates that net income will be lower than 2007 on flat to slightly lower year-over-year sales. The company plans to open 30 new stores and close 15 stores or more. The company does not anticipate incurring any significant asset impairment or lease-buyout costs associated with the store closures. Additionally, the company plans to remodel 50 stores. Results for 2008 will benefit from a fifty-third week. In terms of costs and margins, the company anticipates that inflationary costs from oil and currency exchange will be offset in part by higher selling prices on select products. Gross margins are expected to decline slightly compared with 2007. For fiscal 2008, the company anticipates that its media and marketing spending will be flat to 2007, with lower planned expenditures in the first quarter in advance of a new marketing campaign expected to launch in March. The company expects selling costs will be higher due to increased store count. The company also expects general and administrative costs will be slightly higher in 2008. Operating and free cash flows are expected to be positive in 2008. The company is forecasting capital expenditures of $32 million for new stores, store remodels, completion of the SAP implementation, and certain manufacturing and logistics investments. About Select Comfort Corporation: Founded more than 20 years ago, Select Comfort Corporation is the nation’s leading bed retailer(1). Based in Minneapolis, the company designs, manufactures, markets and supports a line of adjustable-firmness mattresses featuring air-chamber technology, branded the Sleep Number® bed, as well as foundations and sleep accessories. SELECT COMFORT® products are sold through its more than 470 company-owned stores located across the United States; select bedding retailers; direct marketing operations; and online at www.sleepnumber.com.