Select Comfort Announces Third Quarter Results

Select Comfort Corporation (NASDAQ: SCSS), the nation’s leading bed retailer and creator of the SLEEP NUMBER^® bed, today announced results for the fiscal 2009 third quarter ended October 3, 2009. Net sales for the quarter totaled $147.5 million, a decrease of 6 percent compared to $157.2 million in the third quarter of 2008. The company reported third-quarter net income of $6.9 million, or $0.15 per diluted share, compared to net income of $1.0 million, or $0.02 per diluted share, in the third quarter of 2008. The company generated $17.4 million in cash flow from operating activities during the quarter. Third-quarter results include a one-time charge of $3.3 million, or $0.05 per share, associated with the terminated financing activities year-to-date.

“Third-quarter results improved significantly as our focus on controlling costs, building our brand for improved sales, and preserving cash helped mitigate the impact of ongoing market volatility,” said Bill McLaughlin, president and CEO, Select Comfort Corporation. “While our business has begun to stabilize and we’re beginning to experience its longer-term potential, economic and market conditions remain uncertain. Therefore, we are planning and managing conservatively, while prepared to capitalize on growth as we see opportunities.”

Third-Quarter Summary

With 14 percent fewer stores than the previous year, total sales declined 6 percent compared to the prior-year period, with positive same-store growth of 9 percent in the quarter. The company closed 14 stores during the third quarter and 65 stores year-to-date, with plans to close an additional six stores by the end of 2009.

Third-quarter gross profit margin was 63.4 percent, up 120 basis points from 62.2 percent in the prior-year period and 180 basis points on a sequential basis from 61.6 percent in the second quarter. The year-over-year improvement reflects efficiencies in manufacturing, partially offset by a more aggressive promotion strategy to generate store traffic and drive sales.

Sales and marketing costs in the third quarter of 2009 decreased by 20 percent to $66.0 million or 44.8 percent of net sales. This compares to $82.0 million, or 52.2 percent of net sales, in the prior-year period. The reduction in costs in 2009 reflects the lower store base and a 32-percent reduction in media spend to $15.6 million in 2009. General and administrative expenses were $11.8 million in the third quarter, or 8 percent of net sales. This compares to $11.6 million, or 7.4 percent of net sales, in the third quarter of 2008.

For the first nine months of 2009, net sales totaled $407.7 million, a decrease of 14.6 percent compared to $477.5 million for the first nine months of 2008. Net income totaled $0.2 million, or $0.01 per diluted share, compared to a net loss of $12.7 million, or $0.29 per diluted share, for the first nine months of 2008.

Cash flows from operating activities for the nine-month period were $53.0 million, which includes $26.1 million in tax refunds associated with prior-year losses. This compares to $12.2 million of operating cash flow for the first nine months of 2008. The company reduced capital expenditures to $2.0 million for the first nine months of 2009, compared to $28.1 million in the first nine months of 2008. As of October 3, 2009, cash and cash equivalents totaled $4.8 million; and outstanding borrowings and letters of credit under the company’s revolving credit facility totaled $30.8 million.

Outlook

Select Comfort has not recently provided full-year estimates about performance. However, because of the continued volatility of macro-economic trends coupled with the state of the company’s turn-around, Select Comfort reports that it expects full-year 2009 earnings of between $0.02 and $0.08 per diluted share.

The company also anticipates recent sales trends to continue into early 2010, with same-store growth largely offset by reductions in retail stores and the discontinuation of retail-partner distribution. The company is prepared to take advantage of increases in consumer demand as the economic environment improves and its sales and marketing programs continue to take effect.

Financing Update

The company continues to operate under short-term waivers to comply with certain ongoing loan covenants associated with the $50 million available under its revolving credit facility and is negotiating with its lenders to secure a longer-term financing agreement. The company also continues to evaluate financing alternatives beyond the recently announced Sterling Partners agreement in order to increase its financial flexibility.

Conference Call

Management will host its regularly scheduled conference call to discuss the company’s results at 5 p.m. Eastern Time (4 p.m. Central; 2 p.m. Pacific) today. To listen to the call, please dial (888) 972-6711 (international participants dial (210) 234-0123) and reference the passcode “Sleep.” To access the Webcast, please visit the investor relations area of the Select Comfort Web site.

A replay will remain available until midnight Eastern Time, October 30, 2009, by dialing (203) 369-0998. The Webcast replay will remain available in the investor relations area of the company’s Web site for approximately 60 days.

About Select Comfort Corporation

Founded more than 20 years ago, Select Comfort was ranked the no. 1 bedding retailer in the United States for nine years runningⁱ. 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 bedding accessories. SELECT COMFORT^® products are sold through its approximately 400 company-owned stores located across the United States; select bedding retailers; direct marketing operations; and online at www.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 our ability to fund our operations through cash flow from operations or availability under our bank line of credit or other sources, and the cost of credit or other capital resources necessary to finance operations; the risk of non-compliance with financial covenants under our bank line of credit and the risk that we may not be successful in obtaining continuing waivers or other financial accommodations from our lenders; the potential need to obtain additional capital through the issuance of debt or equity securities, which may significantly increase our costs or dilute our existing shareholders, and the risk that we may not be successful in obtaining additional capital that may be needed; current general and industry economic trends; consumer confidence; the effectiveness of our marketing messages; the efficiency of our advertising and promotional efforts; consumer acceptance of our products, product quality, innovation and brand image; availability of attractive and cost-effective consumer credit options; execution of our retail store distribution strategy, including our ability to cost-effectively close under-performing store locations; 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; industry competition; our ability to continue to improve our product line; warranty expenses; risks of pending and potentially unforeseen litigation; increasing government regulations, including new flammability standards for the bedding industry and new safety standards for consumer products, which have or will add product cost pressures and have or will require implementation of systems and manufacturing process changes to ensure compliance; the adequacy of our management information systems to meet the evolving needs of our business and evolving regulatory standards applicable to data privacy and security; our 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 our filings with the Securities and Exchange Commission, including our 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.

ⁱ Furniture/Today

SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited – in thousands, except per share amounts)

			Three Months Ended
			October 3,			% of		September 27,			% of
			2009			Net Sales		2008			Net Sales

Net sales			$	147,470		100.0	%	$	157,231		100.0	%
Cost of sales				53,915		36.6	%		59,475		37.8	%
	Gross profit			93,555		63.4	%		97,756		62.2	%
Operating expenses:
	Sales and marketing			65,997		44.8	%		82,047		52.2	%
	General and administrative			11,818		8.0	%		11,618		7.4	%
	Research and development			436		0.3	%		562		0.4	%
	Terminated equity financing costs			3,324		2.3	%		-		0.0	%
	Asset impairment charges			-		0.0	%		1,477		0.9	%
		Total operating expenses		81,575		55.3	%		95,704		60.9	%
Operating income				11,980		8.1	%		2,052		1.3	%
Interest expense / other				(1,704	)	(1.2	%)		(1,117	)	(0.7	%)
Income before income taxes				10,276		7.0	%		935		0.6	%
Income tax expense (benefit)				3,377		2.3	%		(48	)	0.0	%
Net income			$	6,899		4.7	%	$	983		0.6	%

Net income per share – basic			$	0.15				$	0.02

Net income per share – diluted			$	0.15				$	0.02


Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding				44,830					44,232
Effect of dilutive securities:
	Options			378					114
	Restricted shares			425					305
Diluted weighted-average shares outstanding				45,633					44,651

SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited – in thousands, except per share amounts)

			Nine Months Ended
			October 3,			% of		September 27,			% of
			2009			Net Sales		2008			Net Sales

Net sales			$	407,731		100.0	%	$	477,451		100.0	%
Cost of sales				158,052		38.8	%		192,125		40.2	%
	Gross profit			249,679		61.2	%		285,326		59.8	%
Operating expenses:
	Sales and marketing			194,417		47.7	%		258,074		54.1	%
	General and administrative			36,856		9.0	%		41,880		8.8	%
	Research and development			1,400		0.3	%		2,079		0.4	%
	Terminated equity financing costs			3,324		0.8	%		-		0.0	%
	Asset impairment charges			488		0.1	%		2,534		0.5	%
		Total operating expenses		236,485		58.0	%		304,567		63.8	%
Operating income (loss)				13,194		3.2	%		(19,241	)	(4.0	%)
Interest expense / other				(4,951	)	(1.2	%)		(1,996	)	(0.4	%)
Income (loss) before income taxes				8,243		2.0	%		(21,237	)	(4.4	%)
Income tax expense (benefit)				8,000		2.0	%		(8,496	)	(1.8	%)
Net income (loss)			$	243		0.1	%	$	(12,741	)	(2.7	%)

Net income (loss) per share – basic			$	0.01				$	(0.29	)

Net income (loss) per share – diluted			$	0.01				$	(0.29	)


Reconciliation of weighted-average shares outstanding:
Basic weighted-average shares outstanding				44,783					44,143
Effect of dilutive securities:
	Options			64					-
	Restricted shares			242					-
Diluted weighted-average shares outstanding¹				45,089					44,143

¹For the nine months ended September 27, 2008, potentially dilutive securities have been excluded from the calculation of diluted weighted average shares outstanding, as their inclusion would have had an anti-dilutive effect on our net loss per diluted share.

SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share amounts)
subject to reclassification
				(unaudited)
				October 3,			January 3,
				2009			2009
Assets
Current assets:
	Cash and cash equivalents			$	4,796		$	13,057
	Accounts receivable, net of allowance for doubtful accounts of $404 and $713, respectively				2,593			4,939
	Inventories				15,491			18,675
	Income taxes receivable				897			25,900
	Prepaid expenses				9,756			4,109
	Deferred income taxes				-			1,323
	Other current assets				894			1,150
			Total current assets		34,427			69,153
Property and equipment, net					40,531			53,274
Deferred income taxes					-			5,941
Other assets					7,312			7,045
			Total assets	$	82,270		$	135,413

Liabilities and Shareholders’ Deficit
Current liabilities:
	Borrowings under revolving credit facility			$	26,300		$	79,150
	Accounts payable				36,793			40,274
	Customer prepayments				10,397			11,480
	Accruals:
		Sales returns			2,983			2,744
		Compensation and benefits			14,436			14,575
		Taxes and withholding			4,425			2,938
	Other current liabilities				7,753			8,526
			Total current liabilities		103,087			159,687

Non-current liabilities:
	Warranty liabilities				5,402			5,956
	Deferred income taxes				443			-
	Capital lease obligations				357			621
	Other long-term liabilities				11,731			10,779
			Total non-current liabilities		17,933			17,356
			Total liabilities		121,020			177,043

Shareholders’ deficit:
	Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding				-			-
	Common stock, $0.01 par value; 142,500 shares authorized, 45,589 and 44,962 shares issued and outstanding, respectively				456			450
	Additional paid-in capital				7,048			4,417
	Accumulated deficit				(46,254	)		(46,497	)
			Total shareholders’ deficit		(38,750	)		(41,630	)
			Total liabilities and shareholders’ deficit	$	82,270		$	135,413

SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited - in thousands)
subject to reclassification

					Nine Months Ended
					October 3,			September 27,
					2009			2008

Cash flows from operating activities:
	Net income (loss)				$	243		$	(12,741	)
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Depreciation and amortization				15,310			17,183
		Stock-based compensation				2,540			3,337
		Disposals and impairments of assets				485			2,508
		Excess tax benefits from stock-based compensation				-			(17	)
		Changes in deferred income taxes				7,707			(977	)
		Change in operating assets and liabilities:
			Accounts receivable			2,346			11,222
			Inventories			3,184			12,556
			Income taxes receivable			25,003			(7,167	)
			Prepaid expenses and other assets			(6,756	)		1,195
			Accounts payable			3,256			(16,612	)
			Customer prepayments			(1,083	)		909
			Accrued sales returns			239			(447	)
			Accrued compensation and benefits			(139	)		492
			Accrued taxes and withholding			1,501			(313	)
			Warranty liabilities			(749	)		(1,847	)
			Other accruals and liabilities			(84	)		2,884
				Net cash provided by operating activities		53,003			12,165

Cash flows from investing activities:
	Purchases of property and equipment					(2,040	)		(28,141	)
	Proceeds from sales of property and equipment					15			-
				Net cash used in investing activities		(2,025	)		(28,141	)

Cash flows from financing activities:
	Net (decrease) increase in short-term borrowings					(59,322	)		15,823
	Proceeds from issuance of common stock					83			534
	Excess tax benefits from stock-based compensation					-			17
	Debt issuance costs					-			(1,472	)
				Net cash (used in) provided by financing activities		(59,239	)		14,902

Decrease in cash and cash equivalents						(8,261	)		(1,074	)
Cash and cash equivalents, at beginning of period						13,057			7,279
Cash and cash equivalents, at end of period					$	4,796		$	6,205

SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited)

	Three Months Ended						Nine Months Ended
	October 3,			September 27,			October 3,		September 27,
	2009			2008			2009		2008

Percent of sales:
Retail		83.5	%		78.9	%	80.6	%	77.4	%
Direct		5.3	%		7.7	%	6.2	%	8.0	%
E-Commerce		4.7	%		5.3	%	5.1	%	6.1	%
Wholesale		6.5	%		8.1	%	8.1	%	8.5	%
Total		100.0	%		100.0	%	100.0	%	100.0	%

Sales growth rates:
Comparable-store sales¹		9	%		(27	%)	(6	%)	(24	%)
Net closed stores/other		(10	%)		3	%	(5	%)	4	%
Retail total		(1	%)		(24	%)	(11	%)	(20	%)
Direct		(36	%)		(20	%)	(34	%)	(23	%)
E-Commerce		(17	%)		(42	%)	(28	%)	(29	%)
Wholesale		(25	%)		(37	%)	(19	%)	(29	%)
Total		(6	%)		(26	%)	(15	%)	(22	%)

Stores open:
Beginning of period		420			478		471		478
Opened		2			5		2		18
Closed		(14	)		(8	)	(65	)	(21	)
End of period		408			475		408		475

Retail partner doors²		146			794		146		794

Other metrics:
Average sales per store ($ in 000's)¹	$	985		$	1,074
Average sales per square foot ($s)¹	$	669		$	784
Stores > $1 million net sales¹		44	%		53	%
Average mattress sales per mattress unit (Q3 Company-owned channels; $s)	$	1,768		$	1,917

¹Trailing twelve months for stores open at least one year.

²On August 11, 2009 we announced our decision to discontinue distribution through non-company owned mattress retailers in the contiguous United States. This change is part of the company’s effort to reignite the Sleep Number brand and continue to advance its distribution strategy. The decision was mutually agreed upon with the company’s retail partners and is not expected to have a significant impact on sales or profit in 2009.

Select Comfort Corporation
Media Contact:
Gabby Nelson, 763-551-7460
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Investor Contact:
Jim Raabe, 763-551-7498
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Select Comfort Corporation ( SCSS )

Select Comfort Announces Third Quarter Results