EX-99.1 2 pressrelease01312006.htm PRESS RELEASE, DATED JANUARY 31, 2006 Press Release, dated January 31, 2006
 
 FOR IMMEDIATE RELEASE
 Contact:
  Frank Milano
     Select Comfort Corporation
     (763) 551-6908
     frank.milano@selectcomfort.com
 
  
SELECT COMFORT REPORTS 56 PERCENT INCREASE IN EARNINGS PER SHARE
IN FOURTH QUARTER
Earnings increase 43 percent in 2005 on 24 percent revenue growth;
Comp store sales increase 18 percent in fourth quarter and 15 percent in 2005


MINNEAPOLIS - (January 31, 2006) - Select Comfort Corporation (NASDAQ: SCSS), the nation’s leading bed retailer(1) and creator of the Sleep Number® bed, today reported results for the fourth quarter ended December 31, 2005. Net income increased 52 percent to a record $15.8 million, compared to net income of $10.4 million in the fourth quarter of 2004. Earnings per share increased 56 percent to $0.42 per diluted share, compared to $0.27 per diluted share in the fourth quarter of 2004. Net sales increased 26 percent to a record $187.9 million, compared to $148.6 million in the fourth quarter of 2004.

Earnings for the full year totaled $1.14 per diluted share, an increase of 43 percent as compared to $0.80 per diluted share in 2004. Net sales for the full year totaled $691.1 million, an increase of 24 percent compared to $557.6 million in 2004.

Highlights
·  
Operating margins in the fourth quarter 2005 increased to 13.1 percent compared to 10.9 percent in the fourth quarter of 2004; for the full year 2005 operating margins totaled 9.9 percent compared to 8.9 percent in 2004

·  
Sales growth of 26 percent for the quarter and 24 percent for the year was derived from multiple sources including:
§  
Same-store sales growth of 18 percent in the fourth quarter and 15 percent for the year
§  
40 new stores opened in 2005, ending the year at 396 company-owned stores
§  
219 new partner doors in 2005, ending the year with 308 partner doors
§  
e-Commerce and direct marketing channel sales growth of 23 percent in the quarter and 25 percent for the year
 
"We are delighted with the sales and profit growth we generated in the fourth quarter, capping a very important year for Select Comfort featuring unit growth of nearly 20 percent,” said Bill McLaughlin, chairman and chief executive officer. “We have now sustained a five-year compound annual revenue growth rate of more than 20 percent through 2005 and have increased operating margins by three percentage points over the past three years.”

Operating margins improved to 13.1 percent of revenue in the fourth quarter, compared to 10.9 percent in the same period a year ago, reflecting the leverage in the company’s operating model. Sales and marketing expenses fell to 39.5 percent of net sales this quarter from 43.4 percent of net sales in the fourth quarter of last year. The improvement in sales and marketing as a percentage of net sales occurred despite a 24 percent increase in media investment on a year-over-year basis. General and administrative expenses increased to 8.1 percent of net sales from 6.8 percent of net sales in the fourth quarter of last year, primarily reflecting an increase in the company’s all-employee incentive compensation program. Gross profit increased to a record $114.1 million in the fourth quarter, up from $90.7 million in the same quarter a year ago. On a percent of revenue basis, gross margins were 60.7 percent, compared to 61.1 percent in the fourth quarter of last year. Company-owned gross margins, representing the company’s retail stores, direct sales and e-commerce business, improved to 62.2 percent in the fourth quarter, up from 62.0 percent in the same quarter last year.

Cash flows from operating activities for the year totaled $87.5 million and net of $25.8 million in capital expenditures, the company generated positive free cash flow of $61.7 million. Select Comfort’s balance sheet remains debt-free with cash and investments at year-end totaling $112.1 million. During the year, the company spent $49.7 million to repurchase approximately 2.4 million shares of its common stock, or almost seven percent of the shares outstanding at the beginning of the year.

Mr. McLaughlin added, “Earnings benefited from the inherent leverage in our vertically integrated, direct-to-consumer business model. In 2006 we believe we will continue to improve operating margins while accelerating our investments in longer term opportunities, expanding our R&D expenditures for new product innovation and investing in technology and physical
 
 infrastructure designed to support business expansion, including the first stages of our international expansion.”

Outlook - Increased Expectations for 2006
The company believes that full year 2006 revenues will be at the high end of its long-term growth range of between 15 percent and 20 percent and believes it will exceed its long-term earnings growth rate of between 20 percent and 25 percent. Earnings per share guidance for 2006 is between $1.30 and $1.37 per diluted share. This guidance is net of an estimated $0.10 or $0.11 in stock options expense and reflects earnings per share growth rates of between 23 percent and 30 percent on a comparable accounting basis.

Revenue growth will continue to be fueled by the company’s core strategies:
·  
Improve brand awareness and drive same-store sales through increased media and marketing investments. The company plans to increase media spending in 2006 by 15 percent or more to more than $100 million.

·  
Distribution expansion:
§  
The company expects to add between 40 and 45 net new stores and to remodel approximately 30 existing stores.
§  
The company expects to increase the number of doors in its retail partner program by more than 100 percent in 2006. Earlier this month, Select Comfort announced the addition of 123 retail partner doors, increasing its retail partner program by 40 percent.
§  
The company expects to expand its planned roll-out to all 110 Sleep Country Canada retail locations by mid-year. In December 2005, Select Comfort announced its strategic alliance with Sleep Country Canada and introduced its Sleep Number bed into 45 retail locations in Canada.

Operating margins are expected to increase by up to 1 percentage point in 2006, reflecting traditional points of leverage in sales and G&A expenses. Gross margins and marketing as a percent of net sales are expected to remain at levels consistent with 2005.
 
Capital expenditures in 2006 are expected to total between $40 and $45 million, with new stores and store remodels accounting for approximately half of the total projected investment. Operating initiatives and technology-based infrastructure projects, designed to sustain the company’s long-term growth targets, will comprise the remainder of the capital spending mix.
 
The company remains on track to achieve its 2007 goals of $1 billion in revenue and 12 percent operating margins (before consideration of incremental stock option expense resulting from the implementation of new accounting regulations in 2006) and reiterates its long-term growth targets of:
·  
Same-store sales growth of between 7 percent and 12 percent;
·  
Total revenue growth of between 15 percent and 20 percent, and
·  
Earnings growth of between 20 percent and 25 percent.

Conference Call
Management will host its regularly scheduled conference call to discuss the company’s results and 2006 outlook at 5:00 p.m. Eastern Time (4:00 p.m. Central; 2:00 p.m. Pacific) on Tuesday, January 31, 2006. To listen to the webcast, please access the investor relations area of the company’s website at: www.selectcomfort.com.
A replay will remain available through February 14, 2006, by dialing 402-998-0580, passcode: 735328. The webcast replay will remain available in the investor relations area of the company’s website for approximately 60 days.

2006 Analyst Day Event
Management will host its 2006 Analyst Day Event on Friday, February 3, 2006. A series of management presentations will begin at 10:00 a.m. Eastern Time. To listen to the webcast, please access the investor relations area of the company’s website at: www.selectcomfort.com.

About Select Comfort
Founded in 1987, Select Comfort Corporation is the nation's leading bed retailer(1), holding 32 U.S. issued or pending patents for its personalized sleep products. The company designs, manufactures and markets a line of adjustable-firmness mattresses featuring air-chamber technology, branded the Sleep Number® bed, as well as foundations and sleep accessories. Select Comfort's products are sold through its nearly 400 retail stores located nationwide, through selected bedding retailers; through its national direct marketing operations; and on the Internet at www.selectcomfort.com.



Forward-Looking Statements
Statements used in this press release that relate to future plans, events, financial results or performance are forward-looking statements that are subject to certain risks and uncertainties including, among others, such factors as general and industry economic trends; uncertainties arising from global events; consumer confidence; effectiveness of our advertising and promotional efforts; our ability to secure suitable retail locations; our ability to attract and retain qualified sales professionals and other key employees; our ability to successfully expand distribution through independent retailers; consumer acceptance of our products, product quality, innovation and brand image; our ability to continue to expand and improve our product line; industry competition; warranty expenses; the outcome of pending litigation, including consumer class action litigation; our dependence on significant suppliers, and the vulnerability of any suppliers to commodity shortages, inflationary pressures, labor negotiations, liquidity concerns or other factors; uncertainties related to the supply of foam used to manufacture our products; rising commodity costs; and increasing government regulations, including new flammability standards for the bedding industry. 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 that may be in this news release.

(1) Top 25 Bedding Retailers, Furniture Today, May 23, 2005.

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


 
  
Three Months Ended 
 Twelve Months Ended
 
    
December 31, 
2005 
    
January 1,
2005
    
December 31,
2005
    
January 1,
2005
  
                           
Net sales
  
$
187,881
  
$
148,608
  
$
691,066
  
$
557,639
  
Cost of sales
    
73,784
   
57,864
   
280,590
   
216,965
 
Gross profit
    
114,097
   
90,744
   
410,476
   
340,674
 
Operating expenses:
                          
Sales and marketing
   
74,276
   
64,487
   
286,215
   
249,925
 
General and administrative
    
15,196
   
10,109
   
55,672
   
41,218
 
Operating income
    
24,625
   
16,148
   
68,589
   
49,531
 
Other income:
                          
Interest income
    
631
   
411
   
2,174
   
1,414
 
Income before income taxes
    
25,256
   
16,559
   
70,763
   
50,945
 
Income tax expense
    
9,439
   
6,121
   
26,996
   
19,390
 
Net income
  
$
15,817
  
$
10,438
  
$
43,767
  
$
31,555
  
                           
Net income per share – basic
  
$
0.45
  
$
0.29
  
$
1.23
  
$
0.88
  
Weighted average shares –  basic
    
35,023
   
35,748
   
35,571
   
36,010
 
                           
Net income per share –  diluted
  
$
0.42
  
$
0.27
  
$
1.14
  
$
0.80
  
Weighted average shares –  diluted
    
37,321
   
39,054
   
38,449
   
39,683
 




Reconciliation of weighted average shares outstanding:
                          
Weighted average shares outstanding
    
35,023
   
35,748
   
35,571
   
36,010
 
Effect of dilutive securities:
                          
Options
    
1,619
   
1,852
   
1,681
   
2,186
 
Warrants
    
467
   
1,301
   
998
   
1,339
 
Restricted shares
    
212
   
153
   
199
   
148
 
Dilutive weighted average shares outstanding
    
37,321
   
39,054
   
38,449
   
39,683
 


SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(Unaudited)
 

 
    
December 31, 2005 
    
January 1,
2005
  
Assets
              
Current assets:
              
Cash and cash equivalents
  
$
32,863
  
$
15,066
  
Marketable securities –  current
    
24,122
   
35,747
 
Accounts receivable, net of allowance for doubtful accounts of $552 and $685, respectively
    
10,109
   
8,644
 
Inventories
    
21,982
   
20,481
 
Prepaid expenses
    
9,841
   
7,375
 
Deferred tax assets
   
6,139
   
5,287
 
    Total current assets
    
105,056
   
92,600
 
Marketable securities – non-current
    
55,102
   
40,930
 
Property and equipment, net
    
53,866
   
43,911
 
Deferred tax assets
    
11,256
   
10,755
 
Other assets
    
3,554
   
3,617
 
 Total assets
  
$
228,834
  
$
191,813
  
Liabilities and Shareholders’ Equity
              
Current liabilities:
              
Accounts payable
  
$
31,655
  
$
26,267
  
Consumer prepayments
    
14,718
   
9,368
 
Accruals:
              
Sales returns
    
5,403
   
5,038
 
Compensation and benefits
    
24,839
   
13,913
 
Taxes and withholding
    
9,624
   
6,392
 
Other
    
8,659
   
8,143
 
Total current liabilities
    
94,898
   
69,121
 
               
Long-term liabilities
    
12,589
   
8,348
 
Total liabilities
    
107,487
   
77,469
 
Shareholders' equity:
              
Undesignated preferred stock; 5,000,000 shares authorized, no shares issued and outstanding
    
-
   
-
 
Common stock, $.01 par value; 95,000,000 shares authorized, 35,731,661 and 35,828,222 shares issued and outstanding, respectively
    
357
   
358
 
Additional paid-in capital
    
60,426
   
95,548
 
Unearned compensation
    
(3,393
)
  
(1,752
)
Retained earnings
    
63,957
   
20,190
 
Total shareholders' equity
    
121,347
   
114,344
 
Total liabilities and shareholders' equity
  
$
228,834
  
$
191,813
  


SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)


 
  
Twelve Months Ended 
 
    
December 31,
2005
    
January 1,
2005
  
               
Cash flows from operating activities:
              
Net income
  
$
43,767
  
$
31,555
  
Adjustments to reconcile net income to net cash provided by operating activities:
              
Depreciation and amortization
    
15,747
   
13,643
 
Non-cash compensation
    
793
   
405
 
Loss on disposal and impairments of assets
    
172
   
11
 
Deferred tax benefit
    
(1,353
)
  
(4,032
)
Changes in operating assets and liabilities:
              
Accounts receivable
    
(1,465
)
  
(1,821
)
Inventories
    
(1,501
)
  
(6,371
)
Prepaid expenses
    
(2,466
)
  
(1,407
)
Other assets
    
28
   
(306
)
Accounts payable
    
5,388
   
9,765
 
Accrued sales returns
    
365
   
1,569
 
Accrued compensation and benefits
    
10,926
   
(3,390
)
Accrued taxes and withholding
    
6,990
   
7,372
 
Consumer prepayments
    
5,350
   
3,398
 
Other accruals and liabilities
    
4,757
   
2,091
 
Net cash provided by operating activities
    
87,498
   
52,482
 
Cash flows from investing activities:
              
Purchases of property and equipment
    
(25,840
)
  
(21,399
)
Investments in marketable securities
    
(39,172
)
  
(72,540
)
Proceeds from maturity of marketable securities
    
36,625
   
46,256
 
Net cash used in investing activities
    
(28,387
)
  
(47,683
)
Cash flows from financing activities:
              
Repurchase of common stock
    
(49,727
)
  
(20,853
)
Proceeds from issuance of common stock
    
8,413
   
6,395
 
Net cash used in financing activities
   
(41,314
)
  
(14,458
)
 
Increase (decrease) in cash and cash equivalents
    
17,797
   
(9,659
)
Cash and cash equivalents, at beginning of period
    
15,066
   
24,725
 
Cash and cash equivalents, at end of period
  
$
32,863
  
$
15,066
  



SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(in thousands)
(Unaudited)


 
Three Months Ended
  
Twelve Months Ended
 
December 31,
2005
  
January 1,
2005
  
December 31,
2005
  
January 1,
2005
Percent of sales:
                      
Retail
79.3%
    
80.3%
    
76.7%
    
78.1%
  
Direct
9.3%
    
10.3%
    
10.8%
    
11.5%
  
E-Commerce
5.5%
    
5.0%
    
5.0%
    
4.6%
  
Wholesale
5.9%
    
4.4%
    
7.5%
    
5.8%
  
Total
100.0%
    
100.0%
    
100.0%
    
100.0%
  
                       
Sales growth rates:
                      
Same-store sales growth
18%
    
12%
    
15%
    
16%
  
New/closed stores, net
7%
    
6%
    
7%
    
8%
  
Retail total
25%
    
18%
    
22%
    
24%
  
Direct
14%
    
-3%
    
16%
    
10%
  
E-Commerce
40%
    
30%
    
35%
    
34%
  
Wholesale
68%
    
31%
    
59%
    
73%
  
Total
26%
    
17%
    
24%
    
24%
  
                       
There were 52 weeks in fiscal 2005 and 2004 and 53 weeks in fiscal 2003. Same-store sales and sales growth rates for the quarter and fiscal years ended January 1, 2005 presented above have been adjusted and reported as if each period had the same number of weeks.
                       
Stores open:
                      
Beginning of period
388 
    
362 
    
370 
    
344 
  
Opened
8 
    
8 
    
40 
    
31 
  
Closed
-  
    
-  
    
 (14)
    
(5)
  
End of period
396 
    
370 
    
396 
    
370 
  
                       
Retail partner doors
 
    
 
    
308 
    
89 
  
                       
Other metrics:
                      
Total square footage (000s)
            
469 
    
402 
  
Average sales per store (000s) *
            
$  1,417 
    
$  1,247 
  
Stores > $1 million sales *
            
77%
    
64%
  
Average sales per mattress unit
            
$  2,151 
    
$  1,975 
  
(Q4 Company-owned channels)
                      
Net sales per square foot *
            
$  1,264 
    
$  1,208 
  
Return on equity
            
37.1%
    
30.6%
  
Cash and investments
            
$  112,087 
    
$   91,743 
  
                       
* for stores open during the entire period indicated