8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): October 24, 2006

SELECT COMFORT CORPORATION

(Exact name of registrant as specified in its charter)

Minnesota

(State or other jurisdiction of incorporation or organization)

0-25121	41-1597886
(Commission File No.)	(IRS Employer Identification No.)

6105 Trenton Lane North, Minneapolis, Minnesota 55442

(Address of principal executive offices)           (Zip Code)

(763) 551-7000

(Registrant’s telephone number, including area code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

1

ITEM 2.02  RESULTS OF OPERATIONS AND FINANCIAL CONDITION

On October 24, 2006, Select Comfort Corporation issued a press release announcing results for the third quarter ended September 30, 2006. A copy of the press release is attached as Exhibit 99.1 to this Current Report on Form 8-K.

ITEM 9.01  FINANCIAL STATEMENTS AND EXHIBITS

(c)	Exhibits.
	Exhibit 99.1	Press Release, dated October 24, 2006

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	SELECT COMFORT CORPORATION
	(Registrant)
Dated: October 24, 2006	By: /s/ Mark A. Kimball
	Title:Senior Vice President

INDEX TO EXHIBITS

The exhibit listed in this index is being furnished pursuant to Item 2.02 of Form 8-K and shall not be deemed “filed” for purposes of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any document filed under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, except as otherwise expressly stated in any such filing.

Exhibit No.	Description of Exhibit
99.1	Press Release, dated October 24, 2006

2

EX-99.1

FOR IMMEDIATE RELEASE

Media Contact:	Investor Relations Contact:
Tammy Nystuen	Frank Milano
(763) 551-7496	(763) 551-6908
tammy.nystuen@selectcomfort.com	frank.milano@selectcomfort.com

SELECT COMFORT REPORTS 25 PERCENT INCREASE IN THIRD QUARTER EARNINGS PER SHARE

Company raises full year earnings guidance to between $0.95 and $0.97 per diluted share;

establishes 2007 earnings guidance of between $1.18 and $1.25 per diluted share

MINNEAPOLIS - (October 24, 2006) - Select Comfort Corporation (NASDAQ: SCSS), the nation’s leading bed retailer and creator of the Sleep Number^® bed, today announced results for the fiscal third quarter ended September 30, 2006. Third quarter earnings per share totaled $0.25 per diluted share, an increase of 25 percent over the $0.20 per diluted share in the third quarter of 2005. Net sales increased 18 percent to $208.3 million, and net income increased 22 percent to $13.9 million, compared to net sales of $175.8 million and net income of $11.4 million in the third quarter of 2005. Net income and earnings per share in 2005 did not include stock option expense. If third quarter 2005 results had included stock option expense, earnings would have been $0.18 per diluted share in the prior year, and third quarter 2006 earnings of $0.25 per diluted share would represent earnings growth of 39 percent. A reconciliation of this 2005 pro forma measure accompanies this press release.

“Overall, we had a solid third quarter, with earnings growth of 25 percent and 39 percent on a like-for-like comparison basis. This performance would have been even stronger if not for asset impairment charges this quarter. Our efforts to control costs and improve product quality are progressing and are making a significant contribution to our sustained performance,” said Bill McLaughlin, Select Comfort chairman and chief executive officer. “Though our 18 percent

Select Comfort Reports 25 Percent Increase in Earnings per Share - Page 2 of 11

revenue growth, led by 17 percent growth in our company-owned retail stores, continued to be strong relative to industry growth rates, sales did not meet our expectations following a record Labor Day holiday. Despite this slowdown, we are confident and committed to achieving our long-term goals.”

Third Quarter Highlights

·   Diluted earnings per share increased 25 percent, the seventh consecutive quarter of earnings growth at or above the high end of the company’s long-term growth targets

·   Net sales increased 18 percent, including same-store sales growth of 7 percent

·   Operating profit margin expanded to 10.5 percent after absorbing a $1.8 million asset impairment charge

·   Generated record cash flows from operating activities of $50.7 million, increasing the year-to-date total to $56.4 million

·   Invested $25.8 million to repurchase an additional 1.3 million shares, increasing the year-to-date total to $49.5 million to repurchase 2.3 million shares

The company’s distribution expansion strategy continues to be a significant contributor to sales growth. Select Comfort opened 13 net new company-owned stores in the third quarter, increasing the total to 425 stores at September 30. New stores contributed 10 points toward retail store sales growth of 17 percent in the third quarter, with average first year sales per store achieving new records and exceeding planned levels. The company expanded its retail partner distribution by an additional 119 doors in the third quarter, increasing the total to 727 doors in the U.S. and Canada at September 30. Retail partner sales increased 179 percent compared to the third quarter a year ago, leading to record-level performance by the company’s wholesale channel. The company now expects to end 2006 with 440 company-owned stores and a total of 800 retail partner doors.

As a result of the company’s ongoing purchasing efficiencies, logistics and delivery improvements and by leveraging scale in manufacturing, operating margins improved to 10.5 percent of revenue, from 10.3 percent in the third quarter of 2005. These results include a $1.8 million asset impairment charge for retail stores and software development, and stock option expense of $1.7 million, both of which penalized operating margin gains in the quarter.

Select Comfort Reports 25 Percent Increase in Earnings per Share - Page 3 of 11

Gross margins improved 270 basis points to 62.3 percent of revenue, from 59.6 percent in the third quarter of 2005. Gross margins in company-owned channels - which includes retail, e-commerce and direct - improved to 64.2 percent, from 62.1 percent in the third quarter of 2005 and 62.3 percent in the second quarter of 2006. The sequential increase over the second quarter reflects productivity improvements in both manufacturing and logistics and improvements in operating scale from higher sales levels.

Sales and marketing expenses, which includes retail store expenses as well as media and marketing, totaled $87.7 million, or 42.1 percent of net sales, compared to 41.3 percent of net sales in the third quarter of 2005. Media spending totaled $27.7 million, an increase of 25 percent compared to $22.1 million in the third quarter of 2005. On a year-to-date basis, media spending totaled $82.1 million, an increase of 22 percent compared to $67.1 million last year. For the full year, the company expects media expenditures will total approximately $110 million.

Cash and investments totaled $112.7 million at the end of the quarter, an increase of $0.6 million compared to the balance at December 31. Cash flows from operating activities totaled $50.7 million in the third quarter, increasing the year-to-date total to $56.4 million. On a year-to-date basis, the company has invested $49.5 million to repurchase 2.3 million shares of common stock and $21.0 million to fund capital expenditures.

Earnings for the nine months ended September 30, 2006 totaled $0.65 per diluted share, a 35 percent increase over the $0.48 per diluted share for nine months ended October 1, 2005. Net sales for the nine months ended September 30, 2006 increased 21 percent to $609.7 million and net income increased 30 percent to $36.4 million, compared to net sales of $503.2 million and net income of $28.0 million for the nine months ended October 1, 2005. If 2005 results had included stock option expense, earnings would have been $0.44 per diluted share in the prior year, and 2006 earnings of $0.65 per diluted share would represent earnings growth of 48 percent. A reconciliation of this 2005 pro-forma measure accompanies this press release.

Select Comfort Reports 25 Percent Increase in Earnings per Share - Page 4 of 11

Outlook

The company reiterated its long-term growth targets, which extend beyond 2006:

·   Sales growth of between 15 percent and 20 percent;

·   Earnings growth of between 20 percent and 25 percent, and

·   Same-store sales growth of between 7 percent and 12 percent.

Full year sales guidance remains unchanged at or above the high-end of the company’s long-term sales growth targets and earnings per share guidance was increased to between $0.95 and $0.97 per diluted share. The company’s previously stated full year earnings guidance was between $0.93 and $0.97 per diluted share. The revised earnings guidance reflects growth rates of between 25 percent and 28 percent, compared to 2005 full year earnings of $0.76 per diluted share. If 2005 results had included stock option expense, full year earnings would have been $0.69 per diluted share, and the company’s revised 2006 earnings per share guidance would represent growth rates of between 38 percent and 41 percent.

The company established 2007 guidance for sales growth of between 15 percent and 20 percent and earnings of between $1.18 and $1.25 per diluted share. Based on the company’s revised earnings guidance for 2006, earnings growth is expected to be between 22 percent and 32 percent in 2007.

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, October 24, 2006. To listen to the call, please dial 888-889-1954, passcode: SLEEP. International participants may dial 210-839-8500, passcode: SLEEP. 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 until midnight Eastern Time on November 10, 2006, by dialing 203-369-1547. The webcast replay will remain available in the investor relations area of the company’s website for approximately 60 days.

Select Comfort Reports 25 Percent Increase in Earnings per Share - Page 5 of 11

About Select Comfort

Founded in 1987, Select Comfort Corporation is the nation's leading bed retailer⁽¹⁾, holding 30 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 more than 400 company-owned retail stores located nationwide; through selected furniture retailers and specialty 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; risks of potential litigation; our dependence on significant suppliers, and the vulnerability of any suppliers to commodity shortages, inflationary pressures, labor negotiations, liquidity concerns or other factors; rising commodity costs; the capability of our information systems to meet our business requirements and our ability to upgrade our systems on a cost-effective basis without disruptions to our business; and increasing government regulations, including new flammability standards for the bedding industry and our ability to successfully implement systems and manufacturing process changes to ensure compliance with these requirements. 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 Bedding Specialists, Furniture Today, August 14, 2006.

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SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited - in thousands, except per share amounts)
	Three Months Ended
	September 30,		% of		October 1,		% of
	2006		Net Sales		2005		Net Sales
Net sales	$	208,314		100.0%	$	175,833		100.0%
Cost of sales		78,610		37.7%		71,041		40.4%
Gross profit		129,704		62.3%		104,792		59.6%
Operating expenses:
Sales and marketing		87,708		42.1%		72,704		41.3%
General and administrative		18,327		8.8%		13,791		7.8%
Asset impairment charges		1,763		0.8%		162		0.1%
Operating income		21,906		10.5%		18,135		10.3%
Other income:
Interest income		618		0.3%		405		0.2%
Income before income taxes		22,524		10.8%		18,540		10.5%
Income tax expense		8,583		4.1%		7,094		4.0%
Net income	$	13,941		6.7%	$	11,446		6.5%
Net income per share – basic	$	0.26			$	0.21
Net income per share –  diluted	$	0.25			$	0.20
Reconciliation of weighted average
shares outstanding:
Basic weighted average shares outstanding		52,766				53,457
Effect of dilutive securities:
Options		2,350				2,359
Warrants		3				1,363
Restricted shares		185				313
Dilutive weighted average shares outstanding		55,304				57,492

Select Comfort Reports 25 Percent Increase in Earnings per Share - Page 7 of 11

SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited - in thousands, except per share amounts)
	Nine Months Ended
	September 30,		% of		October 1,		% of
	2006		Net Sales		2005		Net Sales
Net sales	$	609,685		100.0%	$	503,185		100.0%
Cost of sales		235,763		38.7%		206,806		41.1%
Gross profit		373,922		61.3%		296,379		58.9%
Operating expenses:
Sales and marketing		257,848		42.3%		211,777		42.1%
General and administrative		57,638		9.5%		40,476		8.0%
Asset impairment charges		1,763		0.3%		162		0.0%
Operating income		56,673		9.3%		43,964		8.7%
Other income:
Interest income		2,248		0.4%		1,543		0.3%
Income before income taxes		58,921		9.7%		45,507		9.0%
Income tax expense		22,505		3.7%		17,557		3.5%
Net income	$	36,416		6.0%	$	27,950		5.6%
Net income per share - basic	$	0.68			$	0.52
Net income per share - diluted	$	0.65			$	0.48
Reconciliation of weighted average
shares outstanding:
Basic weighted average shares outstanding		53,201				53,631
Effect of dilutive securities:
Options		2,639				2,541
Warrants		35				1,760
Restricted shares		193				291
Dilutive weighted average shares outstanding		56,068				58,223

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SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited - in thousands, except per share amounts)
	September 30,		December 31,
	2006		2005
Assets
Current assets:
Cash and cash equivalents	$	26,029	$	32,863
Marketable securities - current		35,994		24,122
Accounts receivable, net of allowance for doubtful accounts
of $521 and $552, respectively		17,120		10,109
Inventories		26,030		21,982
Prepaid expenses		9,658		9,841
Deferred tax assets		6,641		6,139
Total current assets		121,472		105,056
Marketable securities – non-current		50,699		55,102
Property and equipment, net		58,778		53,866
Deferred tax assets		15,551		11,256
Other assets		3,533		3,554
Total assets	$	250,033	$	228,834
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	47,225	$	31,655
Customer prepayments		10,489		14,718
Accruals:
Sales returns		4,168		5,403
Compensation and benefits		24,814		24,839
Taxes and withholding		8,273		9,624
Other		10,912		8,659
Total current liabilities		105,881		94,898
Other long-term accrued liabilities		15,132		12,589
Total liabilities		121,013		107,487
Common shareholders' equity:
Undesignated preferred stock; 7,500 shares authorized, no
shares issues and outstanding		-		-
Common stock, $.01 par value; 142,500 shares authorized,
52,680 and 53,598 shares issued and outstanding, respectively		527		536
Additional paid-in capital		28,120		56,854
Retained earnings		100,373		63,957
Total shareholders’ equity		129,020		121,347
Total liabilities and shareholders’ equity	$	250,033	$	228,834

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SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited - in thousands)
	Nine Months Ended
	September 30,			October 1,
	2006			2005
Cash flows from operating activities:
Net income	$	36,416		$	27,950
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization		14,261			11,586
Share-based compensation		6,115			549
Loss on disposal and impairment of assets		1,806			165
Excess tax benefits from stock option exercises		-			2,391
Changes in deferred tax assets		(4,797	)		(3,010	)
Change in operating assets and liabilities:
Accounts receivable		(7,011	)		(2,110	)
Inventories		(4,048	)		(1,542	)
Prepaid expenses and other assets		178			(2,629	)
Accounts payable		15,570			2,809
Accrued sales returns		(1,235	)		210
Accrued compensation and benefits		(25	)		8,421
Accrued taxes and withholding		(1,351	)		2,096
Consumer prepayments		(4,229	)		3,920
Other accruals and liabilities		4,796			5,014
Net cash provided by operating activities		56,446			55,820
Cash flows from investing activities:
Purchases of property and equipment		(20,953	)		(19,860	)
Investments in marketable securities		(28,369	)		(22,615	)
Proceeds from maturity of marketable securities		20,900			27,125
Net cash used in investing activities		(28,422	)		(15,350	)
Cash flows from financing activities:
Repurchases of common stock		(49,512	)		(46,201	)
Proceeds from issuance of common stock		7,163			6,887
Excess tax benefits from stock option exercises		7,491			-
Net cash used in financing activities		(34,858	)		(39,314	)
(Decrease) increase in cash and cash equivalents		(6,834	)		1,156
Cash and cash equivalents, at beginning of period		32,863			15,066
Cash and cash equivalents, at end of period	$	26,029		$	16,222

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SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Reconciliation of GAAP Net Income to Pro Forma Net Income
(unaudited - in thousands, except per share amounts)
The financial measures used in this press release quantify the impact of adopting Financial Accounting Standards Board (FASB) Statement of Accounting Standards No. 123 (Revised 2004), Share-Based Payments (SFAS No. 123R) related to the expensing of stock option compensation and are referred to as Pro Forma reporting. We view these financial measures to be helpful in assessing the Company's ongoing operating results and the same as those required to be included in our Form 10-Q quarterly financial statements. We include these financial measures in our earnings announcement because we believe they are useful to investors in allowing greater transparency related to supplemental information we use in our financial and operational analysis.
	Three Months Ended					Nine Months Ended
	September 30,		October 1,			September 30,		October 1,
	2006 *		2005			2006 *		2005
Net income, as reported	$	13,941	$	11,446		$	36,416	$	27,950
Stock-based compensation cost, net of tax,
included in net income		-		155			-		338
Stock-based compensation cost, net of tax,
if fair value method had been applied		-		(1,039	)		-		(2,823	)
Adjusted net income, pro forma	$	13,941	$	10,562		$	36,416	$	25,465
Earnings per share:
Basic – as reported	$	0.26	$	0.21		$	0.68	$	0.52
Basic –  pro forma		0.26		0.20			0.68		0.47
Diluted –  as reported	$	0.25	$	0.20		$	0.65	$	0.48
Diluted –  pro forma		0.25		0.18			0.65		0.44
Weighted average shares outstanding:
Basic –  as reported		52,766		53,457			53,201		53,631
Diluted –  as reported		55,304		57,492			56,068		58,223
* Net income and earnings per share in 2006 include stock option expense

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SELECT COMFORT CORPORATION
AND SUBSIDIARIES
Supplemental Financial Information
(unaudited - in thousands)
	Three Months Ended					Nine Months Ended
	September 30,			October 1,		September 30,			October 1,
	2006			2005		2006			2005
Percent of sales:
Retail		76.0%			77.1%		76.4%			75.7%
Direct		8.6%			9.9%		9.7%			11.4%
E-Commerce		5.3%			5.0%		5.4%			4.8%
Wholesale		10.1%			8.0%		8.5%			8.1%
Total		100.0%			100.0%		100.0%			100.0%
Sales growth rates:
Same-store sales growth		7%			15%		13%			14%
Net new stores		10%			5%		9%			7%
Retail total		17%			20%		22%			21%
Direct		4%			10%		3%			17%
E-Commerce		26%			41%		35%			32%
Wholesale		49%			48%		27%			56%
Total		18%			22%		21%			23%
Stores open:
Beginning of period		412			369		396			370
Opened		15			19		33			32
Closed		(2	)		-		(4	)		(14	)
End of period		425			388		425			388
Retail partner doors		727			264		727			264
Other metrics:
Average sales per store ($000s) *	$	1,546		$	1,375
Average sales per square foot ($s) *	$	1,319		$	1,238
Stores > $1 million sales *		84%			73%
Average sales per mattress unit
(Q3 Company-owned channels; $s)	$	2,232		$	2,064
Average mattress sales per mattress unit
(Q3 Company-owned channels; $s)	$	1,712		$	1,619
Return on equity (trailing twelve months)		44.5%			35.7%
Cash and investments	$	112,722		$	88,389
* trailing twelve months for stores open at least one year