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.

Source: Select Comfort Corporation

Select Comfort Corporation
Investor Contact:
Dave Schwantes, 763-551-7498
investorrelations@selectcomfort.com
or
Media Contact:
Susan Eich, 763-551-6934
Susan.Eich@selectcomfort.com

###

Related Posts

Select Comfort Records Third-Quarter Sales Surge

BRIEFLY Third-quarter snapshot Net sales $374 million Net income...

Select Comfort Income Slips in Third Quarter

Select Comfort Corp., the Minneapolis-based manufacturer and retailer of...

Select Comfort sees third-quarter sales spike

Airbed maker Select Comfort reported that net sales for...

Select Comfort reports strong third-quarter results

BRIEFLY Select Comfort’s third quarter Net sales $247 million...