SCSS

Select Comfort Corporation (SCSS)

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Industry: Consumer Durables
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Select Comfort Corporation (SCSS)

Q3 2008 Earnings Call

October 22, 2008 5:00 pm ET

Executives

Mark A. Kimball - Senior Vice President and General Counsel

William R. McLaughlin - President and Chief Executive Officer

James C. Raabe - Chief Financial Officer

Analysts

Robert Evans - Craig-Hallum Capital

John Baugh - Stifel Nicolaus & Company, Inc.

Ayria Cole

Joel Havard - Hilliard Lyons

Bill Massie

Budd Bugatch - Raymond James

Presentation

Operator

Welcome to the Select Comfort third quarter 2008 earnings conference call. (Operator’s instructions) Now I would like to turn the meeting over to Mark Kimball.

Mark A. Kimball

Welcome to the Select Comfort Corporation third quarter 2008 earnings conference call. Thank you all for joining us. I am Mark Kimball, Senior Vice President and General Counsel. With me on the call are Bill McLaughlin, our President and Chief Executive Officer and Jim Raabe, our Senior Vice President and Chief Financial Officer. In a moment, I will turn the call over to Bill. Following our prepared remarks, we will open the call to your questions.

Please be advised that this telephone conference is being recorded and will be available by telephone replay. It will also be archived on our website. Please refer to the details set forth in our news release to access the replay on our website. The primary purpose of this call is to discuss the results of fiscal period just ended. However, our commentary and our responses to your questions may include certain forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties outlined in our earnings release and discussed in some detail in our Annual Report on Form 10-K and other periodic filings with the SEC. The company’s actual future results may vary materially.

I will now turn the call over to Bill for his comments.

William R. McLaughlin

Thank you for joining us today. Select Comfort did what we said we would do. We returned to profitability in the third quarter. At the end of the second quarter, after a difficult start to the year with two quarters of losses, we stated our goal of returning to profitability in the second half of the year, assuming normal seasonality.

We achieved our goal despite a sales environment that continued to deteriorate and that did not provide the quarter’s normal seasonal lift. While important advances were made in new products and new marketing approaches, we have not stabilized sales and share trend. Our improved results were driven primarily by gains in gross margin and reductions in expenses.

Gross margin in the quarter was 62%, improved versus both prior year and on a sequential basis. Gross margin has been an area of focus during these inflationary times with specific programs to strengthen mix and raise average selling price.

New bed models targeted mid-to-higher price points and met their mix goals and increased bedding accessories sales further supported overall gross margin.

Operating profit margin benefitted from expense restructuring and cost controls across the company. During the quarter costs decreased approximately $18.0 million versus prior year.

So in the quarter we did what we said we would do, delivering $12.0 million more in profit than each of the previous two quarters, despite battling weak sales. In spite of the progress we made and achieved in the third quarter, like all retailers, we expect significant challenges going forward.

Our sales trends deteriorated after Labor Day as the financial crisis deepened and consumers pulled back from discretionary spending. There have been a few small signs of potential improvement along the way, but in general we have no reason to believe consumer sentiment will improve any time soon.

We expect the fourth quarter will be more challenging than the third. We are doing what we can to continue to adjust our cost base and have specific plans to address what we can control and influence.

Specific initiatives in the fourth quarter and into 2009 include first, we are moving to the next phase of cost restructuring by closing additional stores. In 2008 our cost reductions have not included a significant change in our total store infrastructure. Most of the year we have operated with close to 475 stores, with new store openings similar in number to store closures that we were able to affect through natural lease expirations.

We recently concluded an evaluation to optimize our store base. The analysis was conducted market by market considering a range of projected potential volume trends and with a view to optimal footprint by market for the future. The range of potential reductions identified, we engaged a real estate consulting firm to work with us to evaluate options to cost effectively reduce our total store base and associated costs.

We are in the midst of evaluating these options and are not able to provide greater detail at this time other than to say that we expect to reduce our store count by 20 stores in the first quarter of 2009, taking advantage of lease expirations and exit clauses of underperforming stores.

Second, we believe we have additional opportunity to enhance our product cost competitiveness. Our R&D teams have been redirected to focus on design opportunities and quality improvements of current products in an effort to counter inflationary pressures of commodities and deleverage. Our goal is to provide more flexibility in our pricing and promotion, particularly at price points under $1,500 while protecting variable operating margins.

And third, we will decrease marketing expense more aggressively, targeting a percent of sales 2 points to 3 points lower than in 2008. In the quarter, we discontinued the SHeDAISY Creative. We improved cost per lead with proven direct response TV and introduced new radio focused on dual comfort and store locations in support of the Labor Day events. Results over the Labor Day period were positive but have been difficult to read since and we are not sustained through Columbus Day.

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