SCSS

Select Comfort Corporation (SCSS)

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Industry: Consumer Durables
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Select Comfort Corporation (SCSS)

Q2 2009 Earnings Call

July 23, 2009 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 and Senior Vice President

Analysts

Analyst for Budd Bugatch - Raymond James

John Baugh - Stifel Nicolaus & Company, Inc.

Joel Havard - Hillard Lyons

Presentation

Operator

Welcome to Select Comfort’s second quarter 2009 earnings conference call. All lines have been placed in a listen-only mode until the question and answer session. Today’s call is being recorded. If anyone has any objections, you may disconnect at this time.

I would like to introduce Mr. Mark Kimball, General Counsel.

Mark A. Kimball

Thank you, Holly. Good afternoon and welcome to the Select Comfort Corporation second quarter 2009 earnings conference call. Thank you for joining us. I’m Mark Kimball, Senior Vice President, General Counsel. With me on the call today are Bill McLaughlin, our President and Chief Executive Officer and Jim Raabe, our Chief Financial Officer and Senior Vice President.

In a moment I’ll turn the call over to Bill. Following our prepared remarks we will open the call up for your questions. Please be advised that this telephone conference is being recorded and will be available by telephone replay. It also will be archived on our website at www.selectcomfort.com. 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 second quarter results. As you know, we previously announced that we have entered into an investment agreement with Sterling Partners which remains subject to shareholder approval. The Sterling transaction and its background and rationale will be fully detailed and definitive proxy materials that we expect to mail to our shareholders in the next 7 to 10 days. Therefore, we do not intend to discuss the Sterling transaction in any detail in our comments or in our answers to your questions. We urge our shareholders to review and carefully consider the definitive proxy materials when available.

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

Thanks Mark, and thank you all for joining us today. We are looking forward to discussing with you our second quarter performance and our continued progress to improve operating results.

During our last earnings call we shared with you that the anticipated lower sales and earnings and negative cash flow given second quarter’s seasonal low selling period. However, I’m pleased to report that we outperformed our expectations in the quarter. While as expected sales were lower than prior year and the prior quarter, but we delivered improved operating income and cash flow, and importantly, same store sales trends improved both sequentially from the first quarter and during the quarter.

Our second quarter results reflect the impact of the strategies and priorities that we set in motion late last year. Let me share a few of the highlights from the second quarter and why they are important for the second half as well as our continued long term advancement.

Our first priority involves resizing our cost structure to reflect the realities of today’s macroeconomic environment and changes that are designed to allow us to be profitable at lower sales. The fact that we achieved positive operating profit during our seasonally low quarter demonstrates that we’re on the right track.

Several key metrics reflect the positive effects of our cost actions in the quarter. First, we achieved a 200 basis point improvement in gross margin despite volume deleverage and increased focus on value. Second, we experienced a 560 basis improvement in sales and marketing expenses as a percent of sales. Media investment in the quarter was down approximately 44% year-over-year as we left a high spend quarter a year ago.

We continued our 2009 strategy to invest at historic levels of media per unit and to test and prove efficiency before increasing support levels. Year-over-year sales trends in the quarter were in line with our closest competitor despite our media reductions and more than 50 fewer company stores in the quarter. This outcome demonstrates the effectiveness and the efficiency of our recent sales and marketing initiatives.

Finally, our actions to reduce overhead drove a $2.5 million reduction in G&A and R&D in the quarter. Despite this reduction we achieved increased employee engagement across the organization which we measure on a regular basis. Looking ahead ,we are committed to continue to identify and execute additional ways to reduce fixed costs across the company.

Our second priority focuses on reigniting the Sleep Number brand to drive consumer awareness and move us toward our goal of restoring sustainable growth. Our product and our brand clearly remained the key foundations of our future. In today’s environment we understand the importance of delivering value to our consumers and in the second quarter we benefited from the continued refinement and execution of our value strategy. Highlights include first the re-launch of our product line in the first quarter which involved repositioning nine mattress models into three series aligned to good, better, and best with three models below $1500 for a queen bed set continues to simplify consumer understanding of our price range and our competitive value.

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