SCSS

Select Comfort Corporation (SCSS)

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Industry: Consumer Durables
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Select Comfort Corp. (SCSS)

Q3 2009 Earnings Call

October 22, 2009; 5:00 pm ET

Executives

Mark Kimball - Senior Vice President and General Counsel

Bill McLaughlin - President and Chief Executive Officer

Jam Raabe - Chief Financial Officer and Senior Vice President

Analysts

Budd Bugatch - Raymond James & Associates

Brad Thomas - KeyBanc Capital Markets

Jeeva Ramaswamy - GJ Funds

Presentation

Operator

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

I would like to introduce Mr. Mark Kimball, General Counsel. Sir, you may begin.

Mark A. Kimball

Thank you, Sharon. Good afternoon and welcome to the Select Comfort Corporation third quarter 2009 earnings conference call. Thank you all 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 Senior Vice President and Chief Financial Officer.

In a moment I’ll 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 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 the results of the fiscal period just ended. However, our commentary and 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.

Bill McLaughlin

Thank you all for joining us today to discuss our third quarter performance. We’re extremely pleased with the results of the third quarter and their implications for our company’s long term potential. We’ve made substantial progress since last year, and look forward to discussing the implications with you.

Our immediate priority through the recession has been to manage our business for improved profitability and cash. While at the same time, taking steps to reinforce and strengthen our fundamentals for eventual long-term growth.

This past quarter is as an early indication of the potential of our company in market share, profit leverage and cash generation. As many of you know, the third quarter is historically the strongest seasonal quarter for the mattress industry and for Select Comfort. We took full advantage of it to demonstrate our flexibility and leverage potential.

In the quarter earnings per share was $0.15 after a one-time expense of $0.05 per share related to terminated financing. This compares to earnings last year during the same period of $0.02 per share. Same store sales this third quarter increased 9% year-over-year with total company’s sales declining 6% as we consolidated distribution.

We generated positive free cash flow of $17 million in the quarter, and we have now reduced our debt balance from $79 million at the start of the year to $26 million at the end of the third quarter.

Since the beginning of the year, we’ve shared with you our three strategic priorities designed to turn around our business in the near term and to position us for growth in the long term. These three strategic priorities remain first to align our cost with expected sales trends, second to reignite the Sleep Number brand for growth, and third to preserve cash and improve our capital structure. For those of you who may be new to Select Comfort let me provide some historical context.

Prior to this recession, our strategy for the business centered on rapid expansion, more stores, more points of distribution, more marketing and more products. A positive outcome of the challenges faced by our company has been a renewed focus on fundamentals in core advantages.

Simply put, we’re concentrating on improving and getting more out of our core business, making it significantly stronger and more advantaged. We believe that the actions taken to refocus the company also position us very well to both manage through this period of uncertainty and to take advantage of a sustained economic recovery when it occurs.

Now, let met provide and update about our stated priorities. First the third quarter demonstrated the impact of our cost actions that they have had on the leverage potential of our unique business model. On revenues 6% below prior year we delivered an increase in gross margin of 120 basis points. We also improved sales and marketing expense as a percent of net sales by 740 basis points. We achieved these results because we have worked during the past two years to align our cost structure with anticipated lower sales.

Lowering our breakeven point by more than 30%and it’s important to note that Select Comfort has distinct advantages versus traditional retail business models for leverage as sales increased. Our fixed cost do not need to grow as much to accommodate increased demand. Our stores are essentially showrooms and can support substantial sales expansion without increasing store size, inventory level or making significant staffing changes.

For example, well our average sales per store is approximately a million dollars per year. We have similarly sized stores selling as much as $3 million per year with the addition of one or two sales professionals. We are also learning through our reduced marketing levels that we maybe able to leverage marketing further with growth.

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