SCSS

Select Comfort Corporation (SCSS)

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Select Comfort Corporation (SCSS)

Q1 2010 Earnings Call

April 21, 2010 5:00 pm ET

Executives

Mark Kimball – Senior Vice President, General Counsel

William McLaughlin – President, Chief Executive Officer

James Raabe – Senior Vice President, Chief Financial Officer

Analysts

Chad for Budd Bugatch – Raymond James

Mark Rupe – Longbow Research

Bradley Thomas Keybanc Capital Markets

John Baugh – Stifel Nicolaus

Presentation

Operator

Welcome to Select Comfort’s first quarter 2010 earnings conference call. (Operator Instructions) I would like to introduce Mr. Mark Kimball, General Counsel.

Mark Kimball

Good afternoon and welcome to the Select Comfort Corporation first quarter 2010 earnings conference call. Thank you all for joining us. I’m Mark Kimble, Senior Vice President and 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 selectcomfort.com. Please refer to the details set forth in our news release to access the replay on our website.

Please also refer to our new release for a reconciliation of certain non-GAAP financial measures included in the release or that may be discussed on this call. The primary purpose of this call is to discuss the results of the fiscal period just ended. However, our commentary and responses to your question 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 McLaughlin

Good afternoon and thank you for joining us for our review of Select Comfort’s first quarter performance and outlook for the remainder of the year.

Earlier today, we reported strong first quarter results with improved performance across all measures. Revenue was up 13% versus prior year led by an increase in same store sales of 29%. Net operating profit was $14.2 million versus $300,000 in prior year with a margin of 9%, a first quarter record. In our cash balance at the end of March was just under $45 million with no debt and a new credit agreement in place.

We are very pleased with the quality of our quarter’s results. Not only did we deliver against our stated priority of increasing profit in an uncertain environment, but also we achieved solid top line growth and momentum.

There are three points that I’d like to emphasize today that influenced the unique long-term potential of Select Comfort. The first relates to demand. Consumer demand for our unique product and total customer experience is strong and growing stronger. Second is discipline; we will continue to focus on cost control and margin expansion, selectively increasing spend on what’s proven to drive more immediate results.

And third is our long-term outlook. Because of our improved financial strength and performance, we now have some flexibility in our pursuit of investment and long term growth initiatives that build on our competitive advantages.

First, let’s start with demand. Consumer interest in our unique and life-changing product is increasing, as is our confidence in our ability to sustain this positive momentum. We’ve now experienced five consecutive quarters of improved sales trends with increased marketing and selling leverage, which reflects both the quality and sustainability of our improvements.

Given our results, and our strong believe in our product and our programs, we have raised our outlook for the year as indicated in our release. The first quarter was an important test of our ability to sustain growth against improving year ago trends.

During the first quarter of last year, while the economic outlook was quite uncertain, we had started to see improvement in same store sales trends as we enhanced our value proposition which included both repositioning the entire product line and reformulating our promotional strategy.

We also returned to the fundamentals of our advertising and media in the first quarter of 2009, which we believe also improving trends, and these strategies were refined throughout 2009 and into the first quarter of 2010, delivering consistent improvement in same store sales trends including this past quarter, which is when we began lapping prior year improvements.

We believe that during the quarter we benefited not only from strong execution and innovation, but also from an improved consumer environment. We will continue to control what we can control, improving our core programs to take advantage of market growth which our unique vertically business model allows us to do well.

Second, let’s focus on discipline. We remain cautious in our outlook for the economy and discipline yet flexible in our approach to investments. Though there are clear signs of stabilization in the past few quarters, we believe the concerns around employment, housing and interest rates suggest that we must continue our tight control on fixed costs and not invest too far ahead on variable or discretionary spending.

However, despite a conservative approach we are fundamentally a growth-oriented company looking to improve more people’s lives and to invest further in proved opportunities.

For example, during the first quarter we tested, proved and accelerated new marketing and sales approaches. This included incremental local market spending for accelerated development in key markets and it also included increasing national advertising support around specific consumer holiday periods. And given the positive test results, we invested an incremental $2.5 million versus prior year to both offset media inflation and to fuel incremental growth.

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