SCSS

Select Comfort Corporation (SCSS)

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Industry: Consumer Durables
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Select Comfort Corporation (SCSS)

Q2 2010 Earnings Call Transcript

July 21, 2010 5:00 pm ET

Executives

Mark Kimball – SVP, Legal, General Counsel and Secretary

Bill McLaughlin – President and CEO

Jim Raabe – SVP and CFO

Analysts

Brad Thomas – Keybanc Capital Markets

Budd Bugatch – Raymond James

John Baugh – Stifel Nicolaus

Joan Storms – Wedbush

Tony Gikas – Piper Jaffray

Presentation

Operator

Welcome to Select Comfort’s second quarter 2010 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. (Operator instructions) I would like to introduce Mr. Mark Kimball, General Counsel. Sir, you may begin.

Mark Kimball

Thank you, Kelly. Good afternoon and welcome to the Select Comfort Corporation second quarter 2010 earnings conference call. Thank you 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; Jim Raabe, our Senior Vice President and Chief Financial Officer; and Hunter Saklad, Vice President of Finance, who now leads our investor relations efforts. 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 Web site at selectcomfort.com. Please refer to the details set forth in our news release to access the replay on our Web site.

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.

Bill McLaughlin

Thanks, Mark, and thank you for joining us for an update of Select Comfort’s performance and outlook following the second quarter of 2010. We continue to execute our plan and are pleased with the results through the quarter. We entered the year with clear objectives; first, to improve financial performance in an uncertain environment; second to capitalize on opportunities as they arose as the market stabilized; and third, to advance our unique competitive advantages of individualized customer solutions, care and satisfaction to strengthen our foundation for continued growth and acceleration.

During the second quarter, we demonstrated solid execution and results against these priorities, which is indicated by strong financial performance. Revenue of a $139 million was 15% more than prior year despite 46 fewer stores and discontinued retail partner operations in the United States.

Net operating profit of 7.2% reflected continued strong gross margins and leverage of selling, marketing and G&A expenses. And second quarter performance is particularly impressive given the quarter’s seasonal softness, which historically has had a deleveraging effect on cash. Strong operating earnings and tight discipline on working capital allowed us to maintain our cash balance at the end of the quarter at $40 million, with no debt.

In the quarter, we also strengthened our competitive advantages and customer experience, which will have long-term benefits. And let me share a few metrics that we follow closely. First is our net promoter score, a measure of consumer satisfaction. This is a widely used gauge of owners’ strong willingness to recommend a product versus those who would not. Our rating has advanced 25% since the fourth quarter last year when we introduced programs to set new standards in store experience, product quality and customer care. Programs and execution are planned to continue advancing customer satisfaction, which is the cornerstone of long-term growth.

A second metric is average sales per store. This is an important indicator of leveraging sales growth and rebalancing our store portfolio in each market. Over the past three months, average sales per store increased $70,000 representing approximately $30 million of incremental annual sales. And the variable profit margin on incremental sales per store is more than 50% exclusive of increases in media investment.

To put this in perspective, if we were to sell two additional beds per week in a store that's averaging 10-bed to 12-bed sales per week, we could see a $300,000 lift in average annual sales for that store, and across our store base that represents an additional $120 million in annual sales potential and only reestablishes the sales per store level to which we experienced in 2008. We believe there is significantly more opportunity to surpass that goal.

The third measure to note is employee engagement. We measure company-wide engagement twice a year, and achieved an all-time high engagement score during the past quarter. This progress is also reflected in record retention in our stores, plants, home delivery and corporate office teams. Employee engagement is critical to our organization because it is our people who improve the lives of our customers through enhanced experiences and innovative solutions.

Customer satisfaction, store sales leverage and employee engagement are all key measures for the future on which we will continue to focus.

Throughout 2010, we've managed our top line expectations to a cautious outlook on the economy. We continue to prioritize execution to ensure both profit and market share growth. This approach has served us well as we have significantly strengthened our balance sheet. We will continue the same approach into the second half of the year.

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