SCSS

Select Comfort Corporation (SCSS)

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Exchange: NASDAQ
Industry: Consumer Durables
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Select Comfort Corporation (SCSS)

Q4 2010 Earnings Call

February 9, 2011 5:00 pm ET

Executives

Mark Kimball - SVP and General Counsel

Bill McLaughlin - President and CEO

Jim Raabe - SVP and CFO

Hunter Saklad - VP of Finance

Analysts

Chad Bolen - Raymond James

Brad Thomas - KeyBanc Capital Markets

Mark Rupe - Longbow Research

John Baugh - Stifel Nicolaus

Presentation

Operator

Welcome to Select Comfort's fourth quarter and full year 2010 earnings conference call. (Operator Instructions) I'd now like to introduce Mr. Mark Kimball, General Counsel.

Mark Kimball

Good afternoon and welcome to the Select Comfort Corporation fourth quarter and year-end 2010 earnings conference call. Thank you all for joining us. I'm Mark Kimball, 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.

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 also 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 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

Good afternoon and thank you for joining us, as we discuss Select Comfort's recent accomplishments and highlight future opportunities for the company. As you can see from today's news release, the quality of our fourth quarter and full-year earnings represent a strong finish to an important year for us, a year, where we moved from stabilizing our financial position to achieving consistent profitable growth.

We accomplished two very important things during 2010. First, we delivered strong financial results with consistent sales and earnings growth throughout the year, including in the fourth quarter as we lapped a strong prior-year period. And second, we achieved significant operational advances that positioned us well for profitable growth in 2011 and beyond.

As it relates to financial performance, the fourth quarter marked eight consecutive quarters, two full years of consistent profit improvement in an uneven macroeconomic environment. Net operating profit in the year increased a 153%, with EPS of $0.57, $0.13 of that in the fourth quarter.

For the full year, net sales increased 11% and 21% increase in same-store sales. And we continued growing ahead of the industry in the fourth quarter. Our net sales increased 9% and same-store sales 12% versus the industry at 3%. Lastly, the company generated $71 million in cash flow from operating activities during the year and ended 2010 debt free with a cash balance of $81 million.

In 2010, we also made significant progress in our core operations, particularly in three areas. First, attracting more consumers to consider Sleep Number products. Unit sales and company channels increased by 11% despite reduced store weeks. Second, we better satisfy those who became customers. Referral and repeat increased approximately 15% in 2010. And third, we leveraged growth for greater margin and cash flow in order to fund investments for future acceleration.

Key contributors to our 2010 operating improvement included media investment. During the year we increased our media investment by 14% or $8.8 million, while achieving our second highest level of media efficiency during the past 10 years and brand focus. We also strengthened our brand focus and the consistency of the message around the Sleep Number beds unique differences.

We also converted all store marquees to Sleep Number and all of our advertising and consumer communications now have a consistent look and message. In distribution, we continued to restructure our distribution base of company-owned stores. Our focus for now is on productivity rather than a number of stores.

In 2010, among stores opened for at least 12 months, we increased the average revenue 24% and we did this by working on store locations and formats, local marketing programs and sales team selection and training. We also continued to enhance our unique end-to-end customer experience, which is critical to consumer adoption of a revolutionary individualized technology.

Investments over the years in product quality and customer care are paying dividends. Sleep Number customer satisfaction is measured by our net promoter score improved nearly fivefold in the past two years. And we are now firmly in the range of top performing companies and we believe we can advance even further to join the elite.

And our internal employee engagement reached a record high during the year, which is important as engaged employees lead to satisfied customers. Lastly, we increased operating leverage and built cash, which allowed us to begin investing in longer-term growth initiatives. These investments position us to accelerate growth in 2011, and beyond.

And before we move into our 2011 outlook, we want to touch on a transition in our marketing leadership. Our Chief Marketing Officer for the past two years Tim Werner, has decided to move away from the corporate world as a career path, in part to spend more time with his family. We respect his decision and appreciate his willingness to stay actively involved through the transition over the next several quarters.

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