SCSS

Select Comfort Corporation (SCSS)

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Industry: Consumer Durables
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Select Comfort (SCSS)

Q2 2011 Earnings Call

July 20, 2011 5:00 pm ET

Executives

William McLaughlin - Chief Executive Officer, President and Executive Director

Wendy Schoppert - Chief Financial Officer

Mark Kimball - Chief Administrative Officer, Senior Vice President of Legal, Secretary and General Counsel

Analysts

Chad McEver

Mark Rupe - Longbow Research LLC

Eric Hollowaty - Stephens Inc.

Bradley Thomas - KeyBanc Capital Markets Inc.

John Baugh - Stifel, Nicolaus & Co., Inc.

Presentation

Operator

Welcome to the Select Comfort Second Quarter 2011 Earnings Conference Call. [Operator Instructions] 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, Angie. Good afternoon, and welcome to the Select Comfort Corporation Second Quarter 2011 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; and Wendy Schoppert, our Executive 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 sleepnumber.com. Please refer to the details set forth in our news release to access the replay on our website. Please also refer to the news 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.

William McLaughlin

Thank you, Mark, and thank you for joining us today for Select Comfort's second quarter 2011 update.

Let me start by saying that second quarter was another important step toward a record year for our company, with operational and financial successes across the business. And more important, second quarter, again, demonstrates the growth potential of this business. We continue to make steady progress toward goals to enhance our position as the leader in quality sleep and to consistently deliver profitable growth.

Since recovering in 2009 from the macroeconomic crisis, we've now increased the operating profit performance year-over-year for 2.5 years or 10 consecutive quarters. Second quarter operating profit was at a record level, both in dollars and margin rate, building on first quarter achievements.

In the second quarter, revenue increased 16% supported by company-controlled channel comp increase of 20%. We continue to outpace the industry. And operating profit increased 77% versus prior year, with a margin of 10.9% reflecting focus on profitable growth to accelerate earnings. And we ended the period with a cash and marketable securities balance of $98 million and no debt.

What's important to note is that we maintained a strong cash balance during our seasonal low quarter. As we look at current and future performance, there are 5 key competitive advantages that contributed to second quarter success, and we expect them to continue to help drive long-term profitable growth.

They include proprietary products, the Sleep Number brand, distribution and store strategy, the margin and cash potential of our overall business and people and culture.

First is the unique line of Sleep Number bed and bedding products, which feature personalized comfort and other attributes that address real consumer needs. With unmatched value that consumers are just beginning to discover, our products have significant growth and share potential. This is evidenced by our more developed markets, where we estimate market share to be 2 to 3x the national share -- national average share of just 5% of the total industry revenue.

Second is the Sleep Number brand, which is a young iconic national brand that only fully transitioned from Select Comfort during the past year. Our most immediate source of growth is increasing consumer awareness of our brand and also ensuring that they know where to find it. The size of these opportunity is measured by brand awareness relative to industry share leaders.

Today, top of mind consumer awareness of the Sleep Number is only about 25% that of the leading mattress manufacturers, and awareness of our 375 stores is far less than leading mattress retailers. We see a general correlation of awareness to share, which suggests significant opportunity to fuel growth as we increase awareness and understanding of the Sleep Number brand and its exclusive distribution.

Our third advantage is distribution and optimization of company controlled selling channels, our retail stores in particular. We are still learning the potential for how high we can take sales per store. We also are determining the total number of stores to ultimately target. We are investing in local media and adjusting store base with a careful eye on maximizing each store and developing each market. It is clear that significant growth opportunities remain in the United States, which will be our distribution priority for the next several years.

Fourth is profit margin and cash generation, taking advantage of our vertically-integrated business model to accelerate earnings and self fund organic growth. Our goal is to achieve a cash balance designed to sustain investments through market pickups and to take advantage of our core business investment opportunities. Our intent is to continue increasing operating profit margin from the historic high rates of 9% to 10% to targeted 12% to 15% in the coming years.

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