Select Comfort Announces Fourth Quarter and Full-Year 2008 Results

Select Comfort Corporation (NASDAQ: SCSS), the nation’s leading bed retailer and creator of the SLEEP NUMBER^® bed, today announced results for the fiscal 2008 fourth quarter ended January 3, 2009. Net sales for the quarter totaled $131.1 million, a decrease of 31 percent, compared to $190.7 million in the fourth quarter of 2007. The company reported a fourth quarter net loss of $57.4 million, or $1.30 per diluted share, compared to net income of $2.2 million, or $0.05 per diluted share, in the fourth quarter of 2007. Fourth quarter results include $58.9 million in charges, including $32.1 million in asset impairments for stores and information systems, and a $26.8 million charge for the establishment of a deferred tax valuation allowance. Excluding these charges, the company would have reported a net loss of $11.4 million or $0.26 per diluted share.

"2008 was a difficult year for the entire bedding industry, including Select Comfort. Economic conditions deteriorated steadily as the year progressed, and consumer sentiment weakened further in the fourth quarter,” said Bill McLaughlin, president and CEO, Select Comfort Corporation. "Despite this, we achieved positive operating cash flow for the year as a result of proactive and aggressive cost-reduction actions, and we expect significant improvement in earnings for the first quarter of 2009.”

McLaughlin said the company is focused on three key priorities in response to the current economic challenges:

• Reducing costs to more closely align them with near-term sales trends;
• Re-igniting the Sleep Number brand and enhancing its relevance to consumers seeking greater value; and,
• Preserving cash and working to increase financial flexibility.

"During the fourth quarter, we implemented a series of initiatives to reduce fixed and variable costs, maintain margins and improve sales consistency. These initiatives, which are continuing in the first quarter of 2009, are expected to deliver approximately $80 million in cost savings in 2009,” McLaughlin continued. "We also have shifted marketing and promotional activities to focus more on affordable entry-level products and have seen an improvement in sales trends during the first quarter of 2009. We anticipate that challenging conditions will persist throughout the year, but believe the cost actions we have taken, and continue to take, should allow us to generate year-over-year improvement in earnings and positive cash flow in 2009.”

Fourth Quarter and Full-Year Summary

During the fourth quarter, retail sales declined 25 percent, driven by a 29 percent decline in same-store sales, with a net reduction of seven stores during the past 12 months. During the fourth quarter, the company closed five stores. Fourth quarter e-commerce and direct-marketing sales were lower, with revenues in these channels declining 41 percent and 37 percent, respectively. Wholesale sales declined 61 percent in the period.

Fourth quarter gross profit margin of 55.9 percent declined 2.6 percentage points from 58.5 percent in the prior year period. The decline reflects a more aggressive pricing and promotion strategy to generate store traffic and drive sales. Sales and marketing costs in the fourth quarter of 2008 decreased by 19 percent to $74.0 million, representing 56.5 percent of net sales. This compares to $91.8 million, or 48.2 percent of net sales in the prior-year period.

General and administrative expenses were $16.1 million in the fourth quarter, or 12.3 percent of net sales. This compares to $15.2 million, or 8.0 percent of net sales, in the fourth quarter of 2007. The year-over-year variance would have been positive without approximately $2.0 million of fourth quarter 2008 expenses associated with SAP project termination costs and financing-related consulting fees.

Cash flows from operating activities were $3.0 million for full-year 2008, compared to $44.0 million for full-year 2007. The company reduced 2008 capital expenditures to $32.2 million, compared to $43.5 million in the prior year. As of January 3, 2009, cash and cash equivalents totaled $13.1 million and outstanding debt totaled $80.3 million.

Net sales for 2008 totaled $608.5 million, a decrease of 24 percent compared to $799.2 million in 2007. The company reported a 2008 net loss of $70.2 million, or $1.59 per diluted share, compared to net income of $27.6 million or $0.57 per diluted share, in 2007. Asset impairments and the deferred tax valuation allowance totaled $61.4 million for the year. Excluding these charges, the company would have reported a net loss of $22.6 million or $0.51 per diluted share.

Fiscal 2009 Outlook

The company does not provide specific earnings guidance. However, it expects that macro-economic trends and consumer confidence will remain weak throughout the year, and that its sales will decline commensurate with its peer group. As a result of the significant actions taken to reduce costs, the company expects to achieve positive free cash flow and moderately improved profitability in 2009 compared to 2008, before the impact of one-time charges and asset impairments in 2008. These improved trends are already being realized on a first quarter-to-date basis.

Financial Position

As previously disclosed, the company has obtained temporary waivers to comply with certain ongoing bank covenants. During the fourth quarter of 2008 and into the first quarter of 2009, it entered into amendments to its existing credit agreement and has continued to operate under its borrowing limits as a result of modifications to that agreement. The company has continued to work closely with its banks throughout this period. The company also reiterated that it has been pursuing a range of strategic and financing alternatives to enhance both its short-term and long-term financial flexibility.

"There is no doubt that we are operating in the most challenging environment in our company’s history. While we have made good progress on reducing costs and stabilizing sales, it also is important for us to further enhance our financial flexibility,” explained McLaughlin. "Accordingly, we are reviewing various financing and strategic alternatives that will provide additional capital and strengthen our financial position in the near-term and for the future.”

The company’s financial statements for the year ended January 3, 2009, as disclosed in its Form 10-K filed with the Securities and Exchange Commission today, contained a going concern qualification from its auditors. This statement is made in compliance with Nasdaq Rule 4350(b), which requires disclosure of receipt of an audit opinion that contains a going concern qualification.

Cost Reduction and Other Initiatives

As highlighted previously, the company expects to benefit from a series of initiatives to reduce costs and stabilize sales, including actions taken in the fourth quarter of 2008 involving:

• The reduction in corporate workforce by approximately 22 percent, reducing fixed G&A by $10.0 million on an annual basis; and
• The reduction of capital investment by $25.0 million or more by suspending further store openings and ceasing all activities related to the implementation of SAP-based IT applications.

Continued actions in the first quarter of 2009 include:

• Plans to close 55 or more stores in 2009, including 30 stores in the first quarter, reducing fixed store costs by approximately $10.0 million;
• Supply chain restructuring initiatives that drive savings of more than $6.0 million in 2009, including logistics resizing and the closing of the company’s Omaha, Neb., facility;
• The reduction of media spend by $30.0 million, in line with recent and projected sales trends;
• A $20.0 million additional reduction in fixed and discretionary marketing and selling expenses;
• The relaunch of the Sleep Number bed line, reducing product costs by $10.0 million, improving product quality, and focusing on price points below $1,500 to provide broader selection at entry-level price points and a clear product step-up strategy;
• The introduction of more aggressive pricing and promotional strategy to drive traffic and conversion; and

• The introduction of new direct marketing TV creative and local radio, highlighting unique product advantages, which to date, has generated consistent traffic on a lower year-over-year media spend.

Conference Call

Management will host its regularly scheduled conference call to discuss the company’s results at 5 p.m. Eastern Time (4 p.m. Central; 2 p.m. Pacific) March 19, 2009. To listen to the call, please dial (888) 972-6711 (international participants dial (210) 234-0123) and reference the passcode "Sleep.” To access the Webcast, please visit the investor relations area of the Select Comfort Web site.

A replay will remain available until midnight Central Time, March 27, 2009, by dialing (402) 998-0960. The Webcast replay will remain available in the investor relations area of the company’s Web site for approximately 60 days.

About Select Comfort Corporation

Founded more than 20 years ago, Select Comfort Corporation is the nation’s leading bed retailer⁽¹⁾. Based in Minneapolis, the company designs, manufactures, markets and supports a line of adjustable-firmness mattresses featuring air-chamber technology, branded the Sleep Number® bed, as well as foundations and bedding accessories. SELECT COMFORT® products are sold through its approximately 450 company-owned stores located across the United States; select bedding retailers; direct marketing operations; and online at www.sleepnumber.com.

Forward-Looking Statements

Statements used in this news release relating to future plans, events, financial results or performance are forward-looking statements subject to certain risks and uncertainties including, among others, such factors as our ability to fund our operations through cash flow from operations or availability under our bank line of credit or other sources, and the cost of credit or other capital resources necessary to finance operations; the risk of non-compliance with financial covenants under our bank line of credit, and the potential need to obtain additional capital through the issuance of debt or equity securities; current general and industry economic trends; consumer confidence; the effectiveness of our marketing messages; the efficiency of our advertising and promotional efforts; consumer acceptance of our products, product quality, innovation and brand image; availability of attractive and cost-effective consumer credit options; execution of our retail store distribution strategy, including our ability to cost-effectively close under-performing store locations; our dependence on significant suppliers, and our ability to maintain relationships with key suppliers, including several sole source suppliers; the vulnerability of key suppliers to recessionary pressures, labor negotiations, liquidity concerns or other factors; rising commodity costs and other inflationary pressures; industry competition; our ability to continue to improve our product line; warranty expenses; risks of pending and potentially unforeseen litigation; increasing government regulations, including new flammability standards for the bedding industry and new safety standards for consumer products, which have or will add product cost pressures and have or will require implementation of systems and manufacturing process changes to ensure compliance; the adequacy of our management information systems to meet the evolving needs of our business and evolving regulatory standards applicable to data privacy and security; our ability to attract and retain senior leadership and other key employees, including qualified sales professionals; and uncertainties arising from global events, such as terrorist attacks or a pandemic outbreak, or the threat of such events. Additional information concerning these and other risks and uncertainties is contained in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K, and other periodic reports filed with the SEC. The company has no obligation to publicly update or revise any of the forward-looking statements in this news release.

⁽¹⁾ Top 25 Bedding Retailers, Furniture/Today, August 2008.