Select Comfort Reports First Quarter 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 first quarter ended March 29, 2008. Net sales for the quarter totaled $168.2 million, a decrease of 22 percent, compared to $216.5 million in the first quarter of 2007. The company reported a first quarter net loss of $7.1 million, or $0.16 per diluted share, compared to net income of $10.7 million, or $0.21 per diluted share in the first quarter of 2007. "Our first quarter results were affected by a combination of external and internal factors. Performance was significantly impacted by a reduction in consumer discretionary spending due to a weakening U.S. economy. At the same time, we reduced media spend in anticipation of the launch of our new marketing campaign,” said Bill McLaughlin, chief executive officer. "To mitigate the impact of lower volume, we are taking decisive action to reduce costs and preserve cash, while at the same time selectively investing in initiatives to stabilize our business and better leverage our model going forward.” Cost Reduction and Strategic Investment Initiatives Since late in the fourth quarter of 2007, Select Comfort has accelerated initiatives to improve bottom-line performance including significantly reducing general and administrative costs, sales and manufacturing costs, and raising prices on select models. The cumulative benefit to our cost structure from these initiatives is expected to exceed $30 million over the balance of the year and $45-plus million on an annualized basis. Specifically, the company: Eliminated more than 170 positions including 17 percent of corporate staff; Reduced promotional discounts and took pricing action that total approximately $12 million over the balance of the year; Reduced planned 2008 store openings from 30 to 24 stores. As previously communicated, the company will close approximately 15 stores in 2008 and will continue to monitor performance across its entire store base to determine if additional actions are necessary; Reduced the number of store remodels from 50 to 20 for the year; Deferred the launch of SAP until 2009, in order to reduce the short-term cost and resource impact associated with implementation. In addition to aggressively managing costs and better aligning infrastructure with current business trends, the company has strategically invested in programs to drive improved sales and profitability, including: The launch of a new comprehensive brand marketing campaign across all company-owned channels and multiple media forums; Restoring media spending to 2007 levels; and Introducing new products at new price points. First Quarter Summary First quarter sales benefited from 34 net new company-owned stores opened during the past 12 months. Broader product distribution partially offset a 25 percent decline in first quarter same-store sales. First quarter e-commerce and direct-marketing sales were negatively impacted by lower media investments, with revenues in these channels declining 19 percent and 32 percent, respectively. Wholesale sales declined 37 percent, primarily due to two factors: timing of QVC shows in the first quarter, as well as the launch of an updated retail partner product last year that increased prior-year sales. First quarter gross profit margin of 57.6 percent declined 4.4 percentage points from 62.0 percent in the prior-year period. The decline reflects a downward shift in sales mix and higher commodity costs. The sales mix improved significantly in March following the introduction of the company’s new Sleep Number® 6000 bed model. Sales and marketing costs decreased to $90.6 million and increased as a percentage of net sales to 53.9 percent, compared to 45.3 percent in the first quarter of 2007. General and administrative expenses decreased to $16.2 million and increased to 9.6 percent of sales compared to 8.1 percent of sales in the first quarter of 2007. First quarter costs include $1.5 million in severance costs. Cash flows from operating activities totaled $14.6 million for the first quarter, compared to $27.5 million for the same period last year. Capital expenditures totaled $10.3 million for the quarter, compared to $8.4 million in the first quarter of 2007. As of March 29, 2008, cash and cash equivalents totaled $6.2 million and outstanding debt totaled $44.0 million. "We have made the difficult decisions required to drive improved performance as the year progresses,” said McLaughlin. "We expect operating cash flows will be positive while judiciously investing in high-return initiatives. These investments, such as our new marketing campaign and new product introductions, will help to stabilize sales volume and return to profitability in the second half of 2008.” Fiscal 2008 Outlook The company anticipates that macro-economic pressures will continue throughout the year. The company expects net losses to continue for the second quarter of this year, the seasonal low point for sales, with earnings improving in the second half as seasonally higher sales periods return and the benefits of cost reduction initiatives and media spend begin to take effect. Results for 2008 will benefit from a fifty-third week in the fourth quarter. In terms of costs and margins, the company anticipates that inflationary costs from oil and currency exchange will be offset in part by higher selling prices on select products. Gross margins are expected to improve slightly in future quarters. The company anticipates that overall spending on media, selling and marketing will be in line with 2007 over the balance of the year. The company also expects general and administrative costs to be slightly lower than in 2007. The company is forecasting capital expenditures of $27 million for new stores, store remodels, SAP implementation, and certain manufacturing and logistics investments. This compares to $44 million in 2007. The company expects to have approximately 485 retail locations at the end of fiscal 2008. Conference Call Management will host its regularly scheduled conference call to discuss the company’s results on April 23, 2008 at 5 p.m. Eastern Time (4 p.m. Central; 2 p.m. Pacific). To listen to the call, please dial (888) 972-6711 (international participants dial (210) 234-0123) and reference the passcode "Sleep.” In advance of the call, a presentation will be available at www.selectcomfort.com/investors. To access the Webcast, please also visit the investor relations area of the Select Comfort Web site. A replay will remain available until midnight Eastern Time, Friday, May 2, 2008 by dialing (203) 369-1799. 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 sleep accessories. SELECT COMFORT® products are sold through its more than 480 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 press release that relate to future plans, events, financial results or performance are forward-looking statements that are subject to certain risks and uncertainties including, among others, such factors as general and industry economic trends; uncertainties arising from global events; consumer confidence; effectiveness of our advertising and promotional efforts; our ability to secure suitable retail locations; our ability to attract and retain qualified sales professionals and other key employees; consumer acceptance of our products, product quality, innovation and brand image; our ability to continue to expand and improve our product line; industry competition; warranty expenses; risks of potential litigation; our dependence on significant suppliers, and the vulnerability of any suppliers to commodity shortages, inflationary pressures, labor negotiations, liquidity concerns or other factors; 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; rising commodity costs; the capability of our information systems to meet our business requirements and our ability to upgrade our systems on a cost-effective basis without disruptions to our business; and increasing government regulations, including new flammability standards for the bedding industry which bring product cost pressures and have required implementation of systems and manufacturing process changes to ensure compliance. 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 that may be in this news release. (1) Top 25 Bedding Retailers, Furniture/Today, August 2007. SELECT COMFORT CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (unaudited – in thousands, except per share amounts)           Three Months Ended March 29, % of March 31, % of 2008 Net Sales 2007 Net Sales   Net sales $ 168,165 100.0 % $ 216,509 100.0 % Cost of sales   71,239   42.4 %   82,341 38.0 % Gross profit   96,926   57.6 %   134,168 62.0 % Operating expenses: Sales and marketing 90,600 53.9 % 98,138 45.3 % General and administrative 16,161 9.6 % 17,619 8.1 % Research and development 874 0.5 % 1,584 0.7 % Asset impairment charges   333   0.2 %   - 0.0 % Operating (loss) income (11,042 ) (6.6 %) 16,827 7.8 % Other (expense) income, net   (246 ) (0.1 %)   394 0.2 % (Loss) income before income taxes (11,288 ) (6.7 %) 17,221 8.0 % Income tax (benefit) expense   (4,155 ) (2.5 %)   6,544 3.0 % Net (loss) income $ (7,133 ) (4.2 %) $ 10,677 4.9 %   Net (loss) income per share – basic $ (0.16 ) $ 0.21   Net (loss) income per share – diluted $ (0.16 ) $ 0.21     Reconciliation of weighted-average shares outstanding: Basic weighted-average shares outstanding 44,058 49,713 Effect of dilutive securities: Options - 1,879 Warrants - 1 Restricted shares   -     205 Diluted weighted-average shares outstanding1   44,058     51,798 1 For the first quarter of fiscal 2008, potentially dilutive securities have been excluded from the calculation of diluted weighted average shares outstanding, as their inclusion would have had an anti-dilutive effect on our net loss per diluted share. SELECT COMFORT CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (in thousands, except per share amounts) subject to reclassification     (unaudited)   March 29,   December 29, 2008 2007 Assets Current assets: Cash and cash equivalents $ 6,203 $ 7,279 Accounts receivable, net of allowance for doubtful accounts of $1,126 and $876, respectively 7,488 18,902 Inventories 25,655 32,517 Prepaid expenses 11,065 9,816 Deferred income taxes 6,552 6,796 Other current assets   2,868   3,833 Total current assets 59,831 79,143   Property and equipment, net 83,811 80,409 Deferred income taxes 27,445 25,543 Other assets   3,749   5,394 Total assets $ 174,836 $ 190,489   Liabilities and Shareholders’ Equity Current liabilities: Borrowings under revolving credit facility $ 43,475 $ 37,890 Accounts payable 52,575 69,775 Customer prepayments 9,299 8,327 Accruals: Sales returns 3,456 3,751 Compensation and benefits 17,459 14,865 Taxes and withholding 3,921 4,812 Other current liabilities   7,953   9,723 Total current liabilities 138,138 149,143   Warranty liabilities 6,705 6,747 Capital lease obligations 410 - Other long-term liabilities   11,583   10,473 Total liabilities   156,836   166,363   Shareholders’ equity: Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding - - Common stock, $0.01 par value; 142,500 shares authorized, 44,834 and 44,597 shares issued and outstanding, respectively 448 446 Additional paid-in capital 1,005 - Retained earnings   16,547   23,680 Total shareholders’ equity   18,000   24,126 Total liabilities and shareholders’ equity $ 174,836 $ 190,489 SELECT COMFORT CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited – in thousands) subject to reclassification     Three Months Ended   March 29,     March 31,   2008 2007   Cash flows from operating activities: Net (loss) income $ (7,133 ) $ 10,677 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 5,858 6,803 Stock-based compensation 813 2,072 Excess tax benefits from stock-based compensation (2 ) (756 ) Disposals and impairments of assets 339 10 Changes in deferred income taxes (1,658 ) 1 Change in operating assets and liabilities: Accounts receivable 11,414 (2,380 ) Inventories 6,862 (915 ) Prepaid expenses and other assets 1,352 (478 ) Accounts payable (4,777 ) 10,016 Customer prepayments 972 653 Accrued sales returns (295 ) 872 Accrued compensation and benefits 2,607 (2,378 ) Accrued taxes and withholding (888 ) 4,587 Warranty liabilities (59 ) (386 ) Other accruals and liabilities   (796 )   (873 ) Net cash provided by operating activities   14,609     27,525   Cash flows from investing activities: Purchases of property and equipment (10,274 ) (8,395 ) Proceeds from sales and maturity of marketable debt securities   -     29,796   Net cash (used in) provided by investing activities   (10,274 )   21,401   Cash flows from financing activities: Net decrease in short-term borrowings (5,591 ) (370 ) Repurchases of common stock - (43,825 ) Proceeds from issuance of common stock 178 1,170 Excess tax benefits from stock-based compensation   2     756   Net cash used in financing activities   (5,411 )   (42,269 )   (Decrease) increase in cash and cash equivalents (1,076 ) 6,657 Cash and cash equivalents, at beginning of period   7,279     8,819   Cash and cash equivalents, at end of period $ 6,203   $ 15,476   SELECT COMFORT CORPORATION AND SUBSIDIARIES Supplemental Financial Information (unaudited)       Three Months Ended   March 29,     March 31,   2008 2007   Percent of sales: Retail 78.7 % 76.1 % Direct 7.5 % 8.7 % E-Commerce 6.9 % 6.6 % Wholesale   6.9 %   8.6 % Total   100.0 %   100.0 %   Sales growth rates: Comparable-store sales (25 %) (11 %) Net new stores   5 %     10 % Retail total (20 %) (1 %) Direct (32 %) (11 %) E-Commerce (19 %) 27 % Wholesale   (37 %)     37 % Total (22 %) 2 %   Stores open: Beginning of period 478 442 Opened 7 7 Closed   (4 )   (2 ) End of period   481     447     Retail partner doors   774     841     Other metrics: Average sales per store ($ in 000's) (a) $ 1,228 $ 1,449 Average sales per square foot ($s) (a) $ 942 $ 1,197 Stores > $1 million net sales (a) 67 % 79 % Average mattress sales per mattress unit (Q1 Company-owned channels; $s) $ 1,630 $ 1,703 Return on equity (trailing twelve months) 19 % 43 % Cash and marketable debt securities ($ in 000's) $ 6,203 $ 66,807 (a) trailing twelve months for stores open at least one year