Select Comfort Corporation (NASDAQ: SCSS) today reported third quarter 2016 results for the period ended October 1, 2016.
“We delivered record operating cash flows for the first nine months of the year as our operational improvements exceeded our expectations and offset the effects of a worsening consumer environment,” said Shelly Ibach, president and chief executive officer of Select Comfort. “Our investments have strengthened our direct-to-consumer business model and we are making significant progress toward delivering a more convenient customer experience. We expect the digital capabilities we’re developing to succeed in the hyper-competitive digital marketplace.”
Third Quarter Review
- Net sales were $368 million, including 7 percentage points of growth from stores opened in the last twelve months, offset by an 8% comparable sales decline
- Gross profit rate increased by 60 basis points to 63.1% of net sales
- Earnings per diluted share were $0.56, compared with $0.62 in the prior year’s quarter
Cash Flows and Balance Sheet Review
- Generated $145 million in net cash from operating activities for the first nine months of 2016, compared with $132 million for the same period last year
- Invested $39 million in capital expenditures and returned $95 million of cash to shareholders during the first nine months of 2016 compared with $61 million and $69 million, respectively, for the same period last year
- Ended the quarter with $51 million of cash and securities and no borrowings under our revolving credit facility
Financial Outlook
The company updated its outlook for 2016
earnings per diluted share to $1.15 to $1.25 per share, compared with
full-year 2015 earnings per diluted share of $0.97. The outlook assumes
high single-digit sales growth for the full year. The outlook also
assumes an 11% increase in store count in 2016 and capital expenditures
of $65 million, compared with $86 million in 2015. Our outlook does not
contemplate a further deterioration of the consumer spending environment.
Conference Call Information
Management will host its
regularly scheduled conference call to discuss the company’s results at
5 p.m. EDT (4 p.m. CDT; 2 p.m. PDT) today. To listen to the call, please
dial 800-593-9959 (international participants dial 517-308-9340) and
reference the passcode “Sleep.” To access the webcast, please visit the
investor relations area of the Sleep Number website at http://www.sleepnumber.com/eng/aboutus/InvestorRelations.cfm.
The webcast replay will remain available for approximately 60 days.
About Select Comfort Corporation
Nearly 30 years ago, Sleep
Number transformed the mattress industry with the idea that ‘one size
does not fit all’ when it comes to sleep.
Today, the company is the leader in sleep innovation and ranked “Highest
in Customer Satisfaction with Mattresses” in 2015 by J.D. Power. As the
pioneer in biometric sleep monitoring and adjustability, Sleep Number is
proving the connection between quality sleep and health and wellbeing.
Dedicated to individualizing sleep experiences, the company’s more than
3,400 employees are improving lives with innovative sleep solutions. To
find better quality sleep visit one of our more than 500 U.S. Sleep
Number® stores or 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 current and
future general and industry economic trends and consumer confidence; the
effectiveness of our marketing messages; the efficiency of our
advertising and promotional efforts; our ability to execute our
company-controlled distribution strategy; our ability to achieve and
maintain acceptable levels of product and service quality, and
acceptable product return and warranty claims rates; our ability to
continue to improve and expand our product line; consumer acceptance of
our products, product quality, innovation and brand image; industry
competition, the emergence of additional competitive products, and the
adequacy of our intellectual property rights to protect our products and
brand from competitive or infringing activities; availability of
attractive and cost-effective consumer credit options; pending and
unforeseen litigation and the potential for adverse publicity associated
with litigation; our “just-in-time” manufacturing processes with minimal
levels of inventory, which may leave us vulnerable to shortages in
supply; 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; risks inherent in
global sourcing activities; risks of disruption in the operation of
either of our two primary manufacturing facilities; increasing
government regulations, which have added or may add cost pressures and
process changes to ensure compliance; the adequacy of our management
information systems to meet the evolving needs of our business and to
protect sensitive data from potential cyber threats; the costs,
distractions and potential disruptions to our business related to
upgrading our management information systems; our ability to attract,
retain and motivate qualified management, executive and other key
employees, including qualified retail sales professionals and managers;
and uncertainties arising from global events, such as terrorist attacks,
political unrest or a pandemic outbreak, or the threat of such events.
Additional information concerning these and other risks and
uncertainties is contained in the company’s filings with the Securities
and Exchange Commission (SEC), including the 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.
| SELECT COMFORT CORPORATION | |||||||||||||||
| AND SUBSIDIARIES | |||||||||||||||
| Consolidated Statements of Operations | |||||||||||||||
| (unaudited – in thousands, except per share amounts) | |||||||||||||||
| Three Months Ended | |||||||||||||||
| October 1, | % of | October 3, | % of | ||||||||||||
| 2016 | Net Sales | 2015 | Net Sales | ||||||||||||
| Net sales | $ | 367,988 | 100.0 | % | $ | 373,919 | 100.0 | % | |||||||
| Cost of sales | 135,645 | 36.9 | % | 140,283 | 37.5 | % | |||||||||
| Gross profit | 232,343 | 63.1 | % | 233,636 | 62.5 | % | |||||||||
| Operating expenses: | |||||||||||||||
| Sales and marketing | 158,024 | 42.9 | % | 156,899 | 42.0 | % | |||||||||
| General and administrative | 28,278 | 7.7 | % | 27,817 | 7.4 | % | |||||||||
| Research and development | 6,997 | 1.9 | % | 3,521 | 0.9 | % | |||||||||
| Total operating expenses | 193,299 | 52.5 | % | 188,237 | 50.3 | % | |||||||||
| Operating income | 39,044 | 10.6 | % | 45,399 | 12.1 | % | |||||||||
| Other (expense) income, net | (255 | ) | (0.1 | %) | 78 | 0.0 | % | ||||||||
| Income before income taxes | 38,789 | 10.5 | % | 45,477 | 12.2 | % | |||||||||
| Income tax expense | 13,044 | 3.5 | % | 13,623 | 3.6 | % | |||||||||
| Net income | $ | 25,745 | 7.0 | % | $ | 31,854 | 8.5 | % | |||||||
| Net income per share – basic | $ | 0.56 | $ | 0.63 | |||||||||||
| Net income per share – diluted | $ | 0.56 | $ | 0.62 | |||||||||||
Reconciliation of weighted-average shares outstanding: | |||||||||||||||
| Basic weighted-average shares outstanding | 45,621 | 50,945 | |||||||||||||
| Dilutive effect of stock-based awards | 729 | 756 | |||||||||||||
| Diluted weighted-average shares outstanding | 46,350 | 51,701 | |||||||||||||
| SELECT COMFORT CORPORATION | |||||||||||||||
| AND SUBSIDIARIES | |||||||||||||||
| Consolidated Statements of Operations | |||||||||||||||
| (unaudited – in thousands, except per share amounts) | |||||||||||||||
| Nine Months Ended | |||||||||||||||
| October 1, | % of | October 3, | % of | ||||||||||||
| 2016 | Net Sales | 2015 | Net Sales | ||||||||||||
| Net sales | $ | 997,846 | 100.0 | % | $ | 999,017 | 100.0 | % | |||||||
| Cost of sales | 385,168 | 38.6 | % | 379,009 | 37.9 | % | |||||||||
| Gross profit | 612,678 | 61.4 | % | 620,008 | 62.1 | % | |||||||||
| Operating expenses: | |||||||||||||||
| Sales and marketing | 443,477 | 44.4 | % | 424,029 | 42.4 | % | |||||||||
| General and administrative | 86,202 | 8.6 | % | 79,951 | 8.0 | % | |||||||||
| Research and development | 21,661 | 2.2 | % | 10,275 | 1.0 | % | |||||||||
| Total operating expenses | 551,340 | 55.3 | % | 514,255 | 51.5 | % | |||||||||
| Operating income | 61,338 | 6.1 | % | 105,753 | 10.6 | % | |||||||||
| Other (expense) income, net | (581 | ) | (0.1 | %) | 364 | 0.0 | % | ||||||||
| Income before income taxes | 60,757 | 6.1 | % | 106,117 | 10.6 | % | |||||||||
| Income tax expense | 20,627 | 2.1 | % | 34,426 | 3.4 | % | |||||||||
| Net income | $ | 40,130 | 4.0 | % | $ | 71,691 | 7.2 | % | |||||||
| Net income per share – basic | $ | 0.86 | $ | 1.39 | |||||||||||
| Net income per share – diluted | $ | 0.85 | $ | 1.36 | |||||||||||
Reconciliation of weighted-average shares outstanding: | |||||||||||||||
| Basic weighted-average shares outstanding | 46,705 | 51,654 | |||||||||||||
| Dilutive effect of stock-based awards | 708 | 870 | |||||||||||||
| Diluted weighted-average shares outstanding | 47,413 | 52,524 | |||||||||||||
| SELECT COMFORT CORPORATION | ||||||||
| AND SUBSIDIARIES | ||||||||
| Consolidated Balance Sheets | ||||||||
| (unaudited – in thousands, except per share amounts) | ||||||||
| subject to reclassification | ||||||||
| October 1, | January 2, | |||||||
| 2016 | 2016 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 45,383 | $ | 20,994 | ||||
| Marketable debt securities – current | 5,963 | 6,567 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $1,276 and $1,039, respectively | 23,731 | 29,002 | ||||||
| Inventories | 70,609 | 86,600 | ||||||
| Income taxes receivable | - | 15,284 | ||||||
| Prepaid expenses | 11,983 | 10,207 | ||||||
| Deferred income taxes | 15,537 | 15,535 | ||||||
| Other current assets | 17,525 | 13,737 | ||||||
| Total current assets | 190,731 | 197,926 | ||||||
| Non-current assets: | ||||||||
| Marketable debt securities – non-current | - | 8,553 | ||||||
| Property and equipment, net | 203,660 | 204,376 | ||||||
| Goodwill and intangible assets, net | 81,448 | 83,344 | ||||||
| Other assets | 27,156 | 19,197 | ||||||
| Total assets | $ | 502,995 | $ | 513,396 | ||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 106,868 | $ | 103,941 | ||||
| Customer prepayments | 28,348 | 51,473 | ||||||
| Accrued sales returns | 18,038 | 20,562 | ||||||
| Compensation and benefits | 28,876 | 15,670 | ||||||
| Taxes and withholding | 33,234 | 9,856 | ||||||
| Other current liabilities | 29,552 | 23,447 | ||||||
| Total current liabilities | 244,916 | 224,949 | ||||||
| Non-current liabilities: | ||||||||
| Deferred income taxes | 11,837 | 12,499 | ||||||
| Other long-term liabilities | 69,730 | 53,609 | ||||||
| Total non-current liabilities | 81,567 | 66,108 | ||||||
| Total liabilities | 326,483 | 291,057 | ||||||
| Shareholders’ equity: | ||||||||
Undesignated preferred stock; 5,000 shares authorized, no shares issued and outstanding | - | - | ||||||
Common stock, $0.01 par value; 142,500 shares authorized, 44,941 and 49,402 shares issued and outstanding, respectively | 449 | 494 | ||||||
| Additional paid-in capital | - | - | ||||||
| Retained earnings | 176,063 | 221,859 | ||||||
| Accumulated other comprehensive loss | - | (14 | ) | |||||
| Total shareholders’ equity | 176,512 | 222,339 | ||||||
| Total liabilities and shareholders’ equity | $ | 502,995 | $ | 513,396 | ||||
| SELECT COMFORT CORPORATION | ||||||||
| AND SUBSIDIARIES | ||||||||
| Consolidated Statements of Cash Flows | ||||||||
| (unaudited - in thousands) | ||||||||
| subject to reclassification | ||||||||
| Nine Months Ended | ||||||||
| October 1, | October 3, | |||||||
| 2016 | 2015 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 40,130 | $ | 71,691 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 42,555 | 33,694 | ||||||
| Stock-based compensation | 9,272 | 8,952 | ||||||
| Net loss on disposals and impairments of assets | 9 | 202 | ||||||
| Excess tax benefits from stock-based compensation | (516 | ) | (1,991 | ) | ||||
| Deferred income taxes | (673 | ) | (5,633 | ) | ||||
| Gain on sale of non-marketable equity securities | - | (6,891 | ) | |||||
| Changes in operating assets and liabilities, net of effect of acquisition: | ||||||||
| Accounts receivable | 5,271 | (6,543 | ) | |||||
| Inventories | 15,991 | (24,120 | ) | |||||
| Income taxes | 30,386 | 13,433 | ||||||
| Prepaid expenses and other assets | (3,458 | ) | 4,756 | |||||
| Accounts payable | (1,043 | ) | 24,623 | |||||
| Customer prepayments | (23,125 | ) | (3,351 | ) | ||||
| Accrued compensation and benefits | 12,441 | (97 | ) | |||||
| Other taxes and withholding | 7,494 | 3,569 | ||||||
| Other accruals and liabilities | 10,527 | 19,293 | ||||||
| Net cash provided by operating activities | 145,261 | 131,587 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (38,769 | ) | (61,435 | ) | ||||
| Proceeds from sales of property and equipment | 67 | 41 | ||||||
| Investments in marketable debt securities | (5,968 | ) | (29,299 | ) | ||||
| Proceeds from marketable debt securities | 15,090 | 101,087 | ||||||
| Acquisition of business | - | (70,018 | ) | |||||
| Proceeds from non-marketable equity securities | - | 12,891 | ||||||
| Net cash used in investing activities | (29,580 | ) | (46,733 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net increase in short-term borrowings | 3,062 | 2,119 | ||||||
| Repurchases of common stock | (96,410 | ) | (70,300 | ) | ||||
| Proceeds from issuance of common stock | 1,949 | 2,658 | ||||||
| Excess tax benefits from stock-based compensation | 516 | 1,991 | ||||||
| Debt issuance costs | (409 | ) | (639 | ) | ||||
| Net cash used in financing activities | (91,292 | ) | (64,171 | ) | ||||
| Net increase in cash and cash equivalents | 24,389 | 20,683 | ||||||
| Cash and cash equivalents, at beginning of period | 20,994 | 51,995 | ||||||
| Cash and cash equivalents, at end of period | $ | 45,383 | $ | 72,678 | ||||
| SELECT COMFORT CORPORATION | |||||||||||||||||
| AND SUBSIDIARIES | |||||||||||||||||
| Supplemental Financial Information | |||||||||||||||||
| (unaudited) | |||||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||
| October 1, | October 3, | October 1, | October 3, | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||||
| Percent of sales: | |||||||||||||||||
| Retail | 91.3 | % | 92.2 | % | 91.0 | % | 91.7 | % | |||||||||
| Direct and E-Commerce | 6.5 | % | 5.2 | % | 6.3 | % | 5.7 | % | |||||||||
| Wholesale/other | 2.2 | % | 2.6 | % | 2.7 | % | 2.6 | % | |||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||
| Sales change rates: | |||||||||||||||||
| Retail comparable-store sales | (10 | %) | 12 | % | (7 | %) | 15 | % | |||||||||
| Direct and E-Commerce | 23 | % | 3 | % | 10 | % | 11 | % | |||||||||
| Company-Controlled comparable sales change | (8 | %) | 11 | % | (6 | %) | 15 | % | |||||||||
| Net opened/closed stores | 7 | % | 4 | % | 6 | % | 5 | % | |||||||||
| Total Company-Controlled Channel | (1 | %) | 15 | % | 0 | % | 20 | % | |||||||||
| Wholesale/other | (19 | %) | 51 | % | 3 | % | 2 | % | |||||||||
| Total | (2 | %) | 16 | % | 0 | % | 20 | % | |||||||||
Stores open: | |||||||||||||||||
| Beginning of period | 506 | 467 | 488 | 463 | |||||||||||||
| Opened | 24 | 11 | 57 | 24 | |||||||||||||
| Closed | (3 | ) | (3 | ) | (18 | ) | (12 | ) | |||||||||
| End of period | 527 | 475 | 527 | 475 | |||||||||||||
| Other metrics: | |||||||||||||||||
| Average sales per store ($ in 000's) 1, 3 | $ | 2,248 | $ | 2,559 | |||||||||||||
| Average sales per square foot 1, 3 | $ | 895 | $ | 1,063 | |||||||||||||
| Stores > $1 million net sales 1, 3 | 98 | % | 100 | % | |||||||||||||
| Stores > $2 million net sales 1, 3 | 54 | % | 69 | % | |||||||||||||
| Average revenue per mattress unit 2 | $ | 3,959 | $ | 3,992 | $ | 4,031 | $ | 3,991 | |||||||||
1 Trailing twelve months for stores open at least one year. | |||||||||||||||||
2 Represents Company-Controlled Channel total net sales divided by Company-Controlled Channel mattress units. | |||||||||||||||||
3 Fiscal 2014 included 53 weeks, as compared to 52 weeks in fiscal 2016 and 2015. The additional week in 2014 was in the fiscal fourth quarter. Company-Controlled comparable sales metrics have been adjusted to remove the estimated impact of the additional week on those metrics. | |||||||||||||||||
| SELECT COMFORT CORPORATION AND SUBSIDIARIES | |||||||||||||||||
| Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA) | |||||||||||||||||
| (in thousands) | |||||||||||||||||
| We define earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) as net income plus: income tax expense, interest expense, depreciation and amortization, stock-based compensation and asset impairments. Management believes Adjusted EBITDA is a useful indicator of our financial performance and our ability to generate cash from operating activities. Our definition of Adjusted EBITDA may not be comparable to similarly titled definitions used by other companies. The table below reconciles Adjusted EBITDA, which is a non-GAAP financial measure, to the comparable GAAP financial measure: | |||||||||||||||||
| Three Months Ended | Trailing-Twelve Months Ended | ||||||||||||||||
| October 1, | October 3, | October 1, | October 3, | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||||
| Net income | $ | 25,745 | $ | 31,854 | $ | 18,958 | $ | 90,638 | |||||||||
| Income tax expense | 13,044 | 13,623 | 11,112 | 43,452 | |||||||||||||
| Interest expense | 267 | 44 | 721 | 87 | |||||||||||||
| Depreciation and amortization | 14,536 | 11,643 | 56,154 | 43,100 | |||||||||||||
| Stock-based compensation | 1,666 | 3,125 | 10,609 | 11,457 | |||||||||||||
| Asset impairments | 2 | 17 | 51 | 619 | |||||||||||||
| Adjusted EBITDA | $ | 55,260 | $ | 60,306 | $ | 97,605 | $ | 189,353 | |||||||||
| Free Cash Flow | |||||||||||||||||
| (in thousands) | |||||||||||||||||
| Three Months Ended | Trailing-Twelve Months Ended | ||||||||||||||||
| October 1, | October 3, | October 1, | October 3, | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||||
| Net cash provided by operating activities | $ | 98,141 | $ | 86,533 | $ | 121,616 | $ | 140,220 | |||||||||
| Subtract: Purchases of property and equipment | 15,005 | 22,497 | 62,920 | 79,652 | |||||||||||||
| Free cash flow | $ | 83,136 | $ | 64,036 | $ | 58,696 | $ | 60,568 | |||||||||
Note - Our Adjusted EBITDA calculation and our "free cash flow" data are considered non-GAAP financial measures and are not in accordance with, or preferable to, "as reported," or GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the Company's financial performance by investors and financial analysts. | |||||||||||||||||
| GAAP - generally accepted accounting principles in the U.S. | |||||||||||||||||
| SELECT COMFORT CORPORATION AND SUBSIDIARIES | ||||||||
| Calculation of Return on Invested Capital (ROIC) | ||||||||
| (in thousands) | ||||||||
| ROIC is a financial measure we use to determine how efficiently we deploy our capital. It quantifies the return we earn on our invested capital. Management believes ROIC is also a useful metric for investors and financial analysts. We compute ROIC as outlined below. Our definition and calculation of ROIC may not be comparable to similarly titled definitions and calculations used by other companies. The tables below reconcile net operating profit after taxes (NOPAT) and total invested capital, which are non-GAAP financial measures, to the comparable GAAP financial measures: | ||||||||
| Trailing-Twelve Months Ended | ||||||||
| October 1, | October 3, | |||||||
| 2016 | 2015 | |||||||
Net operating profit after taxes (NOPAT) | ||||||||
| Operating income | $ | 30,681 | $ | 133,640 | ||||
| Add: Rent expense 1 | 64,994 | 63,078 | ||||||
| Add: Interest income | 109 | 537 | ||||||
| Less: Depreciation on capitalized operating leases 2 | (16,953 | ) | (15,809 | ) | ||||
| Less: Income taxes 3 | (29,805 | ) | (58,896 | ) | ||||
| NOPAT | $ | 49,026 | $ | 122,550 | ||||
Average invested capital | ||||||||
| Total equity | $ | 176,512 | $ | 271,923 | ||||
| Less: Cash greater than target 4 | - | - | ||||||
| Add: Long-term debt 5 | - | - | ||||||
| Add: Capitalized operating lease obligations 6 | 519,952 | 504,624 | ||||||
| Total invested capital at end of period | $ | 696,464 | $ | 776,547 | ||||
| Average invested capital 7 | $ | 714,956 | $ | 710,701 | ||||
| Return on invested capital (ROIC) 8 | 6.9 | % | 17.2 | % | ||||
1 Rent expense is added back to operating income to show the impact of owning versus leasing the related assets. | ||||||||
2 Depreciation is based on the average of the last five fiscal quarters' ending capitalized operating lease obligations (see note 6) for the respective reporting periods with an assumed thirty-year useful life. This is subtracted from operating income to illustrate the impact of owning versus leasing the related assets. | ||||||||
3 Reflects annual effective income tax rates, before discrete adjustments, of 37.8% and 32.5% for 2016 and 2015, respectively. | ||||||||
4 Cash greater than target is defined as cash, cash equivalents and marketable debt securities less customer prepayments in excess of $100 million. | ||||||||
5 Long-term debt includes existing capital lease obligations, if applicable. | ||||||||
6 A multiple of eight times annual rent expense is used as an estimate of capitalizing our operating lease obligations. The methodology utilized aligns with the methodology of a nationally recognized credit rating agency. | ||||||||
7 Average invested capital represents the average of the last five fiscal quarters' ending invested capital balances. | ||||||||
8 ROIC equals NOPAT divided by average invested capital. | ||||||||
Note - Our ROIC calculation and data are considered non-GAAP financial measures and are not in accordance with, or preferable to, GAAP financial data. However, we are providing this information as we believe it facilitates analysis of the Company's financial performance by investors and financial analysts. | ||||||||
| GAAP - generally accepted accounting principles in the U.S. | ||||||||
View source version on businesswire.com: http://www.businesswire.com/news/home/20161019006346/en/
Contacts:
Investor Contact:
Dave
Schwantes, 763-551-7498
investorrelations@selectcomfort.com
or
Media
Contact:
Susan Eich, 763-551-6934
Susan.Eich@selectcomfort.com
