Sleep Number Corp (SNBR) 2003 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Select Comfort quarter two earnings release conference call. (CALLER INSTRUCTIONS). Mr. Kimball, you may begin your conference.

Thank you. Good morning, and welcome to the Select Comfort Corp. second quarter 2003 earnings conference call. Thank you all for joining us. I'm Mark Kimball, Senior Vice President and General Counsel, and with me on the call are our President and CEO, Bill McLaughlin, and our Senior Vice President and Chief Financial Officer, Jim Raabe.

You should all have seen our earnings release issued earlier this morning, but if you do need a copy, please call investor relations at 763-551-7498, and a copy will be forwarded to you. Please be advised that this telephone conference is being recorded and will be available by telephone replay, and will also be archived on our web site. Please refer to the details set forth in our press release to access the replay, or our web site.

In a moment, I will turn the call over to Bill, who will share his perspectives on our recent performance, and our direction going forward. Jim will then provide an overview of our financial results and our expectations for the balance of 2003. Following these presentations, we will open the call to your questions. In order to give everyone a chance to ask questions, we request that you ask one question at a time, and get back into the queue if you have additional questions. We will plan to take questions until approximately 12 noon, Eastern Time.

Before I turn it over to Bill, I will read our Safe Harbor cautionary statement. The purpose of this call is to discuss the results of the fiscal period just ended. However, our commentary includes and our 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 it over to Bill for his comments.

Thanks, Mark. I am going to keep my remarks brief this morning because Jim has done a nice job of preparing a presentation of our performance in a way that we believe should help you understand our growth, both in Q2 and balance of the year. I want to make sure he has sufficient time.

My message this morning is a simple one., one of positive endorsements of the sustainability of our growth, both balance of the year and beyond. We continue to be very optimistic and committed to our goal of revolutionizing and becoming a leader in the bed and better sleep industry. We continue to learn, to improve and to advance with strategies. It is clear that momentum is building as more and more people learn about our Sleep Number bed unique features and benefits that meet their needs for personal comfort and better sleep. Momentum is building because of our formula of marketing, distribution expansion and the word of mouth of our customers. We are making discovery of your Sleep Number easy, fun and rewarding. In Q2 of 2003, we enjoyed outstanding growth, a real testament to our sales and marketing teams. In going forward, the growth bar will get more difficult as we are lapping even larger year ago comps. Yet, we believe that we can sustain high teens to low 20 percent comps.

Our growth formula, going forward into 2004, will continue to be anchored by unit increases, driven by advertising, product innovation and selling process improvements, as well as the continued increases in consumer word of mouth behind (ph) satisfied customers. The more beds that we sell, the more investors that we're putting into the market. The benefits that we realized this past year in average selling price through improved mix will reduce, in the second half of 2003 and into 2004, but it will be offset as growth from store expansion will increase, as we go forward. Our opportunity is significant. Our product is highly differentiated, and our business model is advantaged and our market share basis is very low.

In addition to volume growth, we also understand the importance of profit improvement. Productivity is the fuel that helps us to accelerate our growth investments. Our goal is to add 1 to 1.5 points of margin per year, possibly up to two points this year to achieve a 10 to 12 percent operating margin by 2005. Sales and G&A are our primary areas of opportunity as we leverage revenue growth. In Q2, this accounted for four points of leverage versus prior year. Gross margin, we expect to maintain in the low 60 percent range, and marketing, we plan to manage as a variable cost, increasing with and sometimes ahead of, sales to fuel the growth.

Three events that I an particularly looking forward to -- the first Boston. Boston is a major market in which awareness and distribution of Select Comfort has historically been low. While Boston represents 2.1 percent of the U.S. population, it represents significantly less of Select Comfort sales. We believe that we can develop this market, which is twice the size and potential of Minneapolis, profitable, with a combination of incremental advertising and store expansion. The payback on this aggressive entry into a little awareness major metro market is less certain, and we have prudently factored this investment into our outlook for this year and next. We are committed to selectively develop large metro markets as they are clearly important to our long-term growth and to delivering our full business potential.

The second area of interest is non-mall store development. Non-mall developments locations, of which we will pilot three in the second half of 2003, have the potential to give us more flexibility in our future real estate expansion plans. We will test these in markets that are more developed with higher awareness, and we will take advantage of the trend towards lifestyle centers, particularly in geographies where malls have not yet been developed. We expect economics to equal mall stores, with lower rents being offset by higher local marketing costs.

The third area of focus and interest is productivity. Leveraging the fixed costs of our stores and our selling structure is our greatest immediate margin expansion opportunity. Average sales per store at the end of Q2 were approximately $900,000, up from approximately $800,000 at the year-end of 2002 and $600,000 at the year-end of 2001. We are clearly making significant progress.

The second source of leverage is G&A. And congratulations are in order for our IT team, for leading the successful upgrade and conversion of our Oracle operating system in Q2 after over eight years worth of preparation. We now have a foundation for system evolution and expansion.

We are off to a good start in Q3, and we continue to be optimistic and committed to achieve our full potential. And now let's turn it over to Jim for more insight into Q2 performance and outlook for the year.

Thanks, Bill. Once again, we are extremely pleased with our quarterly results, with total sales increasing 32 percent to 102 million and same-store sales increasing 34 percent, we have been able to leverage our operating results, improving operating margins to 7.5 percent of sales, and increasing cash balances to 49 million.

First, a bit more color on our sales growth. Sales growth was balanced with increases in mattress units sold in average selling price. The number of mattress units sold increased by 17 percent and the average selling price increased by 15 percent. Our average selling price is calculated by dividing net sales by mattress units sold. As a result, changes in average selling price are affected by a number of factors. The primary drivers of our increase in average selling price were as follows.

First, the sale of adjustable foundations, which are typically sold instead of a normal foundation set, and has a higher selling price than our traditional foundations, contributed one-third of the average selling price increase.

Second, improved mix of mattress models sold represent the force (ph) of the increase, with a high percentage of sales coming from our 5000 and 7000 models.

And finally, a combination of factors, including decreasing return rates, lower promotional costs, a higher penetration of home delivery and assembly services and a small price increase for selected mattress models, contributed to the remainder of this increase.

Accessories sales remain consistent with prior year Q2, representing approximately 8 percent of retail sales, and 7 percent of total sales. As expected, sales increased in each our channels. Retail sales led the sales growth, 38 percent higher than a year ago. Direct sales increased by 17 percent, e-commerce sales increased by 23 percent and wholesale sales increased by 6 percent, with the majority of wholesale growth coming from retail partners.

Retail sales represented 77 percent of total sales, and wholesale sales increased to 6 percent of total sales due to our larger second quarter QVC shows, the results of which were in line with our expectations.

Direct and e-commerce sales, as a percentage of total sales, remained at 13 percent and 4 percent, respectively. Retail comparable store sales increased by 34 percent on top of a 21 percent increase in the second quarter of 2002. We opened ten stores in the second quarter, bringing the total at the end of the quarter to 332 stores. We have had a net addition of eleven stores since the end of the second quarter a year ago. This real estate expansion added 4 percent to retail sales, growing on top of 34 percent comp, to deliver retail's 38 percent growth. We expect to open 15 additional new stores, and close four stores by the end of 2003, with the openings focused on markets where we have strong local advertising support, or which we are near achieving advertising scale.

First-year sales and new store openings continued to trend above our target of $800,000 a year. Our unit growth continues to be driven by increasing media spend, more efficient promotional efforts and improved selling processes. Total media spending in the second quarter increased by 40 percent to 12.7 million. Both national and local advertising spending has been increased, and we are seeing consistent sales growth in all markets.

In the second quarter, we increased national advertising spending by 36 percent and local advertising by 50 percent. In markets without local heavy Sleep Number advertising, we saw same-store order volumes increased by 26 percent. In the four markets that we began advertising with the local Sleep Number campaign at the beginning of this year, we saw same-store order volumes increase by 41 percent. But most exciting is that sales growth has been sustained in those markets entering their second and third year of the local Sleep Number campaign. Same-store order volumes in these 16 markets increased by 27 percent in the second quarter.

As noted earlier, our operating margins are benefiting from the sales increase, improving to 7.5 percent in the second quarter, as compared to 4.1 percent in the second quarter of 2002. We are on track to deliver full-year operating margins in excess of 8 percent. Our gross margins in the second quarter were 61.9 percent, in line with a year ago and 80 basis points lower than the first quarter of this year. As we have noted previously, we expect our future gross margins to remain in the 62 to 63 percent range. The lower margin in Q2, compared to Q1, was primarily due to higher wholesale sales, which generate lower gross margins. We continue to get manufacturing efficiencies from increased volume. That leverage is being offset by higher penetration of home delivery, and higher sales of adjustable foundations, both which generate lower gross margins. The product warranty issue that we disclosed at the end of the first quarter, and that has been discussed this past week, had no material impact on our financial statements. All anticipated costs are fully accrued, and reduced our gross margins in the second quarter by only 20 basis points. We continue to pursue recovery of these costs from our supplier.

Improvements in our operating margins are coming from leverage in our fixed cost structure and selling and general and administrative areas. Selling expenses as a percentage of sales declined to 25.2 percent in the second quarter of 2003 from 28 percent a year ago. In addition, our G&A as a percentage of sales increased 9 percent of net sales from 10.4 percent in the second quarter a year ago.

Our balance sheet continues to improve, with total cash and marketable securities of $49 million. Our accounts receivable balance increased to $6 million in the second quarter, primarily as a result of the timing of our second quarter QVC shows. These shows are the highest in the second quarter as compared to other quarters during the year. This balance should return to more normalized levels of next quarter. Similarly, inventories were a bit higher than normal due to a short-term shifting strike. This situation has been resolved and our inventory levels are again declining. Our business model remains strong, with operating cash flows in excess of $7 million in the second quarter, fully funding our store buildout and remodel schedule.

Now, on to guidance. With exceptional results for the first two quarters of the year, we are updating our guidance for the remainder of the year. For fiscal year 2003, we expect sales of between 429 million and 438 million, with fully diluted earnings per share of between 56 cents and 63 cents. For the third quarter, we expect sales to increase to between 105 million and 109 million, with earnings growth of at least 30 percent to between 13 cents and 15 cents per fully diluted share. For the fourth quarter, we expect sales to increase to between 120 million and 125 million, with earnings growth of at least 30 percent, again, to between 20 cents and 24 cents per fully diluted share. I remind you that our fiscal year is 53 weeks long, and this extra week is included in the fourth quarter.

We expect same-store sales increases for the remainder of the year to range from the high teens to the mid-20s on a 52 equivalent week basis. While we have had extraordinary same-store growth in excess of 30 percent in each of the last four quarters, we don't think it is prudent to plan for this level of growth, although our teams remain aggressive. A significant part of our same-store sales growth has come from averages sales price increases, and we will begin to lap the introduction of many of the factors driving those increases in the back half of the year, making comps in the high teens to low 20s a more realistic assumption. As a result, we feel our range of 56 to 63 cents, a 50 to 70 percent increase in earnings from 2002, an appropriate earnings range. We are very pleased with our prospects for the remainder of 2003, and continuing those strong results into 2004. Thank you for your attention, and we will now turn it over to questions.

(CALLER INSTRUCTIONS). Steve Fenall (ph).

Good morning, everybody. I just barely caught some of the stats you threw out there regarding some of the more established markets, and what the comps trends have been there. I know it's been impressive in the past; and have you seen a continuation of that?

Yeah, I think the two points are the comps in the new stores are very strong at 41 percent, and our -- the markets where we continue to advertise continue to have strong comps on top of what we were already very strong comps from prior years.

Were they running in excess of the national average?

Yeah, they were basically running at average.

Okay. That is great. Thank you.

Joanne (ph) Henry.

Good morning. Great quarter. Jim, did you tell us and did I miss it? How much of the sales increase was from average selling price? I'm trying to get a better handle on that (inaudible) but that going down a bit? How much of the sales growth was from the average selling price increase?

Fifteen percent of the growth was from average sales price increase.

Okay. And the introduction of some of the higher-priced beds are from the -- it was also from -- the average selling price was also from the adjustable foundations, so you're talking about the (inaudible) being the introduction of some of those products?

It is the adjustable foundation, which really was introduced more significantly in the first quarter of next year. But the product changes that we made to the 5000 and 7000 models, which are contributing to the mix improvement, were both during the course of this year, with the 7000 being introduced in the fourth quarter last year.

Okay. You're talking about that lapping and getting the benefit of that increase; that's what we will see coming out in the next first couple of quarters of '04, then?

That is correct.

Patrick Donahue.

Hello and congratulations, once again. On the press release, you had stated that you developed new bed models for QVC and selective retail partners. Could you give us a little more color on that statement on those models, and especially give us a feel for the margins on these models versus your other lines?

The changes to the products were in keeping with the changes that we made to our company-owned product line a year ago. So, we are basically keeping the products consistent, going forward, and the margin impact of these changes was negligible versus the way they have been in wholesale before, which, again, is about a mid-40s to high-40 percent gross margin on those sales. But, again, the bottom-line contribution on wholesale has been approximately equal to what we were selling -- what we realized through our stores.

Laura Richardson.

Good morning. Jim, would you be willing to take a stab at 2004 guidance? And also try to get into a little more detail on what you think the 53rd week adds this year so that we know what we are anniversarying (ph) at the end of next year?

Yeah, from a 2004 standpoint, we have not provided guidance. What we have said is that our long-term growth targets are to have revenue growth in the 15 to 25 percent range, and for earnings growth approximately in that 30 percent range. So, that's, overall, our longer-term target.

From the standpoint of what the additional week as -- it's basically not disproportionate from a sales standpoint. So the sales are probably a couple of points. From an earnings standpoint, it is a little bit more difficult to speak to, because we will evaluate whether we might take that opportunity to boost our advertising and do some other marketing things to help get 2004 off to the start. So, I would not necessarily say that there should be a disproportionate bump in earnings because of that additional week.

Bill Brady.

Great quarter, you guys. I have a couple of questions. Bill, you said that you're going to have three non-mall pilots. Now, in your demographic studies and geographical studies, if they are successful and with higher marketing and lower rent they meet your same criteria you have for your mall stores, how many non-mall stores do you think you can have in the country?

Bill, we haven't gotten specific around that at this point. We have said that we believe we will add 25 to 30 new stores per year. We still feel that that is the correct planning assumption. And, what we will do, going forward, is if successful, integrate the non-mall stores into that formula.

Yeah, but you haven't done any studies showing what this might add to the numbers that I have heard on different occasions, is between 500 and 800 (ph) mall stores (multiple speakers).

What we have said in the past is that we believe there are about 550, A-B (ph) malls, and we have said that could be of interest to us. And we have also said that we believe our distribution could go up as high as 800 locations. But, we've also said that we do not want to pursue a strategy of being on every street corner; and we will take a judicious approach to how we develop markets in terms of density of stores.

What percentage of the sales now come with the adjustable mattress -- adjustable format?

Bill, it's about 4 to 5 percent of our volume in the second quarter.

Do you see this heading up, which would add to your average selling price? Or are there any advertising initiatives that you want to drive that up as a percentage?

No, I think the -- well, first of all, from just a distribution standpoint, we completed the rollout of home delivery to all of our markets with stores in quarter two, and that adds 70 stores to the -- that now have an adjustable foundation available to sell. So, that will increase. (multiple speakers).

(multiple speakers) percent or so anyway...

... as the selling process continues to improve, there will be some improvement, as well.

One other question. You said the returns had dropped. Can you give us an -- quantify that -- it was between 6 and 6.5 percent -- is it below that amount?

It is still in that range; it is a little bit below 6 now. It is continuing to trend downward. and has been for several years now.

Ann-Marie Peterson.

Good morning. A couple of quick questions. What percentage of sales were the at home delivery versus a year ago?

I may need to get back to you on that one; I don't have that one right off the top, Ann-Marie.

Okay. No problem. Just in terms of your marketing program, if you could just discuss sort of changes you've made. You're obviously learning what is effective, what is not as effective, you know, over the course of the last I guess eight quarters here. If you could just comment on that, and then maybe, changes that you are making, going forward, in terms of mix of radio and TV, etc. Thanks.

What we have continued to find, Ann-Marie, is that advertising, particularly the TV and radio, is effective. And we are constantly improving the message there. We just, in quarter two, introduced a spokesperson in Lindsay Wagner, which has been giving us great efficiency, particularly in our direct TV advertising. The changes that we have made recently are increasing the amount of national support, particularly in national TV. And then we continue to overlay the incremental local advertising on top of that. What is not changed and consistent is the amount we are spending on promotion and financing. We are actually continuing to decrease that as a percentage of sales, which is giving us that much more fuel to put back into advertising.

Is it possible that the total marketing spend ratio could be below 20 percent of sales next year? I know you targeted at 20 percent this year; but it just seems like you are getting more bang for your buck on your marketing dollars.

We are still going through the final planning for 2004, but I would not anticipate seeing it go down below 20 percent, Ann-Marie because I think there's just so much continued opportunity for incremental spending, be it in the other major metros that we would enter, or just developing other local markets. We've only got our local campaign -- heavy up campaign in about 20, 25 percent of U.S. . Households there is a great deal of opportunity to continue to expand that. So, yes, we are getting more efficiency and more bang for the buck, but we've still got a long way to go to just continue accelerating the growth.

Just one more if I may, in terms of your new product developments for 2004 - -could you just provide us a little bit of detail on that? Thanks.

In terms of product development for next year, the primary focus continues to be on our core bed line. Just as we did in 2002, we are looking to make significant improvements in our core bed line. On top of that, we are, as we have said in the past, working on some product line extensions, i.e., sofa/sleeper, which we are still in development with a partner; but we still hope to test in 2004.

Kyle Soap (ph).

Good morning, gentlemen. What are the next major metro markets that you are going to be looking to penetrate?

Kyle, I think right now, our focus is obviously on Boston; that is a big one for us. And we have, basically, development teams looking at all of the other major metros where we are not in today in a significant way -- markets like New York, Detroit, Chicago, L.A. But we don't have specific plans on any of those at this time.

Okay. And, is there any disclosure on the non-mall locations that you are looking to test out in the second half -- what markets those are going to be in?

Not at this time. For several different reasons, we would rather not communicate those at this time.

Okay. And one last question. Can you comment on the trends, going forward, in your sales mix, by channel, across your four channels? Is that going to stay relatively close to where it has been, historically, here -- or how is that going to evolve, going forward?

Kyle, I think the retail will continue to be the fastest-growing of our channels. But, I would not see a tremendously significant change in the overall mix between channels.

Brent Rystrom (ph).

Good morning and congratulations. Real quickly, out of curiosity, are you seeing any changes in either national or local advertising rates?

No, we haven't -- not that I'm aware of -- seen anything significant one way or the other.

Okay. Follow on with that, then. Out of curiosity, interest rates -- have you historically delineated what relative effect you've seen from, say, refi's (ph) or interest rates going down? Any thoughts on that as interest rates appear to be starting to head back up for homeowners?

We have not done a specific analysis with our business in particular. But, I think what we can speak to is the fact that with the declining interest rates over the past couple of years, and the increases in refinancing, the mattress industry, as a whole, has been declining. So, it's been going in the opposite direction than what would you expect. So, I don't think that there's a strong correlation. And, we don't believe there is a strong correlation in our business, as we (inaudible) know (ph).

Out of curiosity, any thoughts on competitive issues right now? I know Nautilus Sleep Systems seems to have kind of curtailed their growth strategy, and is making noise about the success of your product. I am curious what you are seeing or hearing from your competitors.

I think that what we are seeing from competitors, Brent, is not anything significant in product innovation, nor in marketing approaches. We are doing our best to stay ahead on product innovation, and just adding fuel to the marketing campaigns and the awareness, and basically driving our own growth.

Okay. And then one final question. What percentage of your products are sold financed?

It's about 35 percent of our sales.

Greg McKinley (ph).

Yes, good morning. A quick follow-up on the financing question. With GE Capital taking over the contract and financing from Canseco, has any terms changed as it relates to terms available to customers, cost to you, to offer financing?

No, no changes -- no significant changes in the agreement. In fact, we -- what really happened was GE assumed the existing contract from Canseco. In connection with that, we did extend the term for a couple of years, but, no significant terms, either changes either to us or to our customers.

Okay. And then also, can you give us a breakout on your P&L on the sales and marketing line? How much of that in dollar terms is advertising and how much of it is just general selling and the marketing costs?

Well, the total advertising spend in the second quarter was about 12.7 million.

Okay. Very good. Thank you.

Dana Walker.

Good morning. Could you address, following from that last question, I think, Jim, you talked about your selling cost percentage being 25.2 percent versus last year's 28. Do I have that correct, in the quarter?

That is correct.

Can you talk about the leverage factors? I believe you cited less discounting and less financing expenses -- perhaps you could elaborate.

Actually, the primary leverage in that is the increasing sales per store that Bill referred to. When we go from $800,000 a year in sales at the end of 2002 to $900,000 a year per store in 2003, that is the key driver. So, it is really just leveraging the fixed costs of occupancy and personnel. We have also focused some attention on increasing efficiencies and how we manage inventory levels in the stores and we look for opportunities there as well. And we have seen some of that. But the majority of it is really leverage over in the higher sales space.

Perhaps one of the two of you could provide an operational and manufacturing review -- given the strong throughputs that the company is going through.

In terms of -- I'm not sure exactly what... operational review, what I can tell you is that we have managed, very effectively, the ramp up in orders. There has been no delay in shipments to our customers. Other than the increase in inventory, both because of the QVC show and because of the shipping issues we had with a supplier -- we had a shipping strike -- the inventory controls have been in place. So, operationally, we continue to manage the ramp up, and believe that we can continue to do so as the business builds.

Jim, you rattled off a variety of numbers related to the effects of advertising based on whether it was local or national. Would you quickly touch on those again?

Sure. The order comps in those markets kind of broken down between where we have primarily national-only type of advertising, and then, also split out two local markets -- or two local marketing groupings, one of which had the Sleep Number campaign introduced this year, and then the other one being where the Sleep Number campaign was introduced locally in 2001 and 2002. In the markets were it is primarily national, our comps were running about 26 percent. In the new markets where reintroduced it this year, we are running about 41 percent. And, in the markets -- in those 16 markets where we introduced it in 2001 and 2002, our comps are running about 27 percent.

Was there also a 50 percent number that you through in there? I wrote that down in the (inaudible).

No, that was referring to the increase in advertising spend -- increase in our local advertising spend.

Would you also perhaps talk more about what you intend to do in Boston without revealing the total war (ph) plan? In terms of additional store locations, where you stand in terms of DJ (ph) support -- when that starts -- that sort of thing?

Yeah this is Bill. Basically, we're going to open four new locations -- four new store locations, pretty much this month -- the month of July, I believe there is one we slide into early August. And then we will be re-locating another store with an existing mall. So, we will then begin the local advertising, which will be both TV and radio. And, we will also add one additional DJ to bring our total to two in that market. So, it is a well-coordinated combination of real estate expansion and taking advantage of the marketing tools that we have proven in other markets. And take advantage of the marketing tools that we have proven in other markets, roll it out through the second half of this year, and sustain it into next year.

You will have how many sites in the Boston market at that point?

Ten -- I think there is 10 stores we will have. Now that's a little bit of an expanded area because there are a couple of them in Southern New Hampshire and outlying areas of Boston. But, those ten will -- well, or the media will reach those ten stores.

Final question for me. Could you talk about the effects you believe your remodel program has had on your sales?

Yeah I think, Dana, at this point, the remodel program is still at the early stages. On average, we are seeing a lift, but the results have been inconsistent from store to store. We still have opportunity to further improve the lifts that we are getting, particularly at just a store by store level. We remain very confident that it was the correct action to have taken, both to align the image -- the image that consumers get when they come to the store with what they have seen in all the advertising.

Laura Richardson.

Actually, Dana did a very good segue into what I wanted to discuss. He asked a bunch of the questions on what I was going to ask on the different types of markets you were talking about the comp increase in -- just a couple little questions related to that. When you said there was the 50 percent increase in local ad spending -- did that -- did all that extra ad spending go to the markets where you added the heavy up this year? Or are you getting heavier up in some of the 2001 and 2002 markets as well?

There is -- we look at each market independently, and there are certain markets that are getting a little bit less and there are certain markets that are getting a little bit more, as we really evaluate the results and decide best how to improve the efficiency of that local spending. That local spending also does include the expansion of our local radio DJ program, which, a year ago, was in only about half of the markets; now is in all of our markets. So, some of that local spending is contributing to what we would call the national-only type of markets.

Okay. So, I'm trying to make sure I understand. You said basically, the market that had the TV advertising, starting in '01 and '02, some of them you might still be increasing the ad spend, some of them you might be decreasing, just depending on the individual market?

That is correct.

Okay. And then, there were some stats I think I last saw in your road show presentation, whereby some of the most mature advertising markets like Minneapolis actually had stronger comps than any of the numbers you gave for those groups today. How did the market look in Minneapolis there in second quarter comps?

The Minneapolis comps, in the second quarter, were right in line with that 26 percent number I gave. So it continues strong.

Bill Brady.

I have three more. Actually Greg asked the one on GE. The 800 for last year was the twelve months -- this is average store sales -- ending December of '02 -- is that right?

That is correct.

The 900 -- is that the latest twelve months? Or is that estimate based on the first two quarters extrapolated?

That is the twelve-month rolling through June.

Great. Okay. So it's the last twelve months through June?

Correct.

And could you break down the 6 percent wholesale between retail distribution and QVC?

About three-quarters of it is QVC.

Yeah. Okay. Thanks a lot, you guys.

Greg McKinley.

A quick follow-up. Are you -- can you give us a breakout of total sales in markets supported by that multi-channel Sleep Number campaign versus the national campaign?

Greg, we will get back to you on that one; we don't have the exact numbers in front of us.

Okay. Can you give us a sense of trends in terms of comps, in the national campaign markets? In other words, you know, this 26 percent comp, how can we measure that with the Lindsay Wagner campaign ramping up last quarter against what you had experienced in the previous several quarters?

I am not sure, exactly, how to answer your question, because we obviously have a number of different marketing efforts going on simultaneously, and it is a little bit difficult to pull them apart. So, we compare the markets individually by what they are -- what those individual markets are getting from marketing support and how that differs from the other one. I think the most important factor is that obviously that first-tier of markets that we saw, initially, jump by 10 to 15 percent comps when we added in 2001, continues to comp in the mid to upper 20s, and they are obviously working off a much higher base, which is important from the standpoint of evaluating sustainability of the advertising campaign and how it can grow our sales as we continue to introduce it into new markets.

Okay. I will follow up with you after. Thank you.

Patrick Donahue.

Can you update us on your free cash flow estimate for 2003? And also, give us a feel for where you would like to be in '04?

In '03, you know, without getting to real specific numbers, we would expect it to be in the low 20 million, 20 to 25 million -- that is after CapEx. 2004 -- we would expect it to be a similar type of number, because we do have NOL's that have been benefiting our free cash flow in 2003. We have about $4.5 million of those NOL's remaining, entering the second half of the year. So, we will start paying tax -- we will actually start paying cash tax in the second half, and we will pay cash tax in all of 2004. So, I would look at a number in 2004 to be similar to the 2003 free cash flow number.

Okay. Did you open any of the three pilot non-mall stores in Q2?

No, they will all open in Q3 and Q4.

Dana Walker.

I have one last question. I was a big Lindsay Wagner fan when I was a young guy. What amount of your ad impression would you say she is now a part of? And where would you suppose that is going to?

Dana, what she is a part of -- or where the impressions are going is on all of our direct to cable TV; and Jim is looking up a number on that. And she is also appearing in some of our print advertising, again, in direct response mediums. They are checking some numbers in terms of what percentage of our impressions that all is.

Is she going to play a role in your radio advertising at the local or national level?

Good point. We do have a couple of radio spots with her, as well, which are being used more on a local basis. So, I have a feeling getting your exact number for you is going to be difficult given the mix of all three of those: print, TV and radio.

Yeah, I'd like to get a little bit more time to kind of work through that. But just roughly on a numbers -- it's not a majority of the spending, certainly, because we spend a fair amount in the local campaign, and that is not Lindsay Wagner. But, we will work through that with our marketing folks and get back to you.

You have an impression, though, at this early stage, that your marketing and ad spend intensity is becoming more productive, as it focuses around a luminous spokesperson?

You know, I think the whole marketing approach is getting better because we constantly are learning and improving. I think Lindsay gives us a focal point. She does a great job; very credible. She has some great personal stories -- how that bed has helped her and her family. But, I don't think it's -- it has improved, it has not significantly improve, because the campaign was working very well before, and our local campaigns that don't use Lindsay, are working even better, as well. So, it's just a constant improving process that we are going through.

A follow-on to the whole ad approach. Perhaps you would talk from a generational standpoint, where you think you are in a campaign message, whether it's TV, radio or print advertising, if that's possible.

If I understand the question as being where are we in the lifecycle of the campaign, I still -- I believe we are in the very early stages of this campaign. We have really gone from just introductory to the first phase of building the phenomenon of Sleep Number. And the campaign has many, many more years of development.

I suppose I am more thinking towards the emphatics of any particular message -- where you stand, certainly when you introduced this in '01 and '03, there was focal points. And I'm wondering, depending how you think about it internally, where you are in a refresh sense, or an and emphatic sense in terms of different messages.

Well again, in -- because our advertising has been rolled out in different waves, if you will, those markets that receive the campaign for the first time in 2001 have already now gone through the Phase II with new creative (ph) earlier this year. We are also in the process of refreshing all of the national media. We started with the short form, and featuring Lindsay Wagner in the second quarter. We will be refreshing the long form direct marketing and featuring Lindsay Wagner here in quarter three.

At this time, there are no further questions.

Okay, thank you, very much, everyone, for joining us for this call. And we appreciate your continued support. Thank you.

This concludes today's conference. You may now disconnect.