Sleep Number Corp (SNBR) 2003 Q4 法說會逐字稿

Good afternoon and thank you all for standing by. [OPERATOR INSTRUCTIONS] I would like to introduce our host for today's call Mr. Mark Kimball, Sir, you may begin.

Thank you and good afternoon and welcome to the Select Comfort Corporation fourth quarter and year-end 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 today but if you 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'll turn the call over to Bill, who will share his perspectives on our recent performance and our direction going forward. and Jim will provide an overview of our financial results and our expectations for 2004. Following these presentations, we will open the call to your questions. Before I turn it over to Bill, I will read our safe Harbor cautionary statements.

The primary purpose of this call is to discuss the results of the fiscal period just ended. However, our commentary includes, and our responses to our 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.

In addition, our commentary and our responses to your questions may include references to certain non-GAAP financial measures in order to provide the most meaningful information and to improve comparability between periods. Information required to be disclosed about these non-GAAP measures, including a reconciliation to the most comparable GAAP measure, is available through our press release filed on Form 8-K and included in the investor relations section of our web site at www.selectcomfort.com. I will now turn it over to Bill for his comments.

Thanks, Mark, and good afternoon. And thank you for joining us today. I will begin this call by discussing some highlights from our fourth quarter and full-year 2003 results. I'll then turn the call over to Jim, who will provide financial details and updated guidance for 2004. Then I'd like to provide you with my thoughts on our outlook of strategies and competitive position. At that point we will be delighted to answer your questions.

On our last call, in October, I stated that our focus for the fourth quarter of 2003 would simply be on execution. Execution of our proven and familiar initiatives. Our Select Comfort team executed superbly as our record fourth quarter results demonstrate. I congratulate the Select Comfort team on this performance and express thanks for their continued dedication to improving our customers' lives.

In the fourth quarter, the Select Comfort team generated revenue growth of 49% versus prior year. Fueled by 28% increase in comp store sales. This performance is even more impressive considering we lapped a year-ago comp store sales of 38%. Our fourth quarter profits also continued to outpace our sales. Operating income doubled, while EPS increased 87%. It's important to understand that 2003 was our second year of significant profitable growth.

In full year 2003, sales increased 36% with same-store sales growth of 31%. Full-year profit increased 86%, achieving an operating margin of 9.3%. Also important to note, we generated $31 million of free cash flow in 2003 while aggressively investing in store expansion, remodels and systems improvements. Do keep in mind that this is a bit inflated because the third -- because for three-quarters of the year we did not pay taxes as we depleted our NOL's. Our growth continues to be self-funded and we are debt-free.

Jim will provide further financial details in a moment. But before I turn the call over to him, I'd like to recap some of our key accomplishments of this past year. We expanded our brand and consumer franchise. In 2003, Sleep Number advertising spending grew 51% to $60 million, and national unaided brand awareness doubled from 4% to 8%.

National advertising support increased 39% in 2003, and local market incremental programming was extended to 5 markets, reaching 29% of the US population, compared to just 19% of the population in 2002. Our increased advertising investment clearly drove our same-store sales growth this past year. Average sales per store increased from $817,000 to $1.1 million, with now nearly 50% of our stores over $1 million in annual revenue.

And importantly, our commitment to grow immediate investments did not come at the expense of profitability, as proven by the improvement in our operating margins. Jim will provide more color on this momentarily. In addition to same-store growth, in late 2002 and into 2003, we began opening new stores. We closed the year with 344 stores, 21 or 7% more than prior year. 2003 saw Select Comfort for the first time concentrating the opening of multiple stores in a market supported by advertising. Our Boston launch continues to meet expectations, with revenues since our second half expansion of media stores up by over 140% versus prior year.

Product innovation in 2003 was limited. But what we did do was effective. We benefited from a full-year 2002's aggressive innovation agenda and in 2003 rollout of our adjustable foundation added 7% to sales in the year. We also expanded home delivery to all markets in 2003, delivering 100,000 beds or 35% of all units sold through our home delivery service. Home delivery is an important part of our growth strategy since it becomes another touch point that enhances the customers' experience. 2003 also saw important non-financial advances at Select Comfort. In the area of people and leadership, we strengthened our senior management team with the addition of Scott Peterson to lead our human resource function. We also added two board members, with functional skills as well as relevant strategic experience and insight. Truedyrat(ph) recently promoted to President of Carlson Hotels in the Americas after several years of being CFO and Mr. Mike Peel, senior VP of Human Resources at General Mills. Last year, we also helped our largest shareholder diversify their position in Select Comfort, reducing their ownership position from just over 38% to less than 5%. And in the process we grew our institutional ownership to 27.8 million shares, approximately 82% of our outstanding shares. This seems to be a good point to turn the call over to Jim Raabe to review financial results and provide 2004 updated guidance.

Thanks, Bill. I'd like to begin my comments by taking you through the income statement and providing you with details of our fourth quarter performance. Then I will discuss our balance sheet and conclude with guidance for 2004. Bill has provided a good overview of our results, and you've seen our release and financial. So I'll get right to some of the factors driving our strong performance, starting with sales. All channels contributed significantly to record sales of 137 million in the quarter. Even after considering the additional week in the quarter for this 53-week fiscal year, channel growth was impressive. Our retail and direct channels each grew by approximately 47%. While e-commerce sales increased 58% and wholesale 74%. Retail sales continue to account for approximately 79% of all sales. Direct represents 12% of sales, while e-commerce and wholesale both account for both 4% of the total. Retail same-store sales continued strong with an increase of 28% on top of a 38% increase for the same period last year. Store expansion added 77% to our sales gain, with the balance of our total revenue growth originating from additional week in this Q4 compared to last year.

We opened three stores in the fourth quarter, closed two and finished the year with 344 stores. Clarifying now for those of you trying to reconcile the 49% total sales growth to 28% same-store growth, as you've already heard, our fiscal fourth quarter in 2003 had one additional week. While we have adjusted our same-store sales to compare store growth for equivalent time periods, the 49% quarter growth compares 2002 sales in 13 weeks to 2003 sales in 14 weeks. Same-store growth without adjusting for the additional week would be approximately 7 percentage points higher. Add to that growth from new stores and other channel performance and you can reconcile to 49% total growth. Our sales growth continued to be driven by mattress units and average selling prices. The number of mattress units sold in the quarter increased by 30%, 23% after adjusting for the additional week. While the average selling price increased by 15%. The average selling price in our owned channels came in at $1,784 per mattress, compared to $1,547 last year. Approximately 40% of this average selling price increase was driven by mix improvements that followed the upgrade of our product line during 2002, while another 40% was due to the addition al revenue from adjacent foundations in our product line.

As we said in our third quarter conference call the one-year anniversary of these product changes occurred late in 2003.and 2002. As a result, we expect sales growth rates related to average selling price increases to decline in 2004. Accessory sales represented 8% of our sales for the fourth quarter, slightly less than a year ago, and this is an area that we believe we can improve on in 2004. Adjustable foundations were 7% of sales, media investment remains one of the center pieces of our sales growth strategy. Media investment in the quarter grew to 16.1 million as we increased national advertising by over 50% and more than doubled local advertising.

Media expansion is contributing to growth in all geographic areas, and stores in all media markets continue to perform well. Markets first receiving local media in 2001 and 2002 had same-store growth rates of approximately 28%, consistent with the chain as a whole. We leveraged the sales growth into improved operating margins ending the quarter with a 12.4% operating margin, 280 basis points better than the fourth quarter of 2002. The continued improvement in this area confirms our belief with planned sales growth we can continue to improve our full year operating margin of 9.3% by 1 to 2 percentage points per year for the foreseeable future. Gross margins declined slightly in the quarter to 62.3%, remaining in our targeted range of 62% to 63% increased use of home delivery, which provides no incremental margin but provides a valuable service to our customers, and increased adjustable foundation sales, which are not manufactured internally and therefore also provide a lower percentage margin, contributed to the slight decrease.

Selling and G&A remain our largest margin improvement opportunities while we continue to manage media and marketing at variable costs. We also benefited from a lower income tax rate. While the rate which we're paying income taxes in 2003 came in as planned, we are now expecting a slightly higher tax rate in 2004 as our store base expands in states with higher tax rates. Interestingly, those projected increase in rates requires us to increase our deferred tax asset balances providing an income tax benefit in 2003. This adjustment to deferred taxes added about one penny to our earnings per share in both the fourth quarter and the full year. Now, a few comments on our balance sheet. Our cash position continues to grow even as we invest in new stores, marketing and efficiency generating infrastructure projects.

We finished the year at $75 million in cash, generating free cash flow of 31 million. Inventory balances increased two 12.4 million compared to 9 million a year ago, due mainly to the increasing popularity of our home delivery and the increase in the number of stores. If you recall, our in-transit deliveries for home delivery are classified as inventory until beds are set up in the home. Our working capital position continues to improve ending the year at nearly $55 million. Now, for our guidance. For the fourth quarter earnings announcements we're issuing updated guidance for the full year 2004 and establishing quarterly guidance for the first time. Our 2004 guidance reflects company own growth, company sales growth of 20 to 25% to between 550 million and $580 million. As we've noted over the past several quarters new store expansion will become a more stable and significant component of sales growth while same-store growth rates should be expected to decline from the near 30% comps at the last six quarters. Sales growth during the first part of 2004 is proving out this expectation. We believe that continued media expansion, along with product innovation, will sustain double-digit same-store growth. For 2004, we expect same-store growth, same-store sales to grow between 15 and 22%.

Our retail channel will be the focus of our growth as we continue to leverage our existing infrastructure. Select Comfort expects to open approximately 25 to 30 stores while closing 3 to 5 for a total of 365 to 370 stores by the end of December 2004. The store growth in 2004 is expected to be somewhat more front end loaded than in prior years, while not all store openings for 2004 have been finalized, 10 new stores are currently slated for opening late in the first quarter and an additional 8 stores are expected to open in the second quarter. We also plan to upgrade approximately 150 stores in 2004, either through a program to make all store marquees consistent and or through efforts to improve the consistency of the look of our older stores.

Operating margins are expected to improve between 1 and 2 percentage points, stemming primarily from selling and G&A expense leverage. Media as a percentage of sales is expected to increase to 14% or more as we continue to pursue growth in product and store awareness. Gross margins should remain in the 62 to 63% range. Overall, we expect earnings per share in the range of 90 cents to 93 cents, more than 30% higher than our 2003 results.

We expect to spend nearly 25 million on capital projects for new store build outs existing store upgrades as well as system enhancements and manufacturing improvements. Cash from operations are expected to be more than sufficient to fund these projects and to add over $20 million to our cash balances by the end of 2004, further strengthening our balance sheet. A couple of additional factors to consider for 2004. As noted earlier, we expect a slightly higher income tax rate. We estimate an effective rate of approximately 38.5%. And share counts for earnings per share purposes should be around 41 million shares.

We also provided an outlook for earnings growth for 2004 in our earnings release. We expect quarterly earnings will contribute to full-year results in the following manner: 17% to 19% of full-year earnings are expected to occur in the first quarter, 15% to 17% in the second quarter, 27% to 29% in the third quarter and 36 to 39% in the fourth quarter. This break down does not follow historical patterns due to the expected shift in QVC programming. Last year our largest sales event with QVC occurred in the second quarter. While in 2004, we expect the program to air in the third quarter. Our sales and earnings growth in the second quarter is therefore expected to be lower than in other quarters. For the first quarter of 2004, we expect to generate revenue of 127 to 133 million, the same-store sales of 15 to 20%. We forecast EPS to be in the range of 14 cents to 16 cents per share.

In closing, we've had a great fourth quarter and full year 2003 and are looking forward to continued successes. While 2004 plans reflect aggressive sales in earnings growth, we believe Select Comfort has the team, strategy and financial capacity for sustained long-term growth. I'll now turn the call back to Bill.

Thanks, Jim. We are now focused on delivering our commitments for a third year. 2004 will be about the continued execution of our core strategies. It is not to say that we won't test new ideas. But, our primary focus will be on building our core and adding more. Let me review how our proven strategies will be executed in 2004. We plan to expand our brand in consumer franchise by continuing to invest in our advertising program, both nationally and in more local markets. Our advertising investment is expected to increase over 30%, with media spending projected to be over $80 million versus $60 million in 2003. National advertising is planned to increase up to 25%. In local markets, incremental advertising will be added to 13 new markets, expanding our reach to 55% of U.S. population compared to 29% in 2003. This is our most aggressive local market expansion to date.

We will also continue to expand retail distribution through our company owned stores. We will open 25 to 30 new stores in 2004. And given our success with new store openings in 2003, we are comfortable with planning to accelerate our store openings over the next several years. We plan to continue expanding our presence in key metropolitan markets this year, including New York and Los Angeles. We also look forward to developing and reading our non-Mall pilot stores through the year for possible expansion and acceleration in 2005. 2004 will see more aggressive product innovation than in last year. We are not in a position to share details today in order not to preempt our second quarter consumer communication, but we believe that our product innovation schedule positions us well for 2004 growth and into 2005. Finally, while the above programs will drive our continued core growth, we will also dedicate resources to preparing new business opportunities for the future. Our focus in 2004 will be on product expansion, testing a sofa/sleeper product in the first half of the year and in channel expansion evaluating the sleep number beds opportunity and hospitality. Neither of these initiatives is expected to have material impact in 2004 at this point. But if successful, they do give us opportunities for incremental growth in the years to come.

After two exceptional years of 30% plus annual revenue growth, we do expect sales to moderate to a more sustainable 20% annual growth rate. We expect to continue to leverage sales for margin improvement and earnings growth targeted at 30%. Our programs are in place and February and March have important long weekends in consumer events, which are traditionally strong mattress buying occasions. We're now working to deliver Q1 and full year guidance.

I'd like to conclude my comments by summarizing our key strengths. First, we have a growth formula that's been proven over the past three years and that addresses a strong and growing consumer trend for personal comfort and quality sleep. These strategies are anchored by a unique product and a proprietary brand that are clearly appreciated by consumers. We have a small share of the national market and a significantly higher share of local markets. It is now a matter of execution. Second, we also have a unique and advantaged business model. Select Comfort is the only vertically integrated major bedding company. We manufacture Sleep number mattresses, sell them primarily through our own retail distribution channels, provide customer support through our in-home delivery service and provide follow-up customer support through our own call center. Not only does this integrated process give us the opportunity to control quality and service at every customer touch point, but also it offers operating efficiency and margin leverage.

Our business model also allows for low inventory and efficient cash conversion. In 2003, we generated $458 million of sales while maintaining our inventory level below $13 million. We've been at very low inventory risk versus other mattress manufacturers and retailers and we believe it would be very difficult to (inaudible) and take years for our competitors to replicate our business model. We also have strong, no debt balance sheet. We expect to add another $20 million of cash in 2004 and we haven't yet continued to fund growth with our own free cash flow. In closing today, we are proud to have delivered to our shareholders industry leading growth over the past two years. We are confident that we can continue to achieve our growth objectives of 20% revenue and 30% EPS growth over the next several years, assuming no major economic disruptions. We're well positioned to support our growth and committed to fund expansion and innovation. Thank for joining us today. I will now turn the call over to Kayla, our operator who will poll the audience for question.

[OPERATOR INSTRUCTIONS] Kyle Stoltz with William Smith Company, you may ask your question.

Good afternoon everyone. Thank you for the information. I have one question. And that is some investors seem to have a perception that Tempur-pedic is a legitimate, competitive threat to you guys. I wonder how you respond to that? Is there anything in addition to what you've already discussed or as what you the guys are doing to strengthen your position, mark your position, which looks to be an increasingly competitive marketplace.

Well, though we participate in a common market space, Temper is really a different product. And it has a different business model with different expansion opportunities. We believe that customers appreciate our adjustable and personalized comfort more than the one size fits all situations that temper and inner springs are limited to. Our business models are quite different. Select Comfort controls our own distribution channel and therefore is quite independent, don't go head to head often with Tempur-pedic and we also have significant margin expansion opportunities. We believe competition is good.

We welcome other bedding companies raising the awareness of better sleep and alternative technologies to coils and springs. You know in terms of a value proposition and a customer satisfaction proposition, we believe we compete quite well against Nautilus, Tempur-pedic sorry, Nautilus too.

I know you mentioned hospitality. Have you considered any other verticals; healthcare I think is maybe one Tempur-pedic might be in. Have you considered any other verticals beyond hospitality yet?

Well in terms of channels, yes. We have considered other healthcare opportunities and some of those are in low levels of development and we do not expect any significant activity in those channels this year, but those again are in our longer-term development opportunities.

Thank you for the insight. And again thanks for all the information.

Steve Denault, Craig-Hallum Capital. You may ask your question.

Good afternoon, everybody.

Hi, Steve.

Regarding the competitive landscape, and obviously they're having some concerns of which may or may not be regarding awareness of the competitive landscape, but would you say there have been any changes on the air side of things, as opposed to foam?

Well, our biggest direct competitor in air is Nautilus. And as you know, they announced that they were withdrawing TV support from the category middle of last year. And then they announced that they were going to come back with a different product or proposition, I believe in the second half of this year, 2004. So that's the biggest change that we've seen. And there have been a couple of other smaller players that have also experienced financial difficulty. I think it's -- I personally think it's a function of some of the changes that we made in our strategy. Again, going to a proprietary brand as opposed to the air bed company and significantly improving our product because we have R&D dedicated -- dedicated R&D resources focused on this product category. That just made it harder for others to follow.

OK, and if I can just ask one more. The pressure mapping technology, how many stores is that in now?

It is now in about 35. We had it in about 8 or 10, and then we added it 25. And they have really just been out there for a short period of time. So we don't have any particular read on those results.

OK. Thanks a lot.

Laura Richardson of Adams Harkness Hill. You may ask your question.

Yes, thanks. Just a couple of guidance related questions. First I was wondering what kind of revenue growth you are expecting in the direct sales parts of the business? May I get back into it but I just want to hear you guys say a number.

Yeah, we had, I think over the last couple of quarters, over the last year, we've indicated our expectation that both e-commerce channel and direct channels would potentially be lagging the retail growth. And what we have seen over the last couple of quarters as we've expanded our media campaign that both of those channels have picked up the pace pretty significantly. So we certainly believe that for the first part of the year we should see real strong growth from both of those channels, as we start lapping some of the increased advertising, we'll look at what happens in the back half of the year. But I think that for the first part of the year we should expect it to grow at similar rates to what retail is.

OK. Thanks, Jim. And then what timing should we be modeling in terms of the new store openings, any closings? And also the new market rollouts, for the 13 new markets?

With regard to your first question on new store openings, we will open somewhere between 25 to 30 more than half of those will be in the first half of the year. As I said, we currently have scheduled 18 in the first half of the year. So there will be in the range of 10, give or take a few, mostly in the third quarter. That's assuming that in our new store signings that we don't add additional ones into the first half, which is the possibility as well. So slightly weighted towards the front and as far as the stores closing, it's one here and there. We've already closed one. So there was one closing in January. But the other, you know, three or four that we may close will be spread throughout the year. And then -- your third question was on advertising roll-out and of the 13 markets, 12 of those opened midway through January.

So most of them are open already?

Most of them are opened. In what just for clarification, what opened means is incremental advertising of some sort has started in those markets, and most of them this year are radio, incremental radio spots.

OK. You mean the ones that have opened so far?

Yeah, the 12 that have -- the 12 local markets that when we say opened, are now receiving incremental local marketing support, that is in the form of, I believe mainly of incremental radio. Some of it was incremental radio. Some of them was a direct response TV, cable TV type of format.

So are any of these going to be sort of big splashy openings like Boston where you did almost double the store base in a month and did the TV advertising as well? Or will these be a little more gradual?

Yeah, these will be a little bit more gradual. It's a wide variety of market. The largest market is Los Angeles, which we started in January. But it's a good group of markets and we're excited about that roll out.

That's interesting that it's kind of a different approach than last year, which, was that deliberate or just a function of when you could get real estate in some of these new markets?

Well, I think what's more unusual is last year and how we did Boston, virtually all the other markets that we've opened with the exception of those where we were already at a high, relatively high development level, where we (inaudible) Denver way back in 2001, when we were able to launch with TV, pretty much the way we've rolled out most of these local markets has been with a gradual build-up of radio first and then depending on the market, then spot TV.

OK. That makes sense. It's hard to get four stores in the same vicinity, I guess, at the same time.

Yeah, I think that comment is correct. If we had an opportunity in some of these other markets to open four or five stores in a very short period of time, we would probably approach similar to what we did in Boston. It's just difficult to find, as you said, real estate. The right kind of real estate in a single market all at the same time.

Yeah, that's reasonable. OK. Then my last question is, you know I'm thinking back to my impression of the first quarter of last year, in terms of comps. It seemed like you probably got off to a more robust start then everything was slowing down in terms of consumer and business spending in February and March, anyway. And the prelude to the war. I mean is that really -- is that what happened last year and then would you think that you could have like maybe a pick up at the end of the first quarter from what you're seeing now because of that?

Yeah, I don't really -- I wouldn't say that we saw any particular pattern a year ago. And so I don't know that I would necessarily see anything different this year.

That's why I said it was an impression, so -

Yeah, right.

You never reported that, but -

I mean, our same-store growth has been pretty consistent throughout this time period. And that isn't to say there aren't months that are better or worse than others.

Right. OK. That's fair. Thanks, guys.

Joanne Henry of Fieldstone Research. You may ask your question.

Congratulations on good quarter. Calling upon the immediate spending questions, do you expect that in New York and Los Angeles you'll be spending significantly more? Is that part of the bigger gain in, the bigger jump in the media spending this year, those are more expensive markets, you won't have maybe the big splash all at once that you did in Boston, but is that part of that big gain or are we really going to see the media spending pretty even throughout the year and toward all markets going for the big national population awareness?

If I understand your question correctly, it is certainly more expensive to advertise in the Los Angeles and the New York. But the way that our advertising model works from the standpoint of when we open a model, we're very disciplined about how much we can spend effectively and how much we have in sales and stores, existing store base within those markets. So the relationship of the advertising to the sales is somewhat consistent regardless of the size of the market. Having said that, Los Angeles, New York, Boston, some of those are significant - are higher and therefore there is a little bit of a disproportionality there. But for the most part we would expect the advertising spending at least as planned. Today to be fairly consistent throughout the year. Certainly if we get ahead of the plan as we did this past year we would continue to expand the media as we go forward.

OK. Thanks. That helps. So what I hear you're saying is you're going to stick pretty much within the template you have as far as media spend per marketing new store openings increased overall?

Correct.

OK. And then if you wouldn't mind, Jim, if you could possibly just really quickly go over again the difference, just a little bit more explanation on the difference for the timing of the shift in quarterly revenues relative to QVC being moved out maybe a little bit on the total impact of QVC to a quarter, the biggest QVC.

Well, yeah, we have outlined in the news release and both of the calls the shift from an earnings perspective. If you recall a year ago, we had 11 cents in earnings in the first quarter and 12 cents in earnings in the second quarter. If you look at the summary that we've provided or the outline that we've provided for how we expect earnings to flow this year we would expect first quarter to be slightly higher from an earnings standpoint than the second quarter. So from an earnings standpoint, they're somewhat flip-flopped. And as I said, and as you've indicated, that's due in large part to the timing of QVC. The QVC show that we're referring to is a kind of a weekend event and it's generated in the past, you know, upwards of 5 million in revenue in a very short period of time, and so shifting that from one quarter to the next has somewhat of an impact. Now, there are other shifts in the QVC. So timing and programming so not all of that $5 million shifts from one quarter to the next, but that's kind of the order of magnitude we're talking about.

OK. Thank you.

Brent Rystrom of Piper Jaffray. You may ask your question.

Yeah. I've just got a couple of quick little questions. As far as the comps done in the 2Q to 4Q and the long term, Are you kind of thinking the range will be someplace in that 15 to 20 for the 2Q for 4Q as well.

Yeah, we haven't looked at -- all right. We haven't provided the outlook for those individual quarters. But I wouldn't see the range of the comps to vary significantly from quarter to quarter.

And then as far as the current quarter, just trying to follow up on an earlier question that somebody asked about the quarter possibly starting weak and ending stronger. Would you see your comps to date are consistent with the range you're looking for the first quarter?

We don't comment on you know the individual monthly comps, as you're aware. But certainly as we indicated on the call, we've had higher comps in the past. We've expected the comps to decline and we are seeing lower comps than what our historical or least what our last six quarter comps have been. And that's certainly been factored in the guidance we've provided.

From an advertising perspective you mentioned spending 60 million on your total advertising in '03. What was the number in '02?

$40 million in '02.

All right. And then final question. The sales volumes in markets, you had mentioned your average store was doing 1.1 million. In markets where you have local advertising, how does that compare to markets where you don't?

Al right. You've really -- there is correlation. Some of that is due to the advertising. Some of it is due to just the maturity, the markets, Minneapolis and some of the other markets have been around for a while. But Minneapolis, for instance is averaging well over two million a store. Denver is averaging over $2 million a store, and I would say that overall our media markets are certainly averaging as we told you higher than the $1.1 million that we're seeing and, across the chain. But I need to go get more detail to provide a more specific answer than that.

That's fine. Thank you very much.

Joan Storms of Wedbush Morgan. You may ask your question.

Hi. Good afternoon. I was wondering if you could comment, you talked a lot about domestic growth and we know you have a lot left in the U.S. can you comment any further on some international strategies that you maybe kind of starting to embark on and also Jim, housekeeping question, on the accounts receivable. I'm sure it's just a timing issue.

Yeah Joan, on the international front, we do have opportunities. We are actually dealing with different people come to us wanting a franchise or something to that effect. We have basically put all of that on hold for the time being. We have so much that we need to, so much opportunity for us here in the United States getting these major Metros and some of the product innovation work going on that at least for the time being that is our primary focus. On the side, we're starting to think about potential strategies for doing it. What we do know is that our product works internationally. We know that our brand works and the advertising, some of the big questions are on distribution strategies and ownership strategies. But I don't foresee that being a major issue here for at least another one to two, to three years, just because we've got so much to do here first in the United States to prove the opportunity.

OK.

And on the receivables side, Joan, the number that you're seeing in the fourth quarter is one that is probably pretty consistent with what you should see going forward. It's about the same as what it has been the last couple of quarters. We're in that $6 million range. The one that really two main reasons for the increase. One of which is our wholesale partners are really just getting ramped up a year ago and those have continued to grow and as a result the receivables related to them have, and then just overall business growth. Some of our receivables is just timing of credit card settlements and as business grows that number creeps up a little bit. So those are the main factors.

Great. Thank you.

Chris LaDonald(ph) of Texa Associates, you may ask your question.

Good afternoon, everyone. Just trying to bridge your earnings guidance to your mention that you expect operating free cash flow greater than 20 million. Taking the mid point of your earnings guidance of 90 to 93 cents let's call it '91.5 at times, 41 million shares was (inaudible) 38 million of net income was CAPEX of 25 million plus depreciation of, I guess you haven't guided the depreciation but 14 is probably pretty reasonable?

Yeah, that's in the ballpark.

OK. So that's, 26, 27 million of free cash. What am I missing?

We've said it's more than 20. And I would expect, I would be surprised if it was in that mid 20 range.

Very good. Thank you.

Greg McKinley of (inaudible) Company. You may ask your question.

Thanks. I was wondering if you could just help me a little better understand the comp trends you're experiencing or you're guiding to here in the March quarter. Specifically, you know, we've seen you guys drive higher ASP tickets per transaction, pretty consistently now for a number of quarters. And with you having an ASP of $1784 here in Q4, I think the way I'm calculating that, it looks to me like that that's roughly 13 or 14% higher than the average ticket size was at the beginning of '03. And so, you know, when you're guiding for 15 to 20% comp in Q1, is that implying really just a very nominal growth in the number of transactions occurring, or am I misinterpreting that data somehow?

Well, I think the one thing you need to just take into consideration is fourth quarter average selling price is higher than what we will typically see, because of the holiday shopping and accessory sales and those types of things. That does add to our average ticket price so that the Q4 number is a little bit higher.

OK.

We would expect, we do expect some growth in average selling price, in particular during part of the year, and then when we had the roll-out of our product upgrades, we think that that can also assist a little bit. But I think, sustaining 15% average selling price increase is certainly not part of our projections for this year and we would expect it to be much more nominal.

Yeah and I guess what I just wanted, maybe I'm misunderstanding it. Even if we saw a slight sequential decline in the ASP from Q4 that we just completed to the current quarter, it would still imply it seems to me like a low teens year over year ASP increase. And when we just add that to our number of transactions increase to get to our comp? And I guess I'm sort of wondering, is that implying number of transaction increases of only something in the low single digits?

I wouldn't expect a low teens increase in average selling price.

OK. On a year over year basis?

No.

OK. OK. The other question I had related to your balance sheet. And just wondering, is there any sort of timing issue with accounts payable? I expected, I don't know, maybe it's just the timing issue, but I expected with the level of sales and the cost of sales during the quarter that your payable balance might be carried a little higher at the end of the year?

Yeah, it is a little bit of a timing issue related, but that's any ongoing, something you'll see on an ongoing basis. With the 53rd week we flopped over from ending the year before month end to after month end so it's just the timing of some of our payments. Now we're getting well, they've always been paid that week up-to-date, that kind of right after, right at month's end.

OK.

But, in the past month end has been a few days before the end of the calendar month.

OK. Thank you.

Dana Walker of Almer Investments (ph). You may ask your question.

Good afternoon.

Hello Dana.

What would you look at as your sequential media spend comparison, Q1 versus Q4.

Are you asking about 2004?

First quarter '04 versus fourth quarter '03.

It will be, it will increase and in the range of probably around 20% from Q4 to Q1.

I believe you said that your Q4 number was around 16. Is that accurate?

Right.

Second question, can you talk about the annualized sales volumes in your '03 class of stores comparing that to your roughly 1 million 1 average?

I have just looked at that number, and I apologize, because I'm drawing from my memory a little bit. But my recollection is it is similar to that average, maybe a hair higher. But for our 2003 class, average sales per store is about the same, if I recall correctly.

So the new stores are averaging at the mature level, right out of the shoot?

Well, if I understand your question correctly, the 2003, the stores in the 2003 markets are kind of what's left in that base. And so, yes, the answer to that is, yes. Our new store openings are averaging a little bit below the million one. They're more in that 800 to 900,000 range and growing from there.

That's my question, that latter point. I was curious whether you're able to cherry-pick locations in a way that you're getting X amount of productivity to start and was curious about what that productivity looks like. Recognizing it's a modest part of the total base, what is your sense for the '04 openings versus what you saw in '03 and their comparability to your average store productivity?

Our expectation is that we will continue to improve on the productivity. I wouldn't expect it to be dramatic, but as we opened stores and focus more and more on stores within markets that either have advertising or getting advertising, we would expect that to improve on a year-over-year basis. But new stores we expect to still be in that 800, 900,000 range.

Final thought. Could you offer some commentary on what it's like to roll your local ad program to additional local markets? Is there a fair amount of customization or is there not a requirement for a great deal of customization as you go from let's say Boston and LA and so on.

There's very little customization of the copy, other than we do, obviously, adjust the closing tags on all radio and TV to call out the stores in those markets. But the creative itself really doesn't change. As you know, a big part of our program is also DJs and local spokespeople. So obviously that is probably the most localized element of the program.

I'm going to cheat. I have one last teaser here as I recall, you began to introduce your adjustable foundation in late '02, early '03. Have you sat on a time when you'll begin to test the sofa bed?

As I've said we'll be at the timing the sofa bed sometime here in the first half of this year.

OK, I missed it then. Forgive me, great work. Keep it up.

Thanks

Laura Richardson of Adams Harkness, you may ask your question

Yeah, thanks. I wanted to follow up on the discussion of transaction size and number of transactions and make sure I understood what Jim was saying. Jim, did you say earlier in the call that you had anniversaried most of these things that helped the average selling price in the end of this year or was it the beginning of next year.

At the end of 2003.

So going forward, the comp growth is going to be more from a number of transactions, probably vastly more, sounds like.

That's correct.

OK. Just wanted to make sure I understood that. Thanks.

[Operator Instructions] Sir, there are no further questions.

Well, thank you all very much for your support, and your participation in our call. Thank you.

I do apologize at this time we do have one question. Did you want to take it.

We can take that, sure.

OK. John Dustkin of SAC Capital. You may ask your question.

Hi guys. Did you give the number I might have missed it did you give the comp in the non-local markets. I think you gave the class of '01 and '02 but I'm not sure if I got the comp for the stores in non-local heavy up advertising.

It was similar to that for the fourth quarter anyway it was very similar to what the overall range was. The '01 and '02 classes were in that close to 28%. The non-media were in that 28% range. The '03 markets were higher, but it's not a very big piece of the total store base, so it doesn't have a lot of impact on the overall average.

OK. And the QVC pushing into the third quarter, was there any reason for that? Is there more television viewer ship in that period?

No, it was just a function of the QVC schedule and also they have a pretty definite formula on product life cycles and how they phase different things. And so it was really driven by QVC's programming more than it was by anything on our part.

And then maybe one last question on the comp guidance. Kind of two parts. I guess Q1 you're saying 15 to 20. And then for the longer term you're still saying 15 to 22. Is there a reason why Q1 is less? Is there something you're seeing early in Q1 or is it something on the comparison level that makes that number lower?

I think the primary reason is because the product upgrade schedule that we have for '04. And while we don't expect it to have a tremendously significant lift on the average selling price, we do think it will have somewhat of a positive effect. And most of that product innovation begins in Q2.

So is there a way I can think about it, the product innovation could contribute X to the comp or the product innovation would take the average selling price up a certain amount?

I wouldn't give a specific amount, but I think you're thinking of it the right way that there's some benefit from that. And that's reflected in the full-year comp versus the quarter comp.

So something further down the road. Then this is probably more just a point of clarification. Longer term, had you been saying 15 to 20 or 18 to 20? I guess I'm just trying to -- my recollection was more of an 18 to 20. I was wondering if there's something you see in the near term where maybe you think that 15 is a better number than 18.

You're talking about the comp guidance?

Yeah.

I think what I would say is we don't believe that 30% is certainly anything that anyone should look at from the sustainability standpoint. But I think what we have said, what we have said is we expect double digit comps to be sustainable. You know 15 to 20 is something more that's first quarter and 15 to 20, 2004 specific. But longer term we certainly feel double digit comps without being more specific than that.

Great. That's it for me guys, thanks.

That will conclude our call for today. Again, thank you all for participating and thank you for your continued support.