Sleep Number Corp (SNBR) 2004 Q3 法說會逐字稿

Good afternoon. And welcome to the Select Comfort third quarter 2004 earnings conference call. At this time, all participants in are a listen only mode, after the presentation we will conduct a question and answer session. To ask a question please press star, 1. This conference is being recorded. If you have any objections you may disconnect at this time. I'll now turn the meeting over to Mark Kimball, Senior Vice President and General Counsel, sir, you may begin.

Thank you, good afternoon, and welcome to the Select Comfort Corporation third quarter, 2004, 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. In a moment, I'll turn the call over to Bill, who will provide some introductory remarks then Jim will provide a review of our financial results in more detail on the outlook for the fourth quarter. Bill will then make a few concluding remarks before we open the call to your questions. Please be advised that this telephone conference is being recorded and will be available by telephone replay and will also be archived on our Website. Please refer to the details set forth in our press release to access the replay on our Website. 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 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. In addition, our commentary and our responses to your questions may include references to certain nonGAAP financial measures in order to provide the most meaningful information and to provide comparability between periods, information required to be disclosed about these nonGAAP financial measures including a reconciliation to the most comparable GAAP measure is available through our periodic filings with the SEC and is accessible through the Investor Relation's section of the Website at selectcomfort.com. I will now turn the call over to Bill for his comments.

Good afternoon and thank you for joining us. And for your interest in Select Comfort. We are going to keep our comments brief today, we think performance matters far more than words or concepts, so our goal today is to share our perspective on performance, to clarify a few key measures and then to respond to your questions. Let me share my perspective on where we are in our journey to revolutionize the way the world sleeps. We are pleased, once again, to report continued sales growth in all distribution channels. Consumer interest and demand for the Sleep Number Bed is strong and getting stronger. Sales in the quarter grew 11% in units and 23% in revenue versus prior year. Giving us growth of 20% or better for now 11 consecutive quarters. We don't spend much time dwelling on what could have been, but these sales results may have been two to three points better with all the associated financial leverage had we not had hurricanes and some negative PR in our lead market in the quarter. In any case, 23% revenue growth, and 15% same store growth during a challenging quarter for consumers and retailers was, indeed, solid. We also continued to gain profit leverage in those areas with fixed costs, particularly selling expense and stores, as well as overhead expenses. Our overall operating margins in the quarter were not as strong as we would have liked largely because of the warranty charge that is referenced in our third quarter release. Our warranty claims have returned to historic levels and we are pleased to be in a position to continue to enhance one of our greatest assets the continued satisfaction of our owner base. I'll now turn the call over to Jim, who will provide more detail around our financial results and I will then return to provide my perspective on where wer are on our journey to revolutionize the way the world sleeps.

Thank you, Bill. I will take you through the income statement and provide some details of our third quarter performance. I will also discuss our balance sheet and conclude with some discussion of our updated guidance for the fourth quarter of 2004 and a preliminary outlook for 2005. As Bill mentioned, revenue grew by 23% to 144.3 million. Fueled by sales gains across all distribution channels. Our sales breakdown by channel is as follows: retail accounted for 78.2% of all sales. Direct represented 10.9%. While E-commerce accounted for 4.3% and wholesale, 6.6%, driven by a very successful QVC show in August. The average selling price in our Company owned channels came in at $1,966 per mattress. Up approximately 15% compared to last year. Mattress mix and increasing accessory sales continued to positively drive average selling price. Unit sales across all channels increased by 11%. Approximately 5% of this growth came from existing distribution. Including QVC and existing retail partners. While the remaining 6% unit growth came from new distribution, new stores, new retail partners, and a small number of initial shipments to Radisson hotels. In retail, sales increased by 21%, including same-store growth of 15%.

As Bill noted, we estimated that the effect of negative publicity in Minneapolis, plus the hurricanes in the southeast, lowered our third quarter sales and same-store growth by 2 to 3 percentage points. Sales in the southeast have returned to normal and we have seen some indication of improvement in Minneapolis, but it's -- expect it will take longer for sales to fully recover in that market. Our most recent media markets, those with local advertising introduced in 2004, have had the highest growth rates as you would expect. And new store openings continued to exceed expectations. Same-store growth was driven by increases in average selling price, following initial strength of our 5,000 bed model in July, sales growth for this model slowed. Sales at the high end of our product line continued to perform very well. We clearly have an opportunity to attract customers to the more moderately price products. A market segment that provides tremendous upside potential. During the quarter, we opened two stores and closed none. We ended the quarter with 362 stores with average sales per store at $1,223,000 at quarter end. Which is 20% than a year ago. Overall, operating margins were 8.8% in the quarter. 1 percentage point lower than a year ago, as Bill noted. Gross margins were 60.3% for the quarter. 61.2% excluding the warranty charge, as compared to 63.8% in 2003.

Remember, that we expected the gross margin to decline from the third quarter of 2003 because of a change in the timing of our largest QVC program, as noted earlier, wholesale sales represented nearly 7% of consolidated sales in the quarter. The 61.2% gross margin is comparable to previous quarters in which wholesale sales were a high percentage of our sales mix. Gross margins in our core line remain solid. Before moving on to other P&L items I'd to make a few clarifying points on our addition to the warranty reserves. First, this increase was not due to an increase in the frequency of product claim rate. We did see a short term spike in both customer service calls and product returns in Minneapolis, following the negative publicity in early August. Those costs have been captured in the third quarter results and call volumes and related claims have since returned to nominal levels. The Increase in reserves is related to a change in our estimate of the cost to service future warranty claims. This change in estimate is associated with planned changes to our customer services practices. We have a number of options available to us when a customer calls with a product issue.

In surveys over the past several months, we determined that certain of these options resulted in a higher level of customer satisfaction than others. Although at a higher cost than what we had contemplated in our reserves up until this point. These changes in practice and increase in reserves will provide added flexibility to ensure the best possible customer experience. We continued to see margin improvements in our areas of leverage opportunity, selling expenses and general and administrative expenses. Selling expenses as a percentage of the sales in the third quarter were 22.7%, 1.9 percentage points lower than a year ago. And G&A as a percentage of sales was 7.2%, 1.4 percentage points lower than a year ago. Marketing expenses including media, increased by .9 percentage points to 21.5% of sales. Media investments were consistent with the last two quarters at $19.8 million. From a balance sheet perspective we continued to see strong cash generation from our business model. At the end of the third quarter, cash and marketable securities totaled $95 million, compared to 75 million at the end of 2003. This increase is due in part to the timing of certain payments, resulting in an increase of certain liabilities and also reflects repurchase of approximately 793,000 shares in the third quarter for $14.6 million. Other balance sheet items of note, accounts receivable were 7.7 -- $7.6 million, the result of QVC and other wholesale sales. And inventories increased to $15.1 million due mainly to increases related to product line changes. We continued to estimate that we will generate $25 million or more of cash in 2004.

One final note, on the release as it relates to current matters. We noted in the release, that a lawsuit has been filed alleging deceptive trade practices and breach of warranty. We don't have much to say at this point, because we have just had the complaint for less than a day. This suit is about the treatment of the handling of our customers. We are disappointed in the claims given our long history of outstanding customer service. We take our customer relationships seriously and pride ourselves on treating customers fairly and honestly. We believe the claims are unwarranted and without merit and we will defend against these actions. Now, let's move on to guidance. At this point in time, for the fourth quarter, we expect revenue to be in the range of 153 million to $158 million. And diluted earnings-per-share to be in the range of 32 cents to 35 cents. We expect same-store growth to continue in the range of 15% to 20%, with additional growth from new stores and other distributions. A brief reminder that fiscal 2003 was a 53-week year as compared to 52 weeks in most years including 2004. The benefits of this additional week fell entirely into the fourth quarter last year. We always speak the same-store comparisons on an equivalized same number of store weeks basis.

Our prior guidance with respect to media spending and store expansion in 2004 is unchanged. We still expect to increase our media investments to approximately $80 million during 2004, compared to $60 million in 2003. Which means that we will spend approximately $20 million on media in the fourth quarter. And we will add a total of 30 stores this is year focused primarily on our new local sleep number media markets and major metropolitan areas. In the fourth quarter we plan to open six stores ending the year with 368 stores. Now, I'd like to provide some preliminary thoughts on 2005. We are currently in our annual planning process and are not ready to provide detailed guidance at this point. However, I would like to share with you some of our thinking as we plan for 2005. We feel confident that we can deliver revenue growth of at least 15% in our core distribution channels in 2005. Retail, which represents approximately 80% of sales, will be most influential to sales growth in 2005. Our new stores, which have been exceeding our expectations should contribute revenue growth of 5 to 7% with the addition of more than 30 locations next year. A second component to growth is same-store sales. As stated previously, our long term target for same-store growth is low double-digits. We have begun trend to this level over the last several quarters and expect to continue to do so as we lap product improvements and associated increases in average selling prices. While we expect to continue to outpace same-store growth of other retailers, improvements in unit volumes will be necessary to hit and exceed these targets.

We believe our channels including direct marketing, E-commerce, QVC, and retail partners which represent 20% of sales and have been performing as expected, should have a growth rate in the mid-teens, with upside potential if we add new retail partners. As for net income and EPS, we expect we will continue to leverage our selling in G&A expenses as we have in each quarter in 2004. In addition, we will focus on leveraging the investment we have made to local media markets over the last several years. With 34 of the largest media markets now established with local media, we expect to take a more modest approach to media growth in 2005. The leverage gained in these areas may be partially offset by some cost pressures such as historically high energy costs and the increase in cost of goods in California, due to the flammability retardancy legislation that takes effect in January. We expect that EPS growth should be at least 20%. The base case scenario that I have laid out does not include any contribution for Radisson, nor investment in longer term initiatives. We prefer to see how the Radisson rollout unfolds and to update you as it progresses. As we have said, the most exciting aspect of the Radisson agreement is the marketing exposure it provides, as Radisson customers experience the comfort of a Sleep Number Bed firsthand. We look forward to providing more guidance when we have completed our detailed planning for 2005. I'll turn the call back to Bill for some additional comments.

Thanks, Jim. And again, thank you all for your interest in Select Comfort. I'm impressed and encouraged with our performance three-quarters through the year. Though, as a young Company, we certainly have much to improve. Our business has demonstrated its fundamental strength the past three months against some pretty difficult conditions. We delivered positive profitable growth and progressed against our strategic objectives, I'm particularly excited by the growing diversity of our business. This quarter's sales reflect the increased -- the increasing strength across multiple channels of our business. From our growing sales and share within our retail partners, to QVC's continued growth fueled by customer satisfaction, to the accelerating growth of our accessory product line and the significant growth in our new and enhanced higher end bed models. We believe that each of these has significant growth potential going forward.

A word about our retail performance. We shared last quarter, that we were not satisfied with our sales conversion this year, particularly, at our entry and mid-price points. We said we believed that this was due to the sequencing of changes that we had made in our product line earlier in the year and to address this opportunity, we introduced our enhanced mid-price bed, the Model 5,000, in the third quarter, and we've now reintroduced our improved entry level model, the 3000 as planned in early October. So, our staggered 2004 line conversion is now complete as we enter the fourth quarter. And to leverage these new products and to target a more balanced sales mix within our line we've also adjusted sales promotions and programs, all within our standard cost structure. It's now all about execution and results. Our primary opportunity to further enhance margin is increasing the productivity of our marketing spend. We believe we are being effective in creating awareness, our message in media strategy is consistent with the past year's success. And as we've already discussed we have fine tuned our product offering and our sales training and our incentives to further -- to fully leverage that growing consumer awareness and interest. We also recognize that we have opportunity to now leverage the new levels of awareness that we've achieved in 2003 and 2004 local market development investments.

Again, I'm impressed and encouraged by the third quarter and excited by our fourth quarter plans. Year-to-date, our sales are more than 25% ahead of year ago and our profit margins continue to improve. In the past years we've demonstrated significant growth when firing on all cylinders. In this year, we are demonstrating -- demonstrating the equally important diversity and resilience of our business, we've demonstrated that even when challenged we're capable of sustaining over 20% growth in revenue and profit. Equally encouraging to me is the continued strength and discipline in our cash performance. Our cash balance stands at $95 million, with no debt. And this, after repurchasing nearly 800,000 shares and investing over $14.6 million to do that in the third quarter. We are clearly on the the right journey, on the right path. And though the terrain is a bit more difficult lately, we are making solid progress, more importantly, we believe we are doing the right things to allow us to continue to achieve even higher levels of performance. In closing, we are encouraged by quarter 3 performance but certainly not satisfied. We know what we need to improve and we have focused and aggressive plans in place to capitalize on our most important important fourth quarter. The cornerstones of our business and growth model remain strong. Our product, brand, our direct customer contact, our efficient product supply, our cash-generation and self-sufficiency and above all else, customer satisfaction and a strong passionate organization. We'll now open the call for questions and we'd like to keep this to within 30 minutes and we'd like to have all of those who have questions have the opportunity to ask their questions so, please, limit yourself to one question and then, as time allows we can follow-up. Thank you, operator?

Thank you. We'll now begin the question and answer session. If you'd like to ask a question, please, press star, one. You'll be prompted to record your name. To withdraw your request, press star, 2. One moment, please. Our first question comes from Steve Denault from Northland Securities. Sir, you may ask your question.

Good afternoon, everybody. Can I get a little bit of clarification or color on the -- within the retail channel, the 15% comp, how much of that was mix and how much of that was unit volume growth?

Yes. Steve. The same-store growth was primarily average selling price. And then we got about 6% growth from the -- from new stores. But, the units were more or less flat.

What -- did any learnings come out of the quarter that maybe changed your perspective on what needs to be done, versus where you thought you were at the end of Q2?

Steve, this is Bill. Not really. I think we've diagnosed our issue which is the need to reestablish growth within the mid-to entry-level level price points. We believe that our strategies are -- are on track. We've now launched the 3000 and continuing to work with the sales organization. And believe we're on the right track for that.

Okay, where are we in terms of the status of the 4,000? Is that is that out of the mix now?

Well, the 4000 was out of the mix from being displayed on the sales floor. In this quarter, we have -- we are piloting -- we've relaunched it into a handful of stores on a test basis to get a read and that could affect some of our plans going forward into next year.

Okay. And, is the implication for new stores performing well? Could one imply that your Manhattan stores are meeting economic expectations? And would you be willing to provide color on that?

I really can't provide a lot of additional detail, but I think we've been pleased with the way the New York stores have performed.

Okay. Thank you.

Our next question comes from Robert Evans from Craig-Hallum Capital. Sir, you may ask your question.

Hi, good afternoon. First, a clarification as it relates to your '05 preliminary guidance. When you had referenced 15% growth, were you saying all in, Company-wide, or I just wanted to clarify what you had stated?

What we were saying was at least 15% revenue growth does not include things like Radisson, so that's the core businesses that we have today. And as we said, we're not providing specific guidance as to what that is. We're more providing a directional view until we get more detail.

Okay. Fair enough. And then as it relates to gross margins going forward, down some this quarter year-over-year and you had explained why as it relates to QVC, what should we expect in Q4 and going forward?

We would, with respect to Q4, I would expect without a heavy wholesale distribution number, gross margin that's in that 62 to 63% range.

Okay.

And that's what we're looking at going forward as well. Obviously, as I said, we're working through the planning before we have specific detail on 2005.

Okay, but that's the right range to think about going forward?

That's correct.

Okay, thank you.

Our next question comes from Greg McKinley from Dougherty Company.

Yeah. Thank you. Guys, can you give us a little more color on -- you're obviously doing something pretty dramatically in your operating expenses where you're getting meaningful leverage, both within sales and marketing excluding media and down in G&A. That's driving a meaningful part of your bottom line growth. Is there anything different you're doing? And you know, what's going to enable you to continue to, you know, to drive some of those efficiencies?

I wouldn't say there's anything we're doing really differently. We're obviously, managing it overall, in line with what we're seeing our sales growth to be. We feel pretty good about the fact that we've been able to generate the profit on a number that we think -- a sales number that we think can be better. I think, certainly, going forward we feel as if we need to have a sustainable revenue growth number to be able to realize the profit potential that we have in our business model. But, I think that's it for the most part.

Okay. And then, getting back to gross margins for a moment. I know you indicated that margins would have been about 61.2% excluding the charge. Given, you know, the fact that a lot of the growth has been driven by, you know, people buying more expensive mattresses which also they happen to be higher margin mattresses, you know, is there something else moving within that gross margin line that, you know, took the number from 62 or 3 -- I know you had QVC this quarter, but you didn't have it in March or June. And, you know, there were sort of mid-61% gross margins then.

Right. And our -- historically, when our wholesale distribution has been in excess of 6% of our overall mix we've had a gross margin in that 61 to 62% range. As we've discussed in prior quarters, one of the things that is driving a little bit lower margins then the 63 to 64 that we were experiencing somewhat last year, is the fact that we have a greater percentage of our sales that are products that are not manufactured by us, such as adjustable foundations. Adding to that, I think, in third quarter and as we look forward to fourth quarter, our accessory mix has also been growing at a very good pace. And those are also products that we don't manufacture, and, therefore carry a little bit lower gross margin. They're obviously incremental to sales and they're incremental to the bottom line but they do have a somewhat smaller gross margin.

Okay. And then, regarding this sort of maybe a focus on gift giving in Q4. Can you give us a little flavor for what that's going to look like in your stores and maybe what your expectations are of some of those initiatives? Thank you.

Greg, this is Bill. Within the stores, it's going to be, as Jim indicated, a more -- a pretty heavy emphasis on accessories -- but even before that, there will be some TV advertising as well as radio and print, all surrounding the gift-giving theme, giving the gift of a perfect night's sleep. We do -- we have seen this behavior from our owners in the past, with satisfied owners giving gifts to their parents, to their kids. Kids to their parents. And we believe whether people give it as a gift or not, it does reinforce the unique elements of our product and will generate the traffic.

Thank you.

Our next question comes from Michael Cox from Piper Jaffray.

Yes, good afternoon. Good afternoon, guys.

Hello. Sorry.

Just a couple of questions, if I may. In terms of advertising spend for next year, as you're preliminary planning that, have you targeted a number of new markets you'll be entering from a local advertising standpoint in '05.

We're still working through the planning. One of our primary focuses will be leveraging the markets that we're in but we don't have a specific number, specific determination on markets for next year.

Okay. In terms of -- to follow-up on the previous question, in terms of gift giving, accessories I'm assuming includes pillows, could you quantify what that is as a percentage of your total business?

I -- I don't have a number with regard to what pillows are by itself, accessories have generally been running 7-8% of our total business. And they're higher than that in our retail stores but I don't have a specific number for pillows.

Okay. That's fine. In terms of the commodity cost pressures, I know you've enacted a couple of different price changes in the recent months to counter that, are you seeing anything different there in terms of fuel costs or any other commodities?

I think commodity prices, like other companies, are -- we're seeing some increases or indications of increases. We're managing through that as we've gone through the planning process and what we can offset and what we can't. But, I can't provide specifics other that to say we are seeing what our competitors and others are seeing from those commodity prices.

Sure. Okay. And then, just quickly, I just want to make sure I caught this. You said on the 5000 model that it was off to a strong start in July and then it slowed somewhat. Is that correct? And would you attribute that to some of the seemingly unusual items in the quarter, be it hurricanes or the publicity here in Minneapolis?

Well, what you heard was correct, the 5000 did get off to a fast start and then it slowed. I would not ascribe that to any of the unusual events that happened pretty much, across the nation. That trend.

Okay. More economic related, then?

Yeah. We're still working our way through exactly what it was and now that we've got it in conjunction with the 3000 and some of the other elements of our marketing mix, we'll see how it performs this quarter.

Okay. Great, thanks a lot, guys.

Laura Richardson from BBT, you may ask your question.

Thanks. Hey, everybody.

Hi, Laura.

I am a little confused on that -- the $700,000 for the incremental increase in the warranty reserves. Was that supposed to all hit the balance sheet this quarter? It looks like the change the change is 500,000.

Yeah. The -- well the 700,000, first of all, is a -- is an after-tax number. So, what actually hits the balance sheet is a little bit higher then that. There's two reasons why you can't reconcile that number. One of which is our warranty is split between a current portion and a noncurrent portion. And, only the noncurrent portion is big enough to show on the balance sheet. The current portion gets lumped into other liabilities. The other piece of it is that, there were some costs related to this increase that were incurred in the third quarter and were charged off as well. So the net increase to the warranty reserve on the balance sheet would be a little bit smaller than the full amount of the charge.

Okay. That's fair. And then, thinking about warranties and product quality. I mean, I know there have been a lot of improvements under this management team from the product quality that the old management team put in the marketplace. And therefore, the warranty reserve is a lot lower, too, do you guys have any data under your belt that suggests, you know, as the installed base of mattresses matures, you really are having fewer claims than the old management team did?

Well, we have certainly seen a decline in claims over the last three to four years. For a number of different types of claims. That are out there. So I mean that data is certainly out there. We always feel like we have opportunities and we can continue to improve it. But we -- our data shows that the claim rates have declined.

Okay. That's fair. And then, just one last question, if I can squeeze it in there. In terms of the ad spend, is there a percent increase you're targeting for next year? It sounds like it's going to be lower than this year. That's fair?

The growth rate will be lower than it was for this year. We don't have a specific target rate at this point yet.

Okay. Thanks.

Joan Storms from Wedbush Morgan, you may ask your question.

Hi, good afternoon. Jim, could you clarify on the preliminary top line guidance for next year with a low, double-digit same-store sales and then, an incremental 5 to 7% for new stores. That gets you kind of to the 15% plus?

That's correct.

Okay. And then, does that imply that the other channels, we expect in acceleration in growth in the other channels at a mid-teens rate?

No, I think that--

Or is that a similar growth rate to this year?

I think, first of all, I would say that the 15% is a growth rate overall is the number that we feel is still very comfortable as a bottom line and feel we can do that or better. The -- the -- we would expect that those other channels, the non retail channels to do, also, mid-teens with potentially, upside -- if we determine -- we can add some additional retail partners. So I would say that overall, those other channels should be in the mid-teens. They've actually done that well this year and so I think it's a -- we have continued opportunity in those areas.

Okay. And when you referred to kind of being unhappy, a little bit unhappy with the unit volume thus far this year, you're referring to the impact that's caused by the staged consequences of the roll-out of the new products? And now that, you know, the 5000 is in stores and the 3000 is in stores that you would expect to say a pick-up in that, is that correct?

Yes. I mean I -- certainly, we have our performance in the 7000 and 9000 as been very, very good. And where we really feel we have an opportunity to add onto the positive results we're getting in that 7000 is the 3000 through the 5000 models. That's where we're focusing our attention and we view that as being really upside to how we've performed over the last couple of quarters.

And then so, you have different plans for Q4 to promote those products and intent to sell people then you did from the second and third quarter?

Yes. I mean, those plans continue to evolve. We continue to see things that we can improve and we make changes accordingly.

Okay, thanks.

Dana Walker from Palmer Investments, you may ask your question.

Gentlemen, where do you stand in implementing any product feature enhancements so that we don't have a mold issue anywhere else? Or a replay in Minneapolis?

Dana, this is Bill. We have a continuing improvement program in place against all of our products. That's largely how we relaunched the product line. Twice in the last two years. We have been working on ways to take what is already a low incident occasion in our product and further lower the risk. And, as that product -- those product improvement opportunities are proven, then we'll just incorporate them in our line as we go forward as we've done other product improvements.

Would you say you're close to being in a position to do that or is that still some distance off?

Kind of depends on still some of the developmental programs. We've got some options that look promising, but, again, until they are proven, not really in a position to talk about them.

Are there some offsets in that little step you might take in one direction might get in the way of a -- the same level of total comfort experience?

No. We won't comp -- we will not compromise the comfort experience of any of our beds.

And, Jim, if you would mind, sir, leading us through those media and ad spend comparison numbers again. And also, on G&A, with the reduction in profit expectation for the year, was there any type of an accrual unwind in Q3 that explains the flat numbers?

There was not -- well, first of all, in the media numbers, we expect to spend $20 million in the fourth quarter, which is consist with what we've spent just about every quarter, with every quarter this year. That brings it to a total of $80 million for the year as compared to $60 million last year. With respect to your comment on G&A, there was not a -- there was not an accrual unwinding. However, with profits being lower than where our expectations were, our incentive compensation, our executive incentive compensation was lower than it was a year ago. As I said earlier, we've -- I think we've demonstrated through that and some other things, the ability to -- I think the model adjusts fairly well to make sure that we are able to obtain our profit target, having said that, we need to do better on the volume side to really -- to meet our longer term potential.

Jim, I was hoping you might go through the Q3 media numbers? Which you went through quickly in your presentation, but, I wasn't fast enough to write them down.

Okay. The Q3 -- the media in the third quarter was $19.8 million. And marketing as a percentage of sales, including media, was about $21.5% of sales, which was .9 percentage points higher than what it was a year ago. Are those the numbers you're referring to?

Those are the numbers, thank you very much.

Okay.

Our next question comes from Kyle Stults from Williams Smith and Company.

Hi. Thanks for taking my question. On your balance sheet, the taxes and withholdings line item it looks like it's about $5 maybe $6 million higher quarter over quarter what was the reason for that?

It's really just timing of payment. Various things because of the shift in the calendar and those types of things weren't due and therefore just showed up as accruals. As we mentioned in our comments, that certainly helps our -- helped our cash position, we certainly feel as if -- that they're not the only thing that's contributing to our overall cash growth. But it's really a timing issue, the particular item you're talking about.

Okay. Thanks, and what was -- what's left on your buyback authorization as it stands today?

Sorry. I didn't mention that earlier. We do have $10 million of authorization that remains outstanding.

Okay. What is a basic share's as they stand today?

The basic shares, well, the number of shares that we would expect in our EPS calculation, is about 39.5 million, last year, which is about where it was in the third quarter. I think the basic shares is about 36, if I remember correctly. 35.5 - 36 million. Yeah, it's about 36 million shares outstanding, approximately.

Thank you.

Joan Storms from Wedbush Morgan, you may ask your question.

Hi, just a quick recap on the 5000 bed, after the introduction, you had a nice pick up in the business, probably due to some postponement and then it slowed a little bit. Is this part of your, you know, goal, kind of, for fourth quarter, to drive the low and the -- increase units sales of the low and mid-level bed?

Yes, we said as our really Company focus for the fourth quarter, is to reignite unit growth, particularly, at the entry and mid-priced price points.

And maybe I didn't write this down, but, could you specify the specifics, marketing and/or merchandise plans to drive that business?

We didn't specify it but it is, other than to say that it is a integrated approach, which started with the relaunch of the new and improved 3000, which is our entry model, so we now have the full lineup starting with the 3 and the 5000 and then in response to a question, we did mention that we are testing the 4000 re-entry in a handful of markets in a handful of stores. And then, in conjunction with that, we are constantly fine-tuning the sales promotion and sales incentive programs to focus on that entry and mid-price points.

All right. Thank you.

Our next question comes from Mark Ruup from Adam Harkness. You may ask your question.

Hey, guys. On the last call, you mentioned that the incentive program for some of the sales people was altered a little bit to kind of drive sales of the mid-priced bed and given the flat volume for the quarter, I was just curious, to see if the 5000, or those incentive changes actually lived up to expectations? And if not or if so, why or why not?

We did modify the incentives at the beginning of the third quarter. And they -- the performance wasn't quite where we had expected it to be. And so we have modified the program even further as we're here in fourth quarter.

Thanks.

Haslett Kashef from Area Partners, you may ask your question.

Good afternoon, guys. A couple of questions. First one is, assuming -- based on what you said, is it safe to assume that there was potentially, 2 to $3 million in lost sales on those two incidents, Minneapolis and the hurricanes?

Yeah. That is about the 2 to 3% number that we referred to.

Okay. And also, on the new Sleep Sofa, I understand that the -- you are testing them in certain markets. Where do you stand with that? I'm sorry, on the couch, the pullout couch.

Yeah. The question is about the sofa sleeper and your observation is correct. That that product is still in test. We have it -- I don't know -- five to six markets now? In about 35 stores. And what we're still working our way through are a lot of the logistical requirements of the product, the shipping and the taking the orders with specific fabric requests and also, it is still very much in a test phase at this point.

And in introducing this product, in looking at the sort of the consumer who already owns your bed, have you in the markets that you introduced it, on those 35, I guess, stores, how has the performance been on that? To date? Exceeding your expectations?

I would say in line with our expectations. We have not -- we have not really done any promotion of it. It's more where we've got it is to really make sure that we evaluate how it affects the selling process and also to make sure that we understand the logistics of getting the sofa to the customers and all of those types of aspects so we have not really actively promoted it. But I think it's in line with what we would expect.

And consistent with your question, a lot of -- there is a strong portion of those consumers who are current bed owners.

Great, thank you.

Greg McKinley from Dougherty Company, you may ask your question.

Thanks, just one quick follow-up. In your wholesale channel, are there other potential retail partners of meaningful size that you're in the process of getting your beds on their floors?

There are certainly other retail partners that are potentials to sell our beds. We don't comment on any particular discussions that might be underway. Until such time as we would be ready to announce something. The third quarter, we did open two new ones, one in Alaska and one in Hawaii.

Okay. Those are retail chains but, more than two stores, correct?

Correct. There were two retail stores that we opened, and then each of those retailers had the number of stores in those individual locations.

Thank you.

Operator, we'll take up two more questions at this time before wrapping up the call.

Thank you, we have a question from Jeff Mix from PAR Capital.

Hey guys. Great job on the quarter. Following up on Ed's sofa sleeper question. Just a quick one. It's safe to assume that none of your revenue or profit guidance for Q4 and the brief mention for 2005, assumes anything from the Sleep Sofa?

That's correct. It's a very nominal amount. And in particular, when you think of the -- it is a custom made product. There is a lag time from when the order is taken to when it gets delivered and a revenue is recognized so we have 35 stores that the sofa may be in. But, there's only a handful of those stores that still would be open long enough to really get any kind of revenue into the fourth quarter. So there's no real meaningful revenue incorporated into our Q4 forecast.

And then looking at the 2005, for your three-year revenue guidance, and said that, I believe you made a comment that the earnings growth would be 20% or something in that range, at least. The Sleeper Sofa is not included that?

That's correct.

Okay. Thank you.

At this time, there are no further questions.

Very good. Thank you all for joining us. And thank you for your continued interest and support in our Company. And we look forward to the next quarter. Thank you.