Sleep Number Corp (SNBR) 2004 Q4 法說會逐字稿

Good afternoon, and welcome to the Select Comfort Q4 and year-end 2004 earnings call. (Operator Instructions). Today's conference is also being recorded. If you do have any objections, please disconnect at this time. And I will turn the meeting over to your first speaker for today, Mr. Mark Kimball, General Counsel. Thank you, sir. You may begin.

Thank you. Good afternoon, and welcome to the Select Comfort Corporation fourth-quarter and year-end 2004 earnings conference call. Thank you very much for joining us. I am 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 and more detail on the outlook for 2005. Bill will 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 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 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 periodic filings with the SEC and is accessible through the Investor Relations section of our website at SelectComfort.com.

I will now turn the call over to Bill for his comments.

Thanks, Mark. Good afternoon and thank you for joining us today to discuss our 2004 results. We are pleased to report another year of strong growth and even more enthusiastic to be looking ahead to 2005 and beyond. 2004 was our third consecutive year of 20 percent revenue growth or better. Total sales increased 22 percent to $558 million, doubling our Company's size in the past three years. In the year, we sold over 300,000 beds, 10 percent more than the prior year, improving approximately a half a million more lives as many of our beds are shared by couples.

2004 also was our third year of profitable growth with diluted earnings per share up 16 percent to 80 cents per share. While 16 percent earnings growth is solid performance, particularly given a year of investment in marketing and product expansion, we did not achieve our goal of profit margin expansion, nor our targeted growth range of 20 to 25 percent. And we focused on this opportunity in 2005.

2004 continued to reflect the strong, self-sustaining cash model of our business. We ended the year with $92 million in cash and securities with no debt. During the year, we funded the addition of 31 stores and we invested $8 million in systems and manufacturing, and we repurchased $21 million of stock. Jim will provide more details on the financial statements momentarily.

I'd like to share with you my perspective on 2005 and beyond. We believe we are well on our way to becoming a $1 billion company over the next three to five years. And see 2005 as an important next stage in our journey. 2005 will be a year of less change with opportunity to increase focus on execution and on delivering leverage of our 2004 initiatives.

We will build upon 2004's marketing expansion, which included incremental local media in 14 new markets; and 2004's aggressive product line changes; and also on last year's set up work for entering hospitality.

In 2005, our two core objectives will include restoring consistent unit growth and re-establishing margin expansion. We believe 2005 revenue should be consistent with our long-term goal of 15 to 20 percent annual growth. We are still a young company with tremendous potential ahead of us. Consumer awareness of our brand and product in store locations has doubled over the past three years, but it is still less than a quarter of the leading industry mattress brand. And during 2004, we made progress on our core strategies in strengthening our operating platform. Specifically, we made significant progress in enhancing our product line, accelerating our investments in media to increase brand awareness, particularly in our underdeveloped major metro markets, and expanding our distribution, consistent with that major metro development strategy.

We believe 2005 same-store revenue will increase in line with our long-term goal of 7 to 12 percent, with greater balance coming from units this year. Key drivers of same-store revenue in 2005 will be anchored first by continued media investment with a budgeted incremental $9 million in greater leverage of the total $88 million through more efficient allocation to national spending. We also will build upon the base of awareness established in previously opened local markets, which now cover 55 percent of the U.S. households and nearly 70 percent of our retail sales geography.

We also believe our goals will be supported by improved value communication and product line offering with the reintroduction of our 4000 model to 3/4 of our stores, which we executed last week. Test markets at the end of last year suggested that the reintroduction of the 4000 to the line can yield a meaningful up to 3 to 4 percent lift in sales versus control markets. Distribution expansion is expected also to be in line with our long-term goal of 5 to 10 percent growth from store expansion. Select Comfort plans to open 30 to 40 new company-owned stores in the year, and we will modestly accelerate our retail partner program as partnerships are identified.

We are also looking forward to working with Radisson and their franchisees through the year to complete the first part of the planned program launch. This is primarily upside opportunity to our long-term revenue growth rate with little profit impact. The program is still too young to project. Momentum is building with the early installations well executed and guest response to the personalized comfort it gives (ph) positive as measured through response cards. While it is too early to read referrals from guests to our stores, this is an area of opportunity for both Select Comfort and our retail partner, Radisson, as Sleep Number bed owners have expressed clear preference for finding their Sleep Number when on the road.

Finally, we believe we can improve profit margin by adding a point of margin per year consistent with our long-term goal of 12 to 15 percent pre-tax operating profit. In 2005, our focus will be on maintaining and possibly improving gross margin of the core business. Cost pressure has come from oil and gas prices as well as from California's requirement for all mattress manufacturers to increase fire-retardant protection. In January, we adjusted some pricing nationally and locally in California to cover the incremental costs but not to fully make up margin. Full margin recovery will be tasked through operating efficiency programs.

We also plan to continue or our historic source of leverage in selling as same-store sales increase. This year, we will also target returning marketing spending as a percent of sales closer to the 2003 level.

We expect continued strong cash performance in the year and believe we can make small enhancements to what has been a very strong track record through further inventory reduction. We will continue to opportunistically repurchase stock and will evaluate investment opportunities consistent with our focused business plan.

Perhaps the most important and exciting initiative in 2005 will be organization development. It will be impossible to replace my friend and close colleague, Noel Schenker, who has led our marketing and product development effort the past four years. But we have a very strong team in place. This is a decision that we won't rush. And as I said, we have a strong team in place and I'm comfortable continuing the exciting work in progress.

We will also be preparing ourselves for the next stage of our journey to $1 billion organization and beyond. We realized in 2004 that our Company -- as our Company grows and addresses different customer needs from direct company-owned sales to customers to retail partners to the hospitality industry and more, our organization needs to evolve from today's highly centralized structure. Through the year, we will be evolving to increase organization capability and empowerment to pursue rapid and profitable growth.

Another learning from 2004, and top priority in 2005 and beyond, is to improve the quality of our investor communication. Our business can be somewhat volatile during a quarter and also quarter to quarter. This makes sense given the nature of our business, a consumer durable with low purchase frequency and a make-to-order business model so we don't have forward insight. We have been reevaluating our guidance process and have decided to make some changes with the new year in order to be able to provide the most consistent and accurate guidance that we can.

Our current practice of communicating twice during a quarter, both times at the beginning of the quarter, when the quality of our insight is the lowest, can be improved upon. And as such, starting with the first quarter of 2005, we will adhere to the following practices. We will report quarter earnings toward the fourth week of the month after the quarter end. We will provide an update on the current quarter during the last month of that quarter. This update will be directional, not specific, versus our outlook.

We will no longer pre-release quarterly sales results. Jim will expand on this. But to be clear, our next regular communication will be on March 9th with a directional update on the first quarter. And then there will be no sales release in early April. And on April 26, we will issue a full release on the first quarter. Again, the intent of these changes is to speak to the investment community when we have greater certainty of quarterly trends.

We entered 2005 with optimism and confidence, supported by the best product line in our history, growing brand awareness, and continually expanding distribution. We're a growth company in the early days of development. We will continue to focus on our core strategies and are confident that these strategies will enable us to become $1 billion company with at least 12 percent pretax operating margin within the next three to five years.

I will now turn the call over to Jim, who will discuss our financials in greater detail and provide updated guidance for 2005. Jim.

Thank you, Bill. I will take you through the income statement and provide some details of our fourth-quarter performance. Then I will discuss our balance sheet and conclude with a discussion of guidance for 2005.

Before I get started, I'd like to direct your attention to the end of our year-end release. Beginning this quarter, we are including with our release specific financial detail that has historically been communicated during our conference call. Our goal with this change is to make the information more accessible to you and to allow us to focus on business trends and objectives during the call.

I will start by recapping the fourth quarter, which I will remind you is one compared against the 2003 fourth quarter, which had one more week than in 2004. Earlier today, we reported diluted earnings per share of 27 cents for the fourth quarter of 2004, which includes a 1-cent charge for the anticipated settlement of California wage and hour litigation. This suit is unfortunately typical for California retailers. We are never happy to settle these types of cases. However, we consider the cost of litigation and the potential distraction to management and felt it was a reasonable settlement. I will just remind you that was a suit that we had announced earlier in the year.

In the fourth quarter, revenue grew by 17 percent on an equivalent week basis to $149 million. Unit growth was 7 percent and the average selling price in our Company-owned channels increased by 10 percent to $1,975 per mattress. For the full year, sales increased 22 percent to a record 558 million. With full year same-store sales growth of 16 percent.

Distribution is the a component of our growth strategy. During the fourth quarter, we opened eight stores and closed none. We ended the year with 370 stores, including ten non-mall locations. Average sales per store were $1,247,000 in 2004, 13 percent higher than a year earlier. Our new stores are opening at a strong pace as well. Stores completing their first 12 months in 2004 average slightly more than $1 million per store, 17 percent higher than stores that opened in 2003.

Sales are growing at a healthy pace, but we have been less satisfied with our profit performance and have developed plans return to our target operating margin growth of 100 or more basis points per year.

In the fourth quarter, sales grew by 8 percent in absolute terms, and that's 13 weeks in 2004 versus 14 weeks last year. And operating profits were essentially flat, excluding the legal settlement. The primary factors were gross margins, which were 120 basis points lower than the year earlier, and investments in local media programs. Operating margins declined in 2004 from 9.3 percent to 8.9 percent. Lower gross margins and media, again, were key drivers.

I'd like to provide an overview of 2004 margin performance along with an outline of our expectations for 2005. Gross margins declined by 160 basis points to 61.1 percent, in part planned and in part due to cost pressures. The planned decline in gross margins was mix related with nearly 2 percent more of our sales mix coming from lower-margin wholesale channels, and strong sales from lower-margin products manufactured by others, such as adjustable foundations and accessories. These mix factors contribute positively to the bottom line, but do put downward pressure on gross margin percent. We were also affected by inflationary pressures, primarily health-care and energy costs.

In 2005, we expect gross margins of approximately 61 percent. We have taken first steps with a price increase initiated in January and through various manufacturing efficiencies. Sales to Radisson will have an additional impact on core gross margins, potentially lowering consolidated gross margins by as much as 100 basis points.

Media and marketing costs increased in 2004 as a percentage of sales by 140 basis points. We planned for some of this increase as we aggressively expanded our local media campaign into 14 new markets, including extensive major metros, New York and Los Angeles. This investment is paying off with sales growth in these new media markets. Sales growth rates did not reach expectations nationally, however, largely due to challenges we experienced with our new product rollout, which in hindsight disrupted our selling process, in particular, of more moderately priced models.

In 2005, we will return to a media expansion model proven in earlier years. We plan to expand media at a slower pace, by approximately 10 percent, largely through national media forums while sustaining media spending in local media markets, harvesting the investments we have made in previous years.

In addition, we're reintroducing the 4000 bed model at most stores, which will restore a $1300 price point to our retail locations. Our goal is to regain in 2005 the media leverage we lost in 2004.

Selling expenses continued to be a source of operating leverage and will continue to be so in 2005. Selling expenses, as a percentage of sales, improved by 140 basis points in 2004, driven largely by the increase in sales per store as we increased the number of stores with more than $1 million in sales from 49 percent to 64 percent. We expect sales per store to continue to increase in 2005.

And finally, general and administrative expenses. We experienced significant leverage in 2004 with G&A costs as a percentage of sales declining by 100 basis points. The decline was due in part to reduced incentive compensation reflecting profit performance that did not meet our internal expectations. If we meet our expectations in 2005, G&A as a percentage of sales will increase by approximately 40 basis points.

In summary, our operating margins did not improve as we had planned. This should not be interpreted as a lowering of our margin expectations. As we have consistently stated, we will continue to invest towards long-term sales and market share growth even when we experience temporary slowing of sales. And this is what we did in 2004.

We have adjusted our plans for 2005 and expect to improve operating margins by up to 100 basis points in the coming year with a three- to five-year target operating margin of 12 to 15 percent.

Now I have a few comments on the balance sheet. In 2004, we generated free cash flow of $31 million and ended 2004 with cash and marketable securities of $92 million, up from 75 million at the end of 2003. This increase is after repurchasing 21 million of Company stock during the course of 2004, including $6 million of stock in the fourth quarter. $5 million of our stock repurchase authorization remains and we would expect to be active in the market in the coming months if our stock price remains at existing levels.

We did experience some increases in our current assets during 2004. Accounts receivable increased to $9 million, in line with wholesale and consumer sales increases. Inventories increased to $20 million due to higher levels of safety stock for foreign purchase components, a higher level of home delivery inventory, reflected as in-transit inventory, and for manufacturing of Radisson mattresses and California fire-retardant mattresses, which required advanced production and increased inventory levels at year-end.

We believe we have further opportunity to marginally improve cash flow in 2005 with inventory improvements through home delivery systems and supply chain management. Once again, we self-funded our growth and remain debt free in 2004 and expect to do so again in 2005.

Now let's turn to our guidance. I would like to take a minute to repeat Bill's comments on changes we will make to our communication practices going forward. First, we will discontinue our practice of providing an early release of sales, and this refers to the release that we have typically done within the first few days after the end of the quarter.

Second, beginning immediately, we will issue only full-year guidance. We will continue to provide long-term targets and an indication of whether we expect the coming quarter to be directionally in line above or below longer-term goals.

Finally, we will begin a practice of providing a business update during the last month of the quarter. This update will only include sales direction for the quarter and will not come in the form of specific guidance. With that backdrop, let me provide an overview of our financial expectations.

Over the long-term, we expect to sustain sales growth rates of at least 15 to 20 percent, with same-store growth between 7 to 12 percent, leveraging the business model with earnings growth rates of at least 20 to 25 percent. In 2005, Select Comfort expects sales growth of between 18 to 20 percent, including sales to Radisson hotels. This sales forecast assumes 5 percent to 8 percent growth from new distribution, same-store growth rates at the upper end of our target range, and Radisson sales contributing 2 percent to 4 percent growth. We believe we can deliver earnings per share of 96 cents to $1.04, which represents year-over-year growth of 20 to 30 percent.

On a quarterly basis, we anticipate earnings growth rates to be lower in the first quarter, as we lapse stronger same-store growth comparisons from a year ago, and that earnings growth rates will accelerate during year. All of the previously noted guidance is exclusive of the effect of expensing stock options. We are in the process evaluating the option regulations and associated impacts and will provide additional information when available.

With that overview, I will turn the call back to Bill for his closing comments.

2004 was a good year with real growth in revenue and profit. We believe 2005 has the potential to be a great year, consistent with our long-term goals of revenue growth in the 15 to 20 percent and earnings growth of 20 to 25 percent and up to 30 percent in 2005.

We continue to strengthen our commitment to our customers and our ability to reach and satisfy an increasing share of customers in need of better sleep and comfort. We believe our competitive advantages include a product and brand that deliver a unique and relevant consumer need, improved sleep and health through personalized comfort at the touch of a button for an individual or for a couple. A supply chain that delivers product quality and cost that we have not yet seen anyone challenge, allowing us to deliver unparalleled value to our customers. A controlled selling environment that allows our new technology to be fully shared with customers in an environment that customers enjoy and that allows us to learn from customers are opportunities to further improve. A cash-efficient business model that self-funds expansion and a great team of people and a place to build careers, all fueled by the passion and satisfaction of improving people's lives.

We are a young Company. Our awareness and share are still less than a quarter of our industry leader. We look forward to updating you on our progress as we strive to become $1 billion company with at least 12 percent profit margin over the next three to five years. We will now open the call to questions. Beth, when you're ready?

(Operator Instructions). Steve Denault from Northland Securities.

Maybe I missed it. For the quarter, what was the unit volume growth versus price mix growth?

The unit volume growth in the aggregate was 7 percent. And our average sales price growth within our company-owned channels was 10 percent.

Okay. So 7 percent unit volume growth in the quarter in the stores?

No, that's total all -- that is total all channels. Our unit comp was about 3 percent.

Okay. Can you help me understand the sort of evolution of the media spend in that next year -- what we'll see from an incremental standpoint will be just national advertising? I mean what are you seeing and what's driving this decision?

I think there are two things there, Steve. The national advertising has always been our most efficient advertising. In the past years, as you know, we have been increasing our local advertising spend because we wanted to develop particularly our major metro markets. In 2004, we had our most aggressive expansion into those local markets, opening 14. And when you open a market, then it's actually less efficient, even more than normal in the first year because you're overspending to get the awareness up and then you pull it back to a sustaining level. So next year, because we're not going to open any new local markets, we will get really twice the efficiency of our spending, one because all of the incremental will be going into national, and secondly, because we won't be having those startup costs on those local markets.

Okay. Is it safe to assume that the established market comps are running at the national average?

We typically don't talk to the specific markets, other than to say that our newer markets -- where we put the advertising in '04 are acting as they normally have, which is above the overall average.

Okay. Any changes on the competitive front?

Nothing significant. It looks like the major inner springs are more focused right now on foam. And then what we continue to see is Temper is continuing to be aggressive both on advertising and distribution expansion.

Michael Cox of Piper Jaffray.

Good afternoon. Congratulations on the quarter. Just a couple of questions. As a point of clarification, you mentioned lower growth rates early in the year. Is it fair to assume that that would imply up year-over-year, positive growth?

Our objective, obviously, is always to have increasing sales -- or increasing earnings on a year-over-year basis. But those growth rates would be slower in the first quarter.

Okay, okay. Very good. In terms of traffic levels in Minneapolis market, given the negative publicity back in August, are those back to normal or close to normal?

They continue to improve. But they're still not back to where we would like them to be.

Okay. In terms of the pricing change you mentioned in January, could you touch on the magnitude of that price change and what type of impact -- I guess the follow-up would be, have you implemented the change from a fire retardancy standpoint outside of California? Or will that have to be hurdles in late '05 if in fact this ruling is change to nationwide?

Mike, with the -- as far as the pricing goes, it is a -- on average, it's about a 5 percent price increase. It's a little bit higher in California. We took an incremental price increase; bit on average across the entire channel, it's about 5 percent. I will let Bill answer the second part of your question.

The second part of the question, as I understood it, Mike, was whether we would be -- what our fire retardancy distribution is today. And right now, it is 100 percent of the product that we're selling into California is fire retardant. And then the fire retardant product is available to the rest of the country if a customer would want that for the additional cost. The national regulation is still to be determined. But right now, the most recent information that I have seen suggests that it would be more middle of 2006 when the regulation would go into effect nationally. And so, yes, then we would have to roll to exclusive in 2006.

Okay. And then on the Radisson deal, I think you mentioned 2 to 4 percentage points of top-line growth. Could you confirm that? And then also on your gross margin guidance of 61 percent, does that include the 100 basis point negative impact from Radisson?

The first part of your question, you are correct, the 2 to 4 percent is what we're suggesting gets factored into the growth rate. As we have said before, the order volume is subject to franchisees. Radisson is -- the hotels are owned by franchisees; and they have final determination as to when and to what extent they put the bed into their hotels. So it's certainly not an exact science in what we're expecting. But I think that's -- we're planning it prudently.

From the standpoint of the gross margin impact, the 61 percent is without Radisson, so the additional 100 basis points would be with Radisson factored in.

Greg McKinley from Dougherty.

Thank you. Jim, could you give us a little more clarification around the change in strategy around media spending? You said about 10 percent growth in your national media spend. And local media, relatively flat. Is that in dollar terms or is that as a percentage of sales?

This is Bill. The 10 percent increase is in total media spending. And so basically we're going to add about $9 million to the media spending, which will get us to about $88 million in 2005. And all of that incremental will go into national or is at least at this time planned to go into national. And then the local marketing will remain basically flat on a dollar to dollar basis. But again it should be more efficient because we don't have the start-up costs of any new markets.

Okay. And just as a little context for that, so the 79 million that was spent in '04, how did that break down on a percentage basis between local and national?

I don't have those numbers in front of me. But I believe it was about 55 percent of the spend was national, 45 percent in local markets.

Okay. Okay. Now in terms of your sales growth outlook for '05, in talking to the higher end of that 7 to 12 percent comp range, can you help us understand some of the component parts of that in terms of -- obviously you have made some merchandise changes with the 4000 moving back in. And you talked about an expectation for recovery on a unit sales basis. Can you help us understand, is that representing the 3, 4 and 5000 models grabbing a larger share of the total sales mix at retail? And what type of unit growth assumptions are implied there?

I think, Greg, if you think of it from the perspective of the 5 percent average selling price increase that we have included in our pricing actions in January, we do have still some lapping of kind of positive mix during the course of the year. So I would expect an average selling price that would increase a little bit above that 5 percent. And that's kind of absent any kind of core mix changes. So getting to that higher end to the comp range, you have that price increase plus a little bit of mix. And I think consistent with what we saw in the third quarter, kind of a low single-digit unit comp. Now obviously, if the 4000 performs well, that probably makes the unit growth number a little bit higher and it probably makes the average selling price growth a little bit lower. I think that directionally, hopefully, helps you understand how we're thinking about the comp.

Yes, definitely. Okay. And then the beds, the 4000, now that has fully rolled out to the 75 percent of stores in the last week. So there's no more planned activity there in terms of broadening its presence. You've done what you've intended to do there?

Yes.

Alright. Thank you very much.

Laura Richardson of BB&T Capital Markets.

Just I wanted to ask a couple of questions related to Radisson and advertising and the product line for this year. And just to make sure I'm clear on what you said on the Radisson numbers, Jim, if 2 percent of the sales growth would amount to like let's say 11 million in revenues at your low-end estimate, is that about right for next year?

Right. It's -- it's kind of 2 to 4 percent would get you in that range. As I said earlier, it's a little bit hard to call. So we're certainly planning it prudently. I think maybe the more important thing is regardless of where that sales volume is, we don't anticipate it is going to add a lot of profit from the standpoint of how you look at profit generation with Radisson. The real benefit, obviously, is increasing trial and awareness to those people that are going to try to bed when they're in Radisson.

Right. Is it even adding anything like a penny or two?

It adds a little bit, but it's only a nominal amount.

Right. They are there for the marketing.

Right.

Okay. And will those revenues be reflected in wholesale?

Most likely, yes. We're still working through how exactly we'll report them. But that would be the most likely place for them.

Okay. And marketing -- I've heard what you said about the national ads are getting the incremental dollars. I am confused about whether that -- whether you know and can measure -- does that help -- does that drive non-store sales? Or can you tell if the national ads drive people to stores and help the comps?

Yes, we can. What we can measure, Laura, is -- and again, I don't have this exact number. But close to 55 percent of the people who contact us first by phone end up buying at the store.

Okay. So it's like a two-step process?

(multiple speakers) system we can direct -- we know where they're calling from and if they're calling from an area near a store, we actually can refer people to those stores.

Okay. Right. And once you get them in the database, you know who they are and why they first called and if and when they buy. And is it going to be with any change in media you use nationally, or any change in message, frequency?

Nothing significant that way. We are continuing to use some of the Internet advertising a bit more. But the general mix of TV, radio continues to be effective for us.

And (technical difficulty) in print a lot too it seems? More and more.

Right. I mean obviously spending an additional $9 million in media allows us to go into various types of things that maybe we aren't today. But I think what Bill is referring to is there's not a dramatic change in messaging or target market.

Okay. And it sounds like -- you've probably -- you've been talking about this at least since before it was announced that Noel was leaving. So I'd assume this was the plan before and after she decided to leave?

Yes.

Is there any chance you'd get a successor who would want to change that and --?

I do not anticipate that in that -- I think the successor will take some time to learn the Sleep Number campaign.

And in the local markets, like in a New York that you opened last year is it you can actually pull back on dollars of media? Or we should just think of every market as flat to last year, but if you're building sales, percentage-wise (multiple speakers) lower?

I think a couple of different things to think about. First of all, when we go into a new market like we did with 14 markets in 2004, there is an estimate where we spend at a higher rate than what we would call sustaining. So having the same amount of dollars does allow for us to spread it a little bit differently, and have I guess what I would say more money to spend over that 12-month period. If you think about taking the investment piece away.

The second thing is obviously, we always evaluate our markets; we adjust spending to what's working, what's not working. So we can move dollars around. Some may get a little more, some may get a little less depending on how they're working and how we evaluate them.

Alright, okay. That makes sense. And the last question I have is just in terms of new products for next year, should we think of the 4000 as basically the new product for 2005? Or might there be a 10,000 Sleep Number bed, or is the sofa coming anytime soon?

No. As I said, I think the way that we're looking at 2005 is leveraging a lot of the work from last year. So I would not anticipate another model of Sleep Number bed being introduced this year. The sofa was in pilot last year and we will continue to expand that as it makes sense to do so.

Bob Evans of Craig-Hallum Capital.

(technical difficulty) on CapEx for 2005?

Bob, can you repeat that question? Sorry, we didn't hear it at our end.

I was wondering, can you comment on 2005 CapEx?

Yes. We will spend or we plan to spend about $30 million in CapEx. That is about 8 or $9 million higher than what we spent in 2004. The increase is related partially to a heavier new store opening schedule that we've got planned. And then we also have some additional IT programs. In particular, we'll be working through a new POS system in 2005.

David Lee.

Can you just talk a little about the total unit volume growth for the previous two to three quarters? Hello?

You know I think that --

It's 7 percent this quarter; just wondering what the -- how's that been trending?

The 7 percent is -- in absolute terms comparing it with an extra week -- it's been trending fairly consistently from quarter to quarter. I think we did see a little bit better in the fourth quarter versus what we had been seeing in the last couple of quarters. But it's been pretty consistent from quarter to quarter.

Michael McCormick, Gilder (ph) Gagnon.

A couple of maintenance stuff, if you don't mind. You had mentioned that you adjusted your bonus spend in the quarter because you didn't meet your objectives. Is that the reason why G&A was down in absolute dollars year-over-year?

Yes. It was certainly a contributor to that.

So on a normalized kind of bonus spend, what would have been kind of the normal G&A growth on a dollar basis?

You know, it's -- the way our bonus works, it's as much as anything a variable -- acts as much as anything as a variable cost. So if we outperform our numbers, it gets taken out if those incremental profit dollars. If we are underperforming, it mitigates the downside. But I think that's the way we really think about it as much as anything.

Did you give us any type of linearity to the unit growth on a quarterly basis? Or could you kind of give us some idea on that?

Could you repeat that question?

The approximate 35 stores you expect to open in '05, is there any kind of linearity to that growth as you would expect?

We're still working through the exact store schedule for '05. But I would -- what typically happens is, is we get a heavier store growth rate in Q2, Q3, a little bit lighter in Q1 and then usually not many stores at all in Q4. Because they need to -- they typically need to open before November, before you get into the selling season. So you can expect a little bit higher in Q2 and Q3.

Okay. And I have two more quick questions. One was the tax rate looked to be a little bit less this quarter. Was there some adjustments because you didn't -- because of the expectations? Or what should we be thinking about for your tax rate?

Going forward, you should expect the tax rate of about 38.5 percent, which is how we look at it during the course of the year. At the end of the year, we did basically look through the entire tax rate for the year when we've got a little bit more visibility to what the full-year tax rate is going to be; and there was a little bit of an adjustment, just truing up the exact tax amounts that we will owe.

Okay. And then so, the last thing on the gross margins. So if you do the 2 to 4 percent Radisson sales estimates, your gross profit would be, based on your estimates, would be 60 percent, not 61?

That's correct.

Okay. Thank you very much.

Greg McKinley at Dougherty.

Just a follow-up. Jim, could you just clarify, you talked about your change in the way you're going to be talking to the street and investors going forward. And from now on, we'll expect to hear from you guys from an earnings and sales basis the fourth week following the end of the quarter. And which is I guess this is the first time we're -- this is the beginning of that strategy. Are you going -- and you won't be giving specific quarter guidances at that point. But we'll get a directional update during the last month of the quarter. With that as a backdrop, you talked about the '05 outlook being -- looking for more growth later in the year, slower growth rates early in the year. And can you just help narrow that range a little bit? Does that mean we could look for flat or negative types of earnings growth in the first half, offset by significant growth in the second half? Can you just help us understand a little bit better what the range of possibilities is with that?

I think -- I'm not sure there's much I can add other than what we -- kind of what we said. We expect to have positive earnings. We have said that we expect 20 to 30 percent in the year. But given the fact that we saw more accelerated growth rates in Q1 last year, and following the product line-up change in Q2 forward, those growth rates slowed. We would expect that tend to be flipped. So we are expecting earnings growth in Q1, but not to the same extent that you should expect it in Q2 through Q4.

Joan Storms of Wedbush Morgan.

Just a couple of quick questions as most of mine have been answered. On the 88 million median investment spend, with more national, intending to leverage there, just on a kind of quarter-over-quarter basis, are we expecting -- we saw some deleverage in the fourth quarter. Are we expecting to see, on the slower growth rate, leverage on a quarter-by-quarter basis throughout the year?

If you recall, Joan, this past year, we had our media spend relatively flat from quarter to quarter. Although our seasonality would point to a little bit slower sales rate in the second quarter. We will move a little bit back to what we've done in the past, which is we'll have a little bit heavier media spend in Q1. We'll spend a little bit less in Q2. And then we'll move it back up a little bit in Q3 through Q4.

Q1 will probably be the heaviest media spend, at least as we have its plan now. That's more consistent with a direct kind of a direct marketing national type of spend pattern. But then, like I said, we would take it down a little bit in Q2 and up a little bit more in Q3 and Q4.

And then also on the gross margin coming in inclusive of Radisson, coming in at around the 60 percent range, we would probably expect, as Radisson ramps up throughout the year, we could potentially see some higher gross margins in the beginning of the year and then lower as we work our way through?

I think that's probably an appropriate way to think about it. Although like we've said, it's a little bit difficult to predict the pattern of Radisson beds. But I think that is a reasonable assumption.

And I guess for what your production schedule is right now for Radisson as you're making the beds, are they being shipped out with orders?

Yes.

And so will your production schedule then -- I guess I answered my own question -- it should ramp up over the course of the year?

Yes. I would expect that.

And then can you comment at all on current comp trends? Or I guess that goes against what you just talked about for guidance?

Well, what we said -- what we had said is that our targets longer-term are for comp growth rates of 7 to 12 percent. And that we would expect in 2005 that there would be towards -- we would expect that there would be towards the higher end of that range. And then kind of going back to what we've talked about for Q1, the fact that it's a little bit more difficult might be a little bit -- I think the thought processes could be a little bit lighter in the first quarter.

Okay. And then finally, the small charge for the settlement, did that come out of the -- what line item did that come out of? Did that come out of gross margin?

It's in G&A.

Laura Richardson, BB&T Capital Markets.

Yes, thanks. Actually Joan just asked a couple of the follow-ups I was going to ask. But one other question is that that lawsuit that popped up around the third quarter or something, is that still in process, and is there any expense ramification that you've either experienced or think you'll experience because of it?

That lawsuit is still pending. We don't believe the claims have any merit, and we are vigorously defending those claims. We stand behind our product. We always have and always will. And, therefore, we believe those claims don't have any basis. But there is no expense associated with it at this time.

Okay, I was thinking more like just the cost of your counter to the litigation? (multiple speakers) professional fees or what have you.

(multiple speakers) professional fees for that and other matters going forward.

What's that?

We have budgeted for that and other legal matters going forward.

Mark Rupe, Adams Harkness.

Hey, guys. Quick question. How are the non-mall stores performing? And in your store plans for '05, are there any other non-mall locations planned?

Yes. There were about ten non-malls at the end of the year. I think their performance has been good. We've been very pleased with them. And that is in our plans to be a big part -- a key part of our store opening schedule in 2005. I don't have a specific number because the entire plan is not done and to a certain extent it's just -- it's driven by availability. But it will be something that we expand on in '05.

And then with the reintroduction of the 4000, are there any mattress models coming out of stores?

No, Mark. The 75 percent of our stores that we've now put the 4000 back into had the space to allow for us to have all five models on the floor in those stores.

As far as the 9000, any less attention given to that?

No. It doesn't change in our selling process.

And lastly, is the sofa sleeper sold just in the Select Comfort stores?

At this time, it is. Yes.

At this time, I am showing no further questions. And I'll turn it back over to you for closing comments, sir.

Okay. If there are no further questions, then we'll conclude the call at this time. Thank you all very much for your participation and your continued involvement with our Company. Thank you.