Sleep Number Corp (SNBR) 2005 Q1 法說會逐字稿

Good afternoon. Welcome, and thank you all for standing by. We appreciate your patience, and we do apologize for the delay in getting into the conference. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the conference over to Mr. Mark Kimball. Sir, you may begin.

Thank you. Good afternoon, and welcome to the Select Comfort Corporation first-quarter 2005 earnings conference call. We do apologize for the delay. Apparently, the conference calling center did not have sufficient resources lined up to begin the call on time.

But thank you all 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 will 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 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 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 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, and good afternoon. And thank you for joining us today. Earlier today, we announced our first quarter results. And we are off to a strong start for the year. First-quarter 2005 diluted earnings per share increased 22% versus prior year to $0.22 per share, while total net sales increased 23% to $173 million.

Importantly, we achieved strong unit growth. As I stated on our conference call in February, one of our core objectives in 2005 is to deliver strong unit growth. And I'm pleased to report that our initiatives are yielding success, as units sold in the first quarter rose 16% versus the first quarter a year ago.

Initiatives announced in the fourth quarter of 2004, designed to give equal priority to our more moderately priced bed models, are being well received by consumers and sales professionals. Our first steps included the roll out of the upgraded models, 5000 and 3000 last year, followed by the reintroduction of our 4000 model three-quarters of our stores in early February of this year.

We have also emphasized to our sales professionals the importance of meeting customer needs at all price points in our selling process. And we modified our marketing and promotional materials and programs accordingly. The results of these efforts are demonstrated in our same-store unit growth of 11% in the first quarter.

We also are pleased with the broad base of our growth across all of our channels. Our first-quarter growth was led by our Company-owned stores and e-commerce and by continued positive results in our selective retail partnerships. Company-owned store growth was 24% in the quarter. Fueled by both same-store growth of 16% and 8% from successful new store openings. Sales through our e-commerce channel increased 25% versus a year ago in the first quarter, and our retail partners sales increased 74% on a per-door basis compared to first quarter, a year ago.

Our Radisson installations to-date are just ramping up and represent less than 10% of the potential total of nearly 90,000 beds. Orders increased over the course of the quarter with Radisson revenue representing 2% of our consolidated sales in the first quarter. These sales offset the low expectation QVC volume in the quarter, primarily due to timing changes of the program schedule. As we have discussed, our Radisson opportunity is oriented to marketing and consumer try out with limited direct profit contribution. And we believe QVC volume will achieve full year expectations, which are basically flat to prior year-ago.

A look at sales performance by market also indicates room for further growth and improvement. Our 24% retail growth rate was driven primarily in our low share new markets. Minneapolis has stabilized but is not yet enjoying significant growth. And within our major metro markets, we had mixed results in the quarter not yet achieving consistent growth across all of our markets. As strong as our sales were in the quarter, we have room to improve.

Net income increased at a similar rate to sales, approximately 22% growth versus prior year. We continue to leverage our selling structure by leveraging same-store growth but did not meet our goals for gross margin improvement in the quarter. Jim will get into more detail. But let me summarize by saying that product and channel mix and energy costs have had greater impact than we initially anticipated. While we still expect to expand operating margins in 2005 by addressing opportunities to improve execution and improvements in overall cost structure, we also expect to continue to be challenged by the volatility of the energy markets the remainder of the year.

Our core business model remains strong and self funding. In the quarter, we once again generated cash well in excess of our operating needs, improving our working capital position and increasing cash to over $100 million, all while repurchasing $6.9 million of stocks in the quarter.

As pleased as we are with our first-quarter results, we are even more excited about the progress that we are making on other initiatives that are critical to our future growth. During 2005, we continued to prepare ourselves for the next stage of our journey to become $1 billion organization and beyond. Our priorities remain unchanged -- focused on expansion of awareness and distribution and on developing our people and organization. We are on track to open 40 new stores this year, while closing approximately 15 locations, 13 of which will be leased departments within Bed, Bath & Beyond.

We also are continuing efforts to selectively expand distribution through traditional mattress retailers, as we did in the first quarter, adding one new retail partner, Better Bedding, which is based in East Hartford, Connecticut. Better Bedding now features Sleep Number Beds in its 17 locations in Connecticut and Western Massachusetts, and this is our first East Coast based retail partnership for Select Comfort.

Media spending in the quarter increased 20% versus year-ago, as planned. And also as planned, this increase was made in national support. Regional spending was down slightly versus year-ago's investment levels required to launch new market expansion.

A second top priority in 2005 is to continue strengthening our organization, as we have been doing for the past years, providing the expertise and capacity to achieve our full potential. As our Company grows and addresses expanding customer needs, our organization needs to evolve from today's highly centralized structure. We will continue to develop our organization, processes, systems and people to pursue rapid and profitable growth.

I believe an indicator of our Company's potential is the caliber of the people that we are able to develop and to attract. And along these lines, we would like to welcome Kathy Roedel, who has joined us as a Senior Vice President for Global Supply Chain. And she will replace Greg Kliner, who will retire from Select Comfort after an orderly transition. Greg was instrumental in helping Select Comfort implement a number of key initiatives, including the openings of our two manufacturing plants in Utah and South Carolina, and the creation and implementation of key supply chain strategies that support our competitive edge today. We want to thank Greg for his many contributions and wish him well on his well-earned retirement.

Kathy joins Select Comfort following a 22-year career with General Electric. We were especially attracted to her experience and capabilities in operation strategy and her deep experience with quality and productivity. Kathy will be working with a strong team, and we're looking forward to their leading continued innovation in our quality, service and efficiency, as we meet the expanding needs of our business.

We also want to welcome Wendy Schoppert to the newly created position of Senior Vice President and General Manager of New Channel Development. This new position represents our recognition that taking advantage of new channel opportunities and geographies including international will take several years and requires focused senior leadership. Wendy will lead Select Comfort's wholesale distribution and hospitality channels as well as new channel development initiatives in international geographies. Wendy joins Select Comfort following senior leadership roles at U.S. Bank Corp. Asset Management and American West Airlines. Her experience with these organizations, which included responsibility for -- strategic business growth plans, general management, product marketing and corporate development initiatives -- makes her extremely well-suited for this early stage business development role at Select Comfort.

We have a search underway for a Senior Vice President of Marketing. We have no defined timeline for filling this attractive and important position. And in the meantime, I am working directly with our talented marketing and product management teams.

In summary, we are very pleased with our strong start to 2005 and are optimistic and confident about our prospects for the balance of the year and beyond. We are making steady progress in further building our brand awareness and continually expanding our distribution. I will now turn the call over to Jim.

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

As Bill noted, both sales and earnings in the first quarter increased by more than 20% as compared to last year. Unit growth was the primary sales driver with increases in all channels. Average annual sales per store increased to $1,297,000, 11% higher than a year earlier. Average sales per mattress in our Company-owned sales channel increased by 6% to $1,932 per unit. The increase is attributable primarily to price increases initiated at the beginning of January and increasing accessory sales. Accessories sales per bed increased by 18% in the quarter.

We also continue to execute on our distribution expansion strategy, a more predictable component of our growth. During the first quarter, we opened 5 stores and closed 5 and ended the quarter with 370 stores including 10 non-mall locations. We expect to open an additional 10 stores in the second quarter and to close 10. Channel growth and other key sales statistics are included in the supplemental attachment to our sales release.

Our store closure plans reflect our recently announced decision to terminate our leased department program with Bed, Bath & Beyond. We believe our relationship with Bed, Bath & Beyond has been mutually beneficial over the 6 years we have worked with them. However, as we examined our distribution network, we determined that our leased departments within Bed, Bath & Beyond stores did not fit our plans for future growth. At slightly more than $600,000 per store, we did not believe these locations had the same potential as our more traditional stores.

4 of our leased departments were closed in the first quarter, and we'll phase out and close the remaining 9 stores during the second quarter. We do not expect these closures will affect our financial results.

Our operating margins declined slightly from 8.3% in the first quarter last year to 7.9% this year. As Bill noted, operating leverage in our selling expenses was offset by declines in our gross margin. During the first quarter, gross margins declined to 59.1%, 240 basis points lower than a year ago and below our target of 61%. The decline in gross margin was due to three factors -- first, the addition of Radisson to our sales mix accounted for nearly one-half of the gross margin decrease.

The two other factors accounted for the remainder of the changing gross margin. First, the shift in overall sales mix to more moderately priced bed models, as we reintroduced the 4000 model to our stores. This shift should be incremental to gross profit dollars but at a lower gross margin percent. And second, inflationary pressures, which have been higher than expected especially fuel costs.

All three factors will be reflected in gross margins for the remainder of the year. While we have opportunities to offset cost pressures, execution of these efforts will extend throughout 2005. Accordingly, we expect gross margins for the balance of the year to be similar to the 59% experienced in the first quarter.

The gross margin decline was offset by continued leverage of marketing and selling expenses, which improved as a percent of sales by 220 basis points to 43.4% compared to 45.6% in the first quarter of 2004. Much of the improvement was attributable to selling expenses, as we further leveraged same-store sales increases.

We continued to invest in awareness building media, spending 26 million in the first quarter. Media, as a percentage of sales, decreased to 14.9% as compared to 15.4% a year ago.

G&A expenses, as a percentage of sales, rose slightly to 7.8% from 7.6% in 2004.

Now, I have a few comments on the balance sheet. At quarter-end, cash and marketable securities totaled 101 million, up from 92 million at the end of 2004. We generated free cash flow of $11 million, which is net of approximately 6 million of capital expenditures. Our cash generation is on track to self-fund our growth in 2005, as it did in 2004. We also repurchased 6.9 million of company stock. We currently have $17 million available for stock repurchases under our formula-based, Board-authorized program. We expect to continue to pursue repurchase opportunities under this -- opportunistically under this program.

Inventories at quarter-end were $18 million, $2 million lower than year-end but consistent with what we would expect going forward with anticipated growth in home delivery sales and longer lead time wholesale and retail partners sales. There were no other balance sheet changes of note. Our cash position continued to take advantage of the favorable working capital structure of our business model.

Now, let's turn to our guidance. Before I discuss our specific outlook, I want to emphasize that it is difficult to extrapolate any single quarter's performance into expectations for the year. As we have stated before, our business can be somewhat volatile on a quarter-to-quarter basis. This makes sense given the nature of our business, a consumer durable with low purchase frequency and a make-to-order business model limiting forward insight. We set annual targets and budgets and run our business to achieve these annual goals. Furthermore, bear in mind, that we do not provide specific quarterly guidance, so it is not a given that when we beat consensus' expectations, we will raise our annual guidance. If business trends seem to warrant a change in our annual forecasts and if we exceed our own expectations, we will raise our guidance. That being said, we are increasing our earnings guidance for 2005 at this time.

Over the long-term, we expect to sustain sales growth rates of at least 15 to 20% with same-store growth between 7 to 12%, leveraging the business model with earnings growth rates of at least 20 to 25%. In 2005, we expect that same-store growth could exceed the high-end of our 7 to 12% target range, and that total sales could exceed our 2005 target range of 18 to 20%. Our same-store growth expectations reflect primarily unit growth with a slowing rate of growth in average selling prices.

As noted in our year-end release, we expect sales growth to be comprised of same-store growth, new distribution growth of 5 to 8%, and growth from Radisson between 2 and 4%. We are optimistic about the sales trends we have experienced early in the year and recognize that we will be lapping lower comps for the balance of the year. We are cautious however in projecting the potential impact of energy costs volatility and potential for difficult consumer environment, as interest rates rise and consumer confidence fluctuates.

Our updated full year earnings guidance of $0.98 to $1.06 considers these factors and represents year-over-year growth in excess of 20%. Our next scheduled market update will occur on June 14th with our tape-recorded quarterly update. With that overview, I will turn the call back to Bill for his closing comments.

Thanks, Jim. We have demonstrated our ability over the past 5 years to meet aggressive growth objectives. And 2005 has the potential to be a great year. We believe we will deliver on the results that are in excess of our long-term goals of 15 to 20% revenue growth and 20 to 25% EPS growth. We will continue to capitalize on our competitive advantages and will aggressively pursue strategies to obtain our goal of becoming $1 billion Company or more with at least 12% operating margin over the next 3 to 5 years.

We have a product and a brand that delivers improved sleep and health through personalized comfort at the touch of a button for an individual or for a couple. And we have a unique business model that includes a supply chain that delivers product quality at a cost that has yet to be challenge, allowing us to deliver unparalleled value to our consumers. Maintaining control over selling environment allows our new technology to be fully shared with customers in an environment that customers enjoy and that allows us to learn from customers our opportunities to further improve.

Importantly, our business model is cash efficient and enables us to self-fund our expansion. We look forward to updating you on our business during the third week of June. And Operator, we will now be open for questions.

(OPERATOR INSTRUCTIONS). Steve Denault.

Northland Securities. Regarding the gross margin contraction you spoke to about 120 basis points being that of Radisson mix with the balance being non-Radisson mix and cost of goods sold inflationary pressure -- what would the breakdown be for the latter two in terms of basis points?

It is pretty comparable between the two, Steve. So there isn't one item that necessarily sticks out more than the other.

Okay. And you referenced 26 million in media spend in Q1 '05, what was in Q1 of '04?

Steve, the number in the first quarter of '04 was 21.6 million.

The unit volumes of growth at the store level of 11%, what was it in the prior Q1 of '04?

I would have to get back to you on that one. I don't have that one right at my fingertips.

Are you seeing any change in the competitive landscape?

Nothing sig -- Steve, this is Bill. We are obviously continuing to see the growth of the more premium higher quality beds. That trend continues within the industry. The industry numbers do include both TempurPedic and Select Comfort's numbers and so that is obviously a portion of that trend. But in the air segment, we have not seen any significant change.

If you look at your established markets, exclusive or excluding Minneapolis, is it safe to assume they are comping at or above Company average?

Jim, do you want to address that?

Can you repeat that, Steve?

If I look at some of the most established markets -- Denver, Kansas City and I will exclude Minneapolis -- is it safe to assume that those markets are still comping at the Company average?

I would say that it is a mix of results. There is no -- we do have some volatility from market-to-market on a quarter-to-quarter basis. Some are performing at or better; some are performing at or below. So it is a little bit of both.

Bob Evans.

Craig-Hallum Capital. Congratulations on a strong comp. Can you comment on the -- it is the follow-ups to these questions on the gross margin in terms of visibility, as we look to this year, the one -- the greatest unknown is the inflation pressures. And do you expect much variability here in terms of what is the downside in this gross margin? Or can you give us a little bit more color in terms of what your range of expectations are there? You said 59%. But is that low into the range or -- just trying to get a little bit better sense of color there?

I guess what I would say, Bob, is that, that is essentially our estimate. There is -- I think we think there is some outside opportunities from a cost initiative standpoint. I think the additional factor that is going to continue to play in, as we go through the balance of the year is increasing Radisson sales, or at least that is what we would anticipate. That's a program that is ramping up, and so there will be an increase in those sales. But if you look at the core business, I think that we can see some improvement.

Okay. And can give us more color on the unit growth that you saw this quarter? Maybe a little bit more color in terms of the breakdown between the addition of the 4000 series and some of the other low-end models that saw unit growth? What was the mix?

Well, without really getting into a lot of specifics, we were lapping -- well, the 9000 product was introduced in April last year. So it was -- the 9000 was new. But we are lacking a period that didn't have a year ago. From that prospective, we continued to see good, strong volume at the upper end price points. But I think what we are seeing primarily is just good success in really those entry-level models. The 3000 has done well; the 4000 has picked up a little bit. But as much as anything, it is really -- looks as if it is -- it is working well as a bridge between our entry-level 3000 and our mid-point 5000, which is our most popular model at about 50% mix.

And would you attribute that to the success of the 3000, the somewhat change in the marketing plan, or introduction of that bed last fall? Just trying to get a little bit more sense of the drivers and sustainability.

Bob, this is Bill. I think that it really is a -- it is all of the pieces of the puzzle coming together. It is the change of our focus within the selling organization to make sure that we are selling the right bed for every customer. It has been some of the way we have emphasized the full range of products that we have for customers in our marketing and in our promotion structure. And it was also some of the product work that we did to bring news and excitement to the 3000 newly launched 4000 and 5000 last year.

Okay. One final question on the G&A, it did increase a little bit as percentage of sales but sequentially was up a decent percentage. Can you give us some sense of -- will that -- should we see a lessening of G&A next quarter or give us a will bit more color as to why the increase. I get that more as not levering with sales to the degree that some of your other expenses do.

One of the factors that always comes in to our G&A is our incentive compensation program. We have incentive compensation program that reaches throughout the organization. And our -- what we expense relates to overall performance.

Fourth-quarter, the performance was not as good, and therefore the incentive compensation number was very low. Where first quarter, we're certainly pleased with the results, and it was a little bit higher. That's really the biggest driver. And it will continue to drive some fluctuations maybe out of the norm, as we continue to go through the year.

Michael Cox.

Piper Jaffray. Congratulations on a very strong quarter. Just a couple of questions on -- the same-store sales came in well ahead of our expectations. I think, you know, your revenue came in above consensus. I was wondering if you could give some color on trends later in the quarter post your mid-quarter update.

We don't generally comment on kind of the trends throughout the quarter. Obviously, the update that we gave in March indicated that we were pleased with trends. But that's really about all I can say.

In terms of the Sofa Sleeper roll out, could you give us some color on the number of markets that is in right now and any early trends you are seeing there?

Michael, this is Bill. We have not changed anything on sofa year-to-date. We are still in about 78, 80 stores, as we were at the end of last year. That's just not been a priority through the first quarter. And basically, we have forecasted our plans to not be significant in the balance of the year. We are going to be testing some things, and there is always opportunity there. But it is not included in our outlook to be anything significantly different than the balance of the year.

In terms of the Radisson, it sounds like that is ramping up. Any early read on response from visitors at the hotels?

Yes, I think Radisson is meeting our expectations. Customer feedback to Radisson has been very strong. Our early indications on referrals to our stores has been positive. The marketing campaign will start towards the middle to late part of the summer, and those materials look great, very consistent with our brand image. So I think that program is on track.

Just one quick additional question. On the commodity side, energy price front -- any opportunity to raise prices on deliveries there? I know you have done that in the past to offset some of the margin pressure.

Yes, this is Bill again. Michael, we do have a couple of tests underway -- and of higher -- of raised prices on home delivery. It is too early to tell how those tests are going now. But we are always looking for those kinds of opportunities.

David Lee (ph).

It's Porter (ph). I was wondering beside the 4000 and the 3000 to 5000 model -- offset the 4000 model, do you have any other new models in the pipeline that you think about introducing? And could you just make sort of comment on how the 3000 and 5000 and 9000 models are doing?

The answer to the first part of your question is that at this time, we don't have any new models that we are prepared to talk about. As we indicated at the outset of this year, this year was really not going to feature any significant new products. And this is a year about just execution of the line that we have because we feel very good about the line and the price points that we have covered.

And I think Jim did a good job summarizing where we were on the model performance within the line through the first quarter. The 9000 is new versus year-ago. And both the 3000 and the 5000 have responded well to the full support programs that we have put behind that entry-level price point.

What about your percentage of sales or percentage of price increases that comes from foundations or adjustable foundations?

Jim, can you cover that?

Yes, the mix in particular adjustable foundation hasn't had a significant impact on an average selling price. That product has been in the product offering for a fair period of time now. And we're certainly lapping where it was somewhat -- had been already rolled out a year ago. So it didn't have much of an impact on average selling price.

Sorry, a couple more questions. Can you comment a little bit about why same-store sales grew so much? Because it has been 16%; that's like the highest in the past 4 quarters. Can you just talk a little bit about where you're seeing -- what are drivers for the strong same-store units -- same-store sales growth?

Well, the same-store sales growth I believe, as Jim laid out, was about 11% units, about 5% price. And the unit growth, I think, reflects all the work that we have been doing to both increase awareness across the markets as well as to refocus our sales force and communication to share the value of our total product line. And the price increases -- that is reflective of the -- basically it is reflective of the about 5% price increase that we took at the beginning of the year. There's a little bit of mix effect that gets worked into it as well. But as you recall, in January of this year, we did take some pricing and selective parts of the line that did represent about a 5% mix or a 5% blended increase.

Can you talk about the reasons why some of the leased locations are closed at Bed, Bath & Beyond? Is it the strategy not working, not getting enough attraction? Can you just shed a little bit more color on it?

Yes, I think the real question that we were asking ourselves is where does this fit within our real estate strategy long term? And what we had seen was, while we were pleased with the relationship and the store sales in profitability were marginal -- and what we saw was, there was probably a better opportunity for us to move those sales into existing stores. Or with the success of our non-mall stores, potentially put stores in locations that were closer to where we had Bed Bath. So it was really just -- whether we had thought that those Bed Bath locations had the same potential as our mall-based and non-mall-based stores. And so we just felt it was appropriate to discontinue it at this time.

What about -- what are the financing deals that you guys had been offering on the website? What is the response like? And is this like the first time you guys are offering that or it has been --?

First of all, our offers are the same across all of our channels. So that same financing offering exists on our direct call center or in our retail stores. And we have had financing as part of our promotional mix for a long time. And it is just part of the way this industry competes. And consumers have been very receptive to financing offers. Importantly, our total promotional spending including price offsets as well as financing has not changed or increased as a percent of sales.

How are you accounting that on the balance sheet?

If I could just ask you to limit your question to 1 a call, so we can let someone else on the call. But basically, our financing costs are treated as a promotional expense. Our dollars-off type promotions are treated as a reduction of sales.

Congratulations on the quarter.

Joan Storms.

Wedbush Morgan. A couple of questions on the sales mix, it looks like your direct business was up more significantly than it has been for a couple of quarters. Anything special going on there?

No, I think, Joan, what it really reflects is, as we have talked about, the media strategy and our move towards more national advertising. That does flow a little bit more into direct -- or I said should say, there are more opportunities for direct sales with an increase in national media spend. And I think that's what it reflects more than anything.

So should we be projecting a little bit higher growth rate in the direct channel then?

I think we would expect it to be a little bit higher than it was last year. Certainly, our overall media strategy is really directed towards cross functional sales and direct in particular have programs to refer people into retail. And that's really where we direct people if we don't have them in sales. But I think a little bit higher growth rate than we had last year is appropriate.

And just Jim, if you can give us a couple housekeeping things -- forward guidance on tax rate was a little bit higher -- should we be still projecting 38.5 or a little bit higher than that?

You know, I think the 38.8 is probably appropriate at this point. We are still working through the tax legislation on credits for U.S. domestic manufactures. And those tax rules are not out yet. So that could change the number a little bit. But for the time thing, I would project more in line with what Q1 was.

You had talked about Radisson making up 2 to 4% of the sales. And before that, you said 5 to 8% from -- and I didn't catch that.

The 5 to 8% is on new -- on basically distribution expansion, new stores.

Okay thanks a lot. Congratulations.

Greg McKinley.

Doherty & Co., thanks. Guys, can you give us just a refresher a little bit on how you look at ROI with your media spending when you are making decisions to allocate more spending nationally versus locally? And why is that going to create a higher return here in the near-term than more regional spending would?

Yes, I will just talk to the ROI briefly, and then Bill if you want to add-on. First of all, the actual kind of ROI is a little bit difficult to read because there is so much overlap in media and overlap in channels. And theoretically, and what we have seen in the past, when we expand media locally, it is focused on a relatively narrow population base where naturally national advertising benefits all of our stores. And that is the core concept. We do have ways of measuring sales generation, lead generation and what kind of return. But it is always a little bit difficult to really determine exactly where the sales come from.

Okay, but generally obviously, you guys are pleased with the return or response rates you had here in the March quarter. Do you intend on sort of that same emphasis in terms mix national versus local in the remainder of the year?

Yes.

Could you comment on a little bit on what your comp outlook is in terms of units versus ASP for the rest of the year? You said in January, maybe on a blended basis, you took a 5% price increase to start the quarter. And we know the 9000 did not yet hit anniversary dates. So, what does that imply in terms of ASP and unit outlook for comparable store growth in the rest of '05?

Well the unit comp in Q1 was 11%; the total dollar comp was 16%. And as you said, we had not lapped 9000 introduction. We will lap it in the second quarter here. As a result, I think that the comp will be for the balance of the year will primarily be unit growth. It is still -- the unit mix is still playing itself out a little bit following the 4000 introduction. So we are still learning a little bit from that. But I think for the most part, it is going to be unit comps for the balance of the year.

And will that change a little bit each quarter because didn't you guys sort of upgrade the product line ratably throughout '04, so it will sort of anniversary those in each of the remaining quarters?

There will be a little bit of fluctuation, but I don't see it being dramatic.

Okayed. And then just to confirms the gross margin change here. When you look at your overall promotional effort, financing and product discounting, that really hasn't changed in terms of the package available to consumers on a discount?

That is correct. As Bill said, we manage those dollars together. And it is equal to or less than where it was a year ago.

William Wallace.

BB&T. I have two quick questions. First is, have you reviewed your lease accounting and do you expect any changes?

We have reviewed our lease accounting. We did so at year-end. The SEC changes that they announced toward the end of the first quarter were reflected in our year-end results and were reflected in our 10-K. They were nominal; the impacts were nominal.

Secondly is, with the accrued warranty costs line item on the balance sheet -- any changes of note to that line?

You asked about the accrued warranty, is that correct?

Yes.

No real significant changes. We always evaluate those trends and accrue as appropriate. And we kind of followed our standard approach towards what we were occurring there.

Is it decreasing again this quarter sequentially?

Well the warranty accrual is always affected by a number of factors -- cost of replacement, sales volumes, and overall trend rates. We see some opportunity in the trend rates. They were up a little bit during the course of the year. But we're seeing improvement now. So I think there is some opportunity there.

And I am showing no further questions at this time.

Okay. Well, then I guess we will conclude the call at this time. We thank you all very much for your participation in the call and your continued interest in our Company. And we look forward to our next release in June. Thank you.