Sleep Number Corp (SNBR) 2005 Q4 法說會逐字稿

Welcome to Select Comfort's fourth-quarter 2005 earnings conference call. (Operator Instructions). Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now, I'll turn the meeting over to Mr. Mark Kimball, Senior Vice President and General Counsel. Sir, you may begin.

Thank you. Good afternoon and welcome to the Select Comfort Corporation fourth-quarter 2005 earnings conference call. Thank you all for joining us. I'm Mark Kimball, Senior Vice President and General Counsel. With me on the call are our President, Chairman 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 his perspective on our recent performance and our outlook for 2006. Jim will then provide more detail regarding our financial results and the outlook for 2006. We will then 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.

Before we begin, we would like to note that in recent quarters, we have experienced some attempts by individuals to obtain information from our sales professionals in the field at times under false pretenses. We regularly advise our sales professionals to be careful not to disclose any financial or other confidential information. We would appreciate your restraint from seeking information from our personnel in the field, so as not to create any distractions or to place them in a difficult position.

The primary purpose of this call is to discuss the results of the fiscal period just ended. However, our commentary includes and our response 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 on our Annual Report on Form 10-K and other periodic filings with the SEC. The Company's actual future results may vary materially.

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

Thanks, Mark. Good afternoon and thank you for joining us to review our fourth-quarter and full year 2005 performance. We will also share our outlook for 2006. By virtually every measure, 2005 was an outstanding year for Select Comfort. Forgive me for being redundant but when earnings per share are up 43% and revenues are up 24% and comp store sales are up 15%, it bears repeating when the fourth quarter continued the positive momentum. And in fact, the momentum accelerated in the quarter despite a challenging economic and competitive environment.

I would like to congratulate the entire Select Comfort team for our success during 2005 and the fourth quarter. We improved many, many more lives this past year by providing the best mattress in the world, strengthening our growth performance and sources of competitive advantages, and we invested in moving from being a very good company to becoming a great company. We have much to be proud of. As exciting as the past 5 years have been, I'm absolutely convinced that we're just getting started on realizing our financial and leadership opportunity.

There are four points that I believe stand out when reflecting upon 2005 -- Select Comfort is growing rapidly and consistently; we have multiple sources of competitive advantage; Select Comfort has raised the 2006 guidance above our long-term targets; and we are on track to realize our 2007 goal and milestone of $1 billion in sales and 12% operating margin before option expensing.

First, Select Comfort is growing rapidly and consistently. 2005 performance demonstrates Select Comfort's ability to consistently and aggressively increase consumer awareness, sales and earnings at superior rates and by following a defined set of strategies that grow more effective with time and scale. In 2005 for instance, year-over-year sales growth by quarter was 23% in the first quarter, 24% in the second quarter, 22% in the third quarter, and 26% in the fourth quarter. Operating margins have increased from 6% in 2002 to nearly 10% in 2005.

Second, Select Comfort has multiple sources of competitive advantage, and they are strengthening over time with process, experience and scale. These include a differentiated product, our brand, our controlled distribution system center and our Company-owned stores in extending to exclusive and leading partners in select markets, our manufacturing and logistics proficiency as well as our relentless focus on customer service, our strong debt-free balance sheet, and most importantly our people across the organization.

Third, we raised 2006 guidance above our long-term targets and above what we discussed only 3 months ago. Guidance for 2006, excluding stock option expensing, is now $1.40 to $1.48 per share as compared to $1.14 per share in 2005. And, we are on track to realize our dreams of achieving our 2007 milestone goals of $1 billion in sales and 12% operating margin pre-option expensing.

So, Jim will follow with a more in-depth discussion. The highlights as I see them include the following. Sales grew 24% in 2005 and 26% in the fourth quarter. This is above our long-term target of 15 to 20% and reflects a healthy balance of unit and average selling price gains. Underlying the sales growth was very strong comp store sales growth of 18% for the quarter and 15% for the year. Comps were achieved concurrent with the opening of 40 new stores and a rapid acceleration of our retail partner program. It's also important to note that unit growth was a strong 19% for both the quarter and the year. We were particularly pleased with strong unit momentum in December, following our price increase.

In 2006, we will continue the same proven growth strategies that we refined the past 5 years, featuring marketing investments, product innovation, distribution expansion, and leveraging our infrastructure. While sustaining superior and consistent sales growth has always been a high priority, our long-term earnings growth targets of 20 to 25% call for enhanced margins based on achieving operating and margin and marketing leverage. Operating income increased 39% in 2005 and 53% in the fourth quarter. EPS growth above these rates reflects both the net income growth and the positive effects of our opportunistic share repurchases earlier this year.

Our shareholders are enjoining the benefits of our repurchases of nearly 7% of the shares outstanding at roughly $20 per share on average. In 2006, we believe we can improve our operating margin another point, thus approaching close to 11%. This improvement will emanate from multiple areas of our vertically-integrated business model, including long-term process improvement programs and leveraging our infrastructure and marketing expenditures.

Our track record of success will undoubtedly cause competitors to attempt to copy our product. Knowing this, we have deliberately invested to sustain our long-term growth by building proprietary advantages. Not only do we believe our product is difficult to match in quality and cost, but also there is much more required for successful selling, customer service and satisfaction and for business success. We have multiple sources of advantage; all of which together form an imposing barrier to entry for new competitors as well as the entrenched traditional coil and spring manufacturers. Let me expand on these important advantages.

Our product is unique, hard to make, and we are very good at it. Our product is clearly unique from traditional spring and foam mattresses. Our product is more complex, more demanding in quality and has more product attributes than those of competitors. We believe and our owners confirm it is also a truly superior product with much stronger consumer features, benefits and value.

We believe we have quality and cost advantage. Not only do we have years of experience and learning, but we also have significant scale advantages versus any other manufacturer in our segment. We also have the advantage of working with a direct-to-consumer business model, so we get feedback from our consumers daily.

Third, our brand is becoming a household name. Finding your Sleep Number is popping up from church sermons to pick-up lines in bars. At least, that's what I'm told. 90% of our sales are through Company-controlled channels. Our unique product and brand requires different selling skills than traditional mattresses. Customers, who are unfamiliar with the technology, need more information, more questions answered and greater service. Our Company-owned distribution channels meet that need through excellent recruiting and training, and we are working with leading retail partners to help their teams take advantage of the brand awareness that we're generating. And our dedicated service extends to our partners' customers, so we maintain an optimal service advantage across the entire system.

We self-fund our growth; all of which has been organic. And our strong free cash flow gives us flexibility to invest. The strength of our balance sheet also provides us with a financial flexibility to consider other means of optimizing long-term shareholder value.

Last but certainly not least is the advantage of our people and our culture. We have a compelling and clear mission and a singular focus. We have demonstrated our ability to deal with challenges, and we are committed to continue to do the right thing for our customers, our employees and shareholders for years to come. We have a leadership team, both management and Board, that is far stronger than might be expected in a company of our size. Select Comfort's leadership is well aligned with the opportunities that we are pursuing and the growth that we are realizing.

In 2005, we took advantage of our success and our compelling potential and strengthened our top management team by hiring three Senior Vice Presidents. And throughout the Company, we continue to strengthen our management team through the combination of internal promotions, cross-functional moves and new hiring. This continues to be a priority for 2006 and beyond.

In 2005, we also achieved a healthy Companywide bonus payout by substantially exceeding the goals established at the beginning of the year. This bonus program aligns all our employees with the profit performance of the Company and thus allowing us to attract and retain a highly capable and motivated workforce.

So in conclusion, we had a great 2005 and we are expecting a great 2006 and beyond. We understand the potential economic and competitive challenges that the coming years may present. But at this time knowing what we know, we're confident that we will continue to sustain or exceed our stated long-term growth targets, aggressive as they are. For 2006, we've provided guidance above our long-term growth targets and significantly above our projections from only a few months ago. And for 2007, we continue to be on track to reach the goals set a number of years ago of $1 billion in sales and 12% operating margin. And when we established those goals, they seemed unrealistic to most people in the investment community. But, we are very proud to say that those Super Bowl-like goals now appear to be within reach.

Now, I would like to turn the call over to Jim Raabe, our CFO, who is aglow as well.

Thank you, Bill. As Bill indicated, we had a terrific 2005 and Q4, a continuation of the 5-year performance that we are very proud of. Overall for the year, our results follow the pattern that we strive for at Select Comfort -- sales growth well ahead of industry trends; operating margin improvement of approximately 1 percentage point; net income increase of 39% and earnings per share increased to $1.14 per share, 43% higher than last year. The sales growth was impressive and exceeded our long-term targets. But, the expansion of our operating margin and cash flow growth deserve particular mention. I will come back to these points after covering our sources of growth and will conclude after addressing the balance sheet and a more detailed overview of our 2006 outlook.

In 2005, we continued the multi-tiered growth story that has been consistent over the past 5 years -- first, same-store growth, then new store expansion and then new channel distribution. Same-store sales led the way, increasing 18% in the fourth quarter and 15% for the year. We now have 4 consecutive years of same-store growth of 15% or better. 77% of our stores now have annual sales in excess of $1 million, continuing progress against a goal we set 4 years ago for all stores to exceed $1 million in sales.

We increased our store square footage by 17%, represented by 40 new stores; 10 store relocations and expansions and net of 14 store closures, including the 13 Bed, Bath & Beyond locations that we closed in the first quarter of 2005. New store sales contributed 7% to retail sales growth in 2005, and stores completing their first 12 months of operations in 2005 averaged over $1 million in sales -- very strong performance by our real estate team.

New channel distribution contributed to growth in two ways. First, we added 7 new retail partners, representing 219 retail partner doors, finishing the year with 308 retail partner doors in the United States. We also expanded into Canada with 45 Sleep Country Canada locations at the end of the fourth quarter. Retail partner sales grew 62% in 2005.

In addition, at the end of the year, Sleep Number beds represented 32% of Radisson Hotel and Resorts domestic beds. Most importantly, unit growth reemerged as the core source of our sales growth in 2005. We sold over 376,000 mattresses across all channels, up 19% over 2004, with same-store growth on a unit basis increasing a very strong 10%.

Market share on a unit basis is still less than 2%, indicating again the significant growth opportunity ahead of us. Our average sales price, which includes accessories and delivery in our Company-controlled channels, also contributed to growth, increasing to $2,151, 8% higher than the fourth quarter of last year.

As noted earlier, our operating margin growth deserves particular mention. Since 2001, we have demonstrated our ability to grow margin along with sales. And in 2005, we performed as expected, adding 1 percentage point to operating margins to 9.9% versus the 8.9% reported in 2004. In the fourth quarter, operating margins improved to a record 13.1%, up 2.2 percentage points over the 10.9% reported in the same period a year ago.

Our gross margins continue to improve. While gross margins declined 40 basis points to 60.7% on a year-over-year basis, gross margins improved sequentially for the second consecutive quarter, particularly strong performance from our operations team given the challenges and material disruptions due to hurricanes. The consolidated gross margin includes the blended margin of our Company-owned channels and our wholesale businesses and reflects the accelerated growth of these wholesale businesses, which grew 59% in 2005. Our Company-owned gross margins, which include our direct-to-customer Company-owned distribution improved to 62.2% in the fourth quarter, up 20 basis points compared to the fourth quarter of last year.

Sales and marketing contributed most significantly to our operating margin improvement. Over the last 2 years, sales and marketing as a percentage of sales have declined by 3.5 percentage points, as we successfully leveraged the advantages of our direct-to-customer business model. In the fourth quarter, sales and marketing expenses represented 39.5% of sales, an improvement of 3.9 percentage points compared with the 43.4% of revenue in the fourth quarter of last year. The improvement is particularly impressive considering a 24% increase in advertising investment to $22.8 million this quarter. The leverage reflects the effectiveness of our media, increased efficiencies in stores with continued same-store growth and cost improvements from our previously-announced, renegotiated third-party consumer credit agreement.

General and administrative expenses as a percentage of sales increased to -- increased in the quarter to 8.1% as compared to 6.8% last year. For the year, G&A represents 8.1% of sales as compared to 7.4% last year.

As Bill mentioned, we have a Companywide bonus program that serves to attract higher caliber people and aligns them to Company and investor objectives. Our 2005 G&A expense reflects a higher bonus payout, in line with current year performance. This speaks to the sustainability of our 2005 results, as we added a full percentage point to operating margins while fully compensating and incenting our organization.

The strength of our balance sheet also continued along familiar lines. We ended the year with $112 million in cash and investments and again demonstrated the advantages of our unique business model, and our balance sheet remains debt free. Our cash increased by $20 million through the year, even after investing $26 million in new capital, primarily stores and technology, and after having spent $50 million in the year to repurchase our stock. $20 million is currently authorized for continued repurchases.

As compared to the beginning of the year, our balance sheet has grown consistent with overall sales growth most importantly as it relates to inventory levels and accounts receivable balances. We have seen some larger-than-normal increases in certain liabilities. Consumer prepayments increased with sales and with the increase in the percentage of our sales installed through our home delivery service. And compensation accruals increased consistent with our increased payouts under our incentive compensation program. Our other liabilities increased due to a number of factors, including an increase in warranty accruals, growing with sales and increases in commodity costs.

I would now like to address our outlook for 2006. As Bill stated, the Company remains on track to achieve its stated goal for 2007 -- $1 billion in sales and full year operating profits of 12% before stock option expense. We feel confident maintaining our long-term growth targets -- same-store sales growth of between 7 and 12%, net sales growth of between 15 and 20% and earnings growth of between 20 and 25%.

In 2006, our guidance is for full year earnings up from $1.30 to $1.37. This guidance reflects stock option expense of $0.10 to $0.11 per share and an EPS growth rate before options of between 23 and 30% above our long-term growth targets. We expect revenue growth to be at the high end of our long-term sales growth target of 15% to 20%.

The sources of our growth are consistent with prior years -- same-store growth at the high end of our long-term rate of between 7 and 12%, led by increased media investment to more than $100 million, up more than 15% compared to 2005; 40 to 45 new stores net of closures as compared to 26 net new stores in 2005; 100% growth in new retail partner doors, the same growth in e-commerce and direct marketing channels; and sustained sales in Radisson, QVC, and other wholesale relationships.

In international, our first steps of expansion began in the fourth quarter of 2005 and they will not contribute significantly to 2006 sales growth. Our international expansion will be largely investment based in 2006, as we begin to establish the infrastructure for future growth.

From a profit perspective, our goal is to again improve operating margins by up to 1 percentage point. Our leverage opportunities are well-established and consistent with prior years, primarily sales, marketing and G&A with gross margins forecasted to be approximately equal to 2005 levels. The 1 percentage point margin expansion goal is intended to be an apples-to-apples comparison, excluding the effects of stock option expense. Select Comfort will adopt SFAS 123R on a prospective basis effective with first-quarter 2006 results. We expect option expense will add $0.10 or $0.11 of expense on an after-tax basis to 2006 costs.

We will again be investing in long-term growth. The two most significant areas of investments are plan to be R&D, where we intend to double our 2005 investment; and international, which requires infrastructure, systems and market development. Cash from operations will continue to fund our growth. Our capital investment will be significantly higher, estimated at 40 million to $45 million in 2006 compared with 26 million in 2005. The increase is for new stores and relocations and expansions; logistics and manufacturing enhancements; and our continued systems development, which includes preparation for international markets. We remain committed to both operating and capital expense initiatives that should enable us to improve capacity utilization rather than physically expanding our existing production facilities or building new plants. To that end, we believe that we have capacity in place to meet our growth projections through at least 2007 without incurring additional construction costs.

We have ambitious goals for 2006. We have a proven track record and demonstrated capability to sustain our growth, improve our margins and achieve our long-term goals. And we're confident that we will sustain our performance and achieve our goals again this year. We hope that you will continue to monitor our progress throughout the year, as we work to build upon the successes we have demonstrated each of the past 4 years.

Carrie, I would now like to open the call up to questions.

(Operator Instructions). Joel Havard, BB&T Capital Markets.

Let's see, on the international initiative, you outlined a pretty clear plan of how to get there. I just got one question on that at this early stage. Do you all anticipate that will be 100% Company-owned forever at the start, transitioning over some period of time? Could you elaborate on that a bit?

At this point, we don't have that part of the strategy fully confirmed. What we do know is that the product will work, the brand will work, a lot of our -- the supply chain will work well. One of the key questions is the one that you're hitting on, which is exactly how we will go to market.

Obviously, our first move into Canada was not Company-owned; it was through a retail partner. Now, we have the ability to backfill that with storage if we think that's the right thing to do down the line. But then, as we're looking at other markets that have to -- distribution is one of the key questions that we are working on.

Okay, and on the R&D side, I'm certain the answer is going to be a mix. But can you tell us where the emphasis is going to be on either a -- aimed at either end of the price point scale?

I think that the best way to think about our product innovation plan for 2006 at least is continuous improvement of our current line from features to quality to costs of our current line. We don't anticipate any significant new price points this year.

Congratulations on a good quarter. We'll see you later this week.

Bob Evans, Craig-Hallum Capital.

Again, congratulations on a great quarter, great year. Can you comment a little bit more on the incremental CapEx from '06 to '05, a little bit more detail in terms of where that's coming from? Obviously, more stores but where else are you spending the money?

Well, there are more stores, Bob. But there are also remodels and expansions -- I should really say expansions and relocations. Our store leases are now starting to cycle through. And so, we have an increasing number. With our success, we have more opportunity to really upgrade our locations within our existing malls and we look to do that. So, there's a piece of it that is that.

As we said in the call just from a capacity standpoint and an overall logistics standpoint, we're continuing to upgrade our existing capabilities there to be able to maintain capacity at greater efficiency.

And then, there is a growing piece of our capital that's certainly on the systems side. Over the last couple of years, we have been upgrading -- continuing to upgrade our systems. But as we look at international expansion, that has its own kind of investment requirement.

Okay. Can you comment further, Bill, on the -- your guidance for the same-store sales growth is to the higher end of your range or your historical range for '06. Can you kind of give us your -- why you have the level of confidence that you do going into the year?

Well, I do, Bob, because it's the same -- we've basically been working against the same strategies for the last 5 years now. And, as Jim said, we've got 4 consecutive years of 15% comp store growth or better. It's primarily driven by advertising -- or marketing I should say, which just builds that consumer awareness and interest. And then it's followed through with the continued improvements that we have in execution in the store.

This is also a business that is quite a bit on the tipping point type model, where the more people that are sleeping on the bed, the more referrals we're getting. It has continued to be one of building momentum.

Steve Denault, Northland Securities.

Monster quarter, guys, congratulations. When you look at the comps in the quarter, what was pricing versus volume versus sales mix?

The comp for the quarter in total was 18%. The unit number was consistent with what we have been running over the last couple of quarters; basically about 9% was the unit comp. So we had about a 9% unit and a 9% pricing. A good piece of that pricing was -- a good piece of that 9% on the ASP side was pricing. We had about a 5% price increase that we took at the beginning of the year, and then we did take out a price increase again in December. But there was also improvement in the mix overall. But, I would say it was unit, then pricing, then mix.

What did you see at the store level when you took the $0.05 pricing in early December? Did it have any impact at all on -- I mean what was your sense there in terms of what it did to volume?

As I had said in my comments, Steve, we saw momentum build through the month of December.

Through the month and in --

Or in the month. December's momentum was strong even within the quarter.

Okay. Any change on the competitive side, any changes?

Nothing significant.

Greg McKinley, Dougherty & Company.

Guys, in the past, I think you've occasionally given us some measuring points around how you see your stores perform when they share a market with some of your wholesale partners. Can you make any comments on that?

No specific comments, but I would say that we continue to -- we continue to be very confident in the strategies we're taking. Our stores continue to perform well, and our partner relationships continue to perform well as well.

Just for my understanding can you help me better understand, when you are going after a new wholesale partner, how is it or beyond obviously expanding their product assortment to their customers, what other incentives do they perceive in the relationship with you such that I would imagine they are giving up slots that are already occupied by some of their big suppliers, like Serta, Sealy, Simmons. So what is it about a relationship with you guys that is beyond the additional assortment, causing them to say -- yes, I want to bring Select in there and displace an existing supplier?

Well, generally, many of these partners have approached us first. And they are doing so because their customers are increasingly interested in Sleep Number. In terms of what we offer them, it is a couple things. It is the traffic that we are driving from the awareness of Sleep Number. It's also the -- it's basically a semi-exclusive relationship for them, and they understand the power of that. Then, the third thing is they get as I said in my comments the full support of Select Comfort, so from customer service and all of our sales training, which gives the benefits from all -- what we've learned in our stores. Well, they have great confidence in our product and the quality and the service that their customers are going to receive.

But the Company isn't providing them any sort of financial guarantees, etc., to earn those slots?

No, sir.

Then finally, I wonder just a little information on real estate. You are growing a lot of stores again this year. Can you give us a little color in terms of -- is there -- are more of your stores ending up in these emerging lifestyle centers versus regional malls? Is that changing at all?

The mix is shifting more towards lifestyle centers; that's mainly because that's the nature of the way real estate is developing. The new real estate that is being built is real estate centers. We will still have -- or is lifestyle centers. We would still expect that less than half of what we open in 2006 will be lifestyle centers. So it will still be primarily malls; although, the shift is definitely occurring.

Greg McKinley; Then last question, there is a comment in your press release that says marketing as a percentage of sales expected to remain at levels consistent with '05. And I think that's you know increasing spending growth there by about 15% at least in media. Wouldn't some natural leverage occur then if your outlook is for total sales growth you know at the high end of your 15 to 20% range? Or am I missing misreading that?

No. I think that that's correct. As we've said, we expect to get a point of leverage. Some of that will come in the marketing area.

Michael Cox, Piper Jaffray.

Congratulations on the quarter, guys. On the advertising side, do you plan to introduce the advertising in any new local markets in 2006? And in that incremental about 13 million in ad spend, is that primarily national advertising?

There's no significant local market ads planned at this time; though, that is always under review. What we've got is a lot of markets with -- a lot of local markets with some level of local marketing that we can just build upon it. So, we will be building out some of the local markets that we have already entered.

In terms of where the incremental spending is going, it's a little -- it's a combination of national and local. But it's also some of our new investments. For example, our online -- yes, our Internet support is going to go up significantly this year, as are our what we call retail activation tools -- things like the Sunday inserts and some of the more retail activation-type tools.

On the gross margin side, with presumably a higher percentage of your mix going towards the wholesale channel with retail partners continuing to grow, could you touch on what the factors are that will keep that gross margin flat in '06?

Well, our operations team is doing a great job of really identifying opportunities to continue to create a more efficient and effective environment internally. It's mainly that. There are some investments as well. But, it's the things that we have always worked with with regard to scale and leverage from that standpoint within our plant that basically help to get some improvement as well.

Overall though also, while we are getting a lot of growth on the wholesale side, it's still a relatively small number and doesn't have a dramatic impact on those numbers.

Great. And my last question -- it sounds like December was a strong month for you. Is it fair to say that those trends continued into the first quarter?

Really can't comment on the first quarter. But like you said, we did see good, strong trends throughout the quarter.

[Chuck Duwicky], Carlton Growth Fund.

Congratulations on the great quarter, gentlemen. My question just basically focus on the retail partnerships like a couple others. I think I have a good understanding of why you are pursuing those at this time. But I'm really wondering where the primary risks associated with that. And then really, maybe from your experience with Bed, Bath & Beyond what you have been able to do to mitigate some of those risks moving forward with some of the other companies?

You know, in terms of the risks, they are really pretty well controlled in that -- because this is really incremental business, it's not -- if it doesn't work, if we choose to exit a relationship or if a partner would choose to terminate a relationship, we fall back to our primary business, which is our stores and our Company-controlled businesses. We're not really building a significant amount of infrastructure that's dedicated to this. We don't have a lot of fixed costs there.

The Bed, Bath & Beyond relationship just for clarity was a store within a store. They were our employees. So, that's really a pretty different model. Probably the more relevant piece is that we have been working with retail partners for 3 plus years now, and we've learned quite a bit through our earlier relationships, which by the way are all still intact and growing and doing very well. So, we have learned though a lot about the sales training that's required, about some of the merchandising help that's required, some of the customer service follow-up that has been required and a little bit about product assortment and all the rest and all of those -- all of that learning has helped us establish the new relationships. And those are all off to great starts as well.

Then, has there been any concern about maybe a brand dilution-type thing? Because I mean you talked about in previous calls too that Select is not a commodity. It's a high-service need when you sell it. Has there been any concern or discussion about that?

I think one of the key differences again is that these are semi-exclusive relationships. So, we are in that market really just ourselves and very high-quality partners that we have selected and selected in large part basis their willingness to invest in the brand and maintain the quality standards that we work with them on.

(Operator Instructions). Pauline Reader, Thomas Weisel Partners.

In previous quarters, you've commented on store performance by maturity. I'm just wondering how that's been tracking in the fourth quarter or how it tracked and how it did relative to previous quarters.

Just to emphasize what we've talked about in the past, we really don't think we have any mature markets nor mature stores. What we're really doing is building awareness and building the brand. What I can say though is that our lead markets have been responding real well to a lot of the new creative efforts that we've been trying in some of these more retail activation tools that take advantage of the awareness in the market but then talk about where the stores are and highlight or emphasize the unique selling process and experience in those stores that those efforts that go beyond just the introductory advertising have performed well. And you know, when you look at comp store growth in the 15% pluses we've been delivering and 18% in the quarter, obviously, we have good results across the board.

Just a follow-up -- you have talked also before about freshening up the marketing campaign in those markets. So, if I'm reading this correctly, it sounds like the retail activation part is kind of what you're going with in those markets?

That's the first part of it, but we are working on just continuing to improve the -- I shouldn't say improve but expand the creative of the Sleep Number campaign and we're not done there by any means. We will have more in that category yet this year.

Greg McKinley, Dougherty & Company.

Just one quick follow-up, guys -- could you give us a quick comment on your comp outlook for next year with relatively stable product line anticipated? How is a migration, the product line mix, people maybe moving up into higher price product or how do you anticipate ASP contributing to growth at retail?

You know, I think we would expect to see something -- we would expect to see something similar to what we've seen this year, which is kind of a high single-digit yield comping a little bit of the ASP contributing in particular with the price increase that we took in the fourth quarter. But, that would generally be the mix I would expect.

Okay and that was a blended 5% increase when you take into account all your models across the lines?

That is correct. We protected the price points at the entry-level, and that's a blended rate over the full line.

(Operator Instructions). There are no further questions at this time. I would like to turn it back over to Mr. Bill McLaughlin.

Well, thank you all for joining us on today's call. I look forward to meeting those of you -- I and the senior management team look forward to meeting those of you that will be making the trip to Salt Lake City to join us at our plant for our 2006 Analyst Day event later this week. And for those of you that are unable to attend, I hope that you will take the time to listen to our Webcast of that event for further insights into our business. Thank you, Bill McLaughlin.

That does conclude the conference for today. Please disconnect all remaining lines at this time.