Sleep Number Corp (SNBR) 2006 Q1 法說會逐字稿

Welcome to Select Comfort’s First Quarter 2006 Earnings Conference Call. [Operator Instructions]

Now I will 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 First Quarter 2006 Earnings Conference Call. Thank you all for joining us. I’m Mark Kimball, Senior Vice President and General Counsel and with me on the call are Bill McLaughlin, our Chairman and CEO, Jim Raabe, our Senior Vice President and Chief Financial Officer, and Doug Collier, our Senior Vice President and Chief Marketing Officer.

In a moment, I’ll turn the call over to Bill, and following remarks from the senior management team we will 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 restraining 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 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.

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

Good afternoon. As this is our first conference call for fiscal year 2006 I want to wish all of our investors a happy new year. I also want to welcome the many new investors who have discovered us in the past few months. We appreciate your investment considerations and invite you to call us with any questions that you might have regarding the company.

We are pleased to report a strong start to the new year. Our results speak for themselves with or without the effects of expensing stock options. To begin, I would like to highlight a few of this quarter’s accomplishments.

Unit volume increased nearly 11% compared to last year. Same store sales growth totaled 18%. Operating margin improved seven-tenths of a percentage point (0.7%) as reported and 1.4 percentage points on a like-for-like basis after adjusting for stock option expenses this quarter.

And we continued strong incremental cash flow of more than $9 million from operating activity.

All clearly indicate sustainable high performance. And to capitalize on this expected growth we invested $18.4 million in the first quarter to repurchase an additional 515,000 shares of our stock.

At our Analyst Day in February we highlighted the strategies that we’ve been working against and improving upon the past six years. We explained how these strategies would continue to develop and drive growth in 2006 and beyond, particularly toward our year 2007 goals of achieving revenue of $1 billion and operating profit margin of 12%.

We remain on track to meet these milestones and we continue to invest in new growth initiatives that we believe position us to exceed these goals over time. As strong as our first quarter financial results were, in my opinion the most significant accomplishments in the first quarter were behind the scenes in preparation for the balance of the year and beyond.

We continue to invest in building a team and culture to manage the growth and scale of our long-term business potential. In addition to our ongoing efforts to promote from within, we are integrating new talent into every area of our organization.

In 2005, at the senior team level, we focused on operations, marketing and new business. In 2006 we started to actively search for leadership in several other key areas such as information systems and R&D.

Another critical part of management is recognizing the accomplishment of our many frontline people that are integral to our growth, and to provide continuing education and development across all levels of our organization.

Earlier this month we hosted a sales conference for over 500 of our sales leaders from across the country. The energy and enthusiasm that is generated from bringing these people together is beneficial in many ways. Through the marketing and sales initiatives we have in store in the coming months this gathering was a great way for us to share our plans and prepare our entire sales organization for the new bed models, new advertisements, and new promotions that will be seen over the coming months and weeks.

Raising consumer awareness of our unique product and the advantages of personalized comfort and better sleep that the Sleep Number bed offers has long been a key driver to our growth, particularly through our continued high level of same-store growth. Our marketing organization has prepared new advertising and branding campaigns that we plan to air this quarter after some final production work and testing is completed.

We also will be rolling out product enhancements with no change in price points compared with our existing models. Both the new advertising campaign and the latest product enhancements are expected to contribute to sustaining our track record of growth.

Distribution expansion remains another key component in our ability to sustain growth on a long-term basis.

In the first quarter we added six new stores and for the first time topped 400, ending the quarter at 402 Company-owned stores. In addition, we added 119 new partner doors. So we are already well underway towards meeting our stated goal of doubling our select retail partner program in 2006.

And work continued in the first quarter responding to interests from our leading retailers-- other leading retailers interested in offering their consumers our unique products.

On the margin front, our operations team continues to do an outstanding job as reflected in the gross margin improvement of more than 1 percentage point as measured on both a blended rate and on a Company-owned basis.

In addition to leveraging the growing scale of our business, our operations team worked closely with our R&D staff to reduce complexity in our products and to gain additional manufacturing efficiencies with our suppliers.

We continue to open new avenues of growth. Our expansion into Canada with Sleep Country Canada last December continues on or ahead of schedule and we’re realizing a strong mix of sales. And we are working to ensure that their sales professionals are fully prepared to support our brand as we continue to expand our relationship through all of their nearly 120 store locations.

The final strategy that advanced in the first quarter, and that is expected to sustain performance going forward, was focus on inventories and working capital to ensure Select Comfort’s continued free cash generation while self-funding growth and opportunistically repurchasing shares.

So in conclusion, we are facing-- so in conclusion, while we are facing rising costs, like all manufacturers and retailers, and our customers are again being pressured from rising fuel prices and higher interest rates, we look forward to the future anticipating the positive impact that we expect to realize from our new growth initiatives.

I’d like to give Doug Collier, our Senior Vice President of Marketing, the chance to provide his perspective on our developing consumer franchise. And Jim Raabe, our Chief Financial Officer, will then review the final financial details for the quarter. Doug.

Thanks Bill. In a departure from past practice, I’ve joined Bill, Jim and Mark here today to discuss a few of our marketing initiatives and how we’re enhancing and advancing our marketing model.

As Bill indicated we continue to make progress with our other priorities, such as distribution and operations, and while we could speak to our progress in any of these areas we decided to focus on marketing during today’s call.

The results of our marketing model and the Sleep Number campaign over the past five years have been impressive with unaided awareness going from next to nothing to 14% as of our most recent brand tracking study in January. So we’re certainly proud of that rapid growth in awareness. We’re mindful and motivated by the fact that we’re still not top of mind for 86% of the population. This gives us confidence that our spending will continue to generate planned growth for a long time.

Late last year we looked at what we needed to do to not only continue to increase the awareness and growth of the brand but to accelerate it. We undertook significant research which included a strong focus on understanding why, in those cases when consumers were aware of our brand and product, did they choose not to buy.

One key finding was that our advertising was effective at creating awareness of the Sleep Number concept and of dual adjustability of the feature but it didn’t always leave consumers look at clear understanding of the benefit. When we dug deeper with our owners they told us that dual adjustability, reduction of pressure points, less toss and turning and less back pain all boiled down to one fundamental benefit -- they got more deep sleep on the Sleep Number bed.

We also found that our current campaign was effective with early adopters but wasn’t motivating the mass of the market as much as we’d like. It was connecting logically but not necessarily as emotionally as we believe we need to in order to build a broad-based world-class brand.

We, therefore, set out to develop a campaign which built on the strengths of the original Sleep Number work that would continue to effectively communicate personal comfort and individual adjustability, but also would step far beyond to create a clear understanding of the deep sleep benefits of the Sleep Number bed and connect with consumers emotionally and logically.

The new campaign utilizes the connection between deep sleep and dreams to visually communicate the core benefit of our bed compellingly and memorably. The message is supported and substantiated with facts about sleep and the demonstrated benefits of our unique bed. The ads demonstrate the benefits of the Sleep Number bed in a very dramatic and captivating way, quite unlike any mattress ads you’ve seen before. It consists of new TV spots, radio, magazine ads and billboards, all of which will be tested in selected markets during the second quarter and then rolled out more broadly in the second half of the year.

The imagery and messaging of the campaign will be integrated after further testing throughout our marketing neck, including a totally redesigned SelectComfort.com Website which will go live in early May. This next generation of our Website will feature much stronger branding elements, simpler navigation, improved product benefit communication and better visibility of our retail store location. It’ll also strongly communicate the distinct advantages of the Select Comfort store screen in a very immersive way including pressure mapping and other elements.

Another areas of focus is our promotional activity. We intend to create bigger retail promotional events which have more impact and are more integrated across the marketing mix, including PR, advertising, in-store and e-marketing. The first of these we’ll launch in May and it’s called our Dream Stakes promotion. It features a national sweepstakes as well as opportunities in every single store for someone to win their daydream. We intend to run these more comprehensive promotional events on a quarterly basis to increase awareness and excitement for the brand and to drive traffic to our stores.

Finally, as Bill mentioned, an updated product line will also be rolled out in the second quarter featuring new looks, feels and features across the product range. Our primary objective was to freshen the line, to provide a more contemporary look and feel including the integration of popular materials, such as mint, in a more significant way.

We also made improvements to the step-up logic of the overall line with feature changes in select models. These new beds will be in our stores over the next couple of months.

In addition, as we’ve mentioned before, we’ve significantly increased our R&D spending commitment in 2006 in order to create a more constant pool of innovative new products beginning as early as 2007. We’re in the process of hiring key personnel to bolster our existing team and to drive our R&D efforts. We’re making great progress on that front and toward our goal of accelerating our face of innovation.

In summary, we’re taking significant steps forward in advancing our marketing model beginning with brand awareness and extending through to new product innovation. We’re not resting on our success. We’re testing our way through substantial marketing advances, which we believe will help us continue to meet our long-term growth target.

Thanks for your time. Now we’ll Jim Raabe, our Chief Financial Officer.

Thanks Doug. As Bill indicated earlier this was another strong quarter for Select Comfort. Sales growth was 23%, which was ahead of our long-term target of between 15% and 20%. This was the first time in our history when quarterly net sales exceeded $200 million, which is a great way for us to start the new year.

And earnings per share growth, on an apples to apples basis, increased 55%. As a result of the continued strength in our performance, the Company has raised 2006 earnings guidance to between $1.35 and $1.42 per diluted share. This compares to the prior EPS guidance of between $1.30 and $1.37 per diluted share.

I will return to the Company’s outlook after providing some additional comment on first quarter results.

Sales this quarter benefited from a balance of strong unit volume, up almost 11%, and average higher selling prices. Our average high-- our average selling price in Company-owned channels increased to $2,176, up from $1,932 in the first quarter last year.

The AFP increase of 13% includes improvement in product mix and approximately 8% from both our December price increase across our bed line and our home delivery price increase from last July.

Two highlights of the quarter in my opinion, [technical difficulty] 15% now more than $2 million per year. The positive economics of our store model and new branding campaign support our confidence that these performance measures can continue to improve.

We also added eight new stores and closed two stores during the quarter to finish up 402 Company-owned stores.

Rounding out Company-owned channels, e-commerce sales increased by 39% while direct channel sales increased 12%.

From a retail partner perspective we added 119 doors in the quarter, finishing March at 427 retail partner store locations. That is an increase of more than 300 doors compared to last year and reflects significant progress for our goal of expanding our retail partner program to leading mattress retailers in most major metropolitan areas.

Retail partnerships represent about 3% of total revenue and combined with other wholesale channels, such as QVC and Hospitality, represent approximately 7% of sales.

Once our retail partner goal of between 1,000 and 2,000 doors is fully developed we anticipate revenues in our wholesale channels will be about 15% and may be as high as 20% of our total revenue mix. This is a multi-year goal and we fully appreciate that it takes time for our partners to get comfortable selling adjustable firming.

The second highlight is the operating margin improvement led by gross margin expansion. Operating margins improved to 8.6% this quarter, up from 7.9% in the first quarter last year.

Excluding stock option expense, operating margins expanded by an additional seven-tenths of a percentage point (0.7%). This improvement keeps us on track to achieve our 2007 operating margin goals.

Gross margins this quarter were strong at 60.7% on a blended basis and 62.3% for our Company-owned channels. These margin percentages represent increases of more than 100-basis points against a year ago period reflecting a favorable combination of price, volume and mix.

Our ability to leverage scale, including the benefits of dual sourcing, helped to mitigate the effects of higher manufacturing and commodity costs. We expect gross margins will remain at this level in the second quarter but could improve slightly in the second half of the year.

We had planned for some volatility in energy prices in 2006, although the degree of volatility could affect our expected product margin.

Sales and marketing expenses increased $15.5 million. On a percent of sales basis we continue to leverage sales and marketing expenses at 43% of sales this quarter, down from 43.4% in the year ago period.

Our media investment increased by 22% to $31.6 million. Consistent with past practice we increased our media investment over what was originally planned as operating performance exceeded expectations. In the second quarter we expect media investment to increase by nearly 20% compared to year ago.

General and administrative expenses as a percentage of sales increased in the quarter to 9.1%, up from 7.8% in the first quarter last year. Higher G&A as a percentage of sales reflects the added burden of stock option expense, which amounted to $1.5 million, and higher levels of incentive compensation based on the strong operating results.

We do not expect to leverage G&A expenses in 2006 in light of the new stock option accounting rules. We do, however, expect to leverage G&A over the long term.

From a balance sheet perspective, cash and investments decreased by $7.6 million compared to year-end 2005 and we ended the quarter at $104.5 million.

We bought back an additional 515,000 shares this quarter, at an average cost of approximately $35.75 per share, for a total of $18.4 million.

Cash flows from operating activity of $9.1 million were below year ago levels primarily due to two timing factors. First, higher levels of 2006 estimated income tax payments in the first quarter and the payment of the Company’s company-wide incentive compensation for 2005.

Our cash position and balance sheet overall remain strong with no debt and over $100 million in cash and investments.

We’re extremely pleased with our progress in the first quarter. We continue to invest in support of our long-term growth capabilities. We are on track to increase our store count by between 40 and 45 stores, including approximately 12 new stores in the second quarter and are on track to double our retail partner door count in 2006.

The increase in full-year earnings guidance to between $1.35 and $1.42 per diluted share is a $0.05 increase over our prior guidance. Excluding the impact of $0.11 of stock options expense that we have incorporated into our EPS estimates, earnings growth in 2006 is expected to be between 28% and 34%. We are confident that 2006 will be another year where results exceed our long-term target and the increased guidance reflects our positive outlook for the year.

For those of you new to our story, a reminder that the second quarter is the seasonal low point of our year with lower consumer sales and reduced benefits of our leverage potential. In addition, the 2006 second quarter is particularly active as we continue to invest in our growth.

As Doug indicated, we will roll out new media creatives, a new Website and new product lines -- all which have startup costs.

In addition, for the first time in over five years we’ve sponsored a Company-wide conference for our sales team in April at an expense of approximately $1.5 million that will be recognized in the second quarter. The timing of the conference was especially attractive considering the broad slate of sales and marketing initiatives that will begin to become more evident in the marketplace over the next several weeks.

Over the past five years we have consistently sustained sales growth significantly above industry trends and leveraged the growth to increase margins and cash generation. We are excited to see the new programming in action and are confident that the investment will provide long term benefits as we continue to progress toward achieving our 2006 and long term target.

Now I’d like to open the call to questions. Jackie.

[Operator Instructions] Mark Rupe with Ryan Beck and Company.

Hey guys, heck of a quarter. Bill, on the gross margin outlook being flat I think you said in Q2 and then improving through the rest of the year, in the last few years obviously the second quarter’s a weaker quarter but the wholesale mixes didn’t-- not double but close to double than it was in the first quarter. Is that expected in the second quarter as well this year? Is QVC going to have a big promotion?

Mark, I would expect that we will have somewhat higher sales in the wholesale channel, maybe not as significantly as what we have seen in the past. But what we will get from pressure from the wholesale we feel as if we will offset with the margin improvements that we’re putting into place.

Okay, and then as far as the retail partnerships, I know-- I see you started testing Sleepy’s and Mattress Firm in the fall of last year, so you’ve been in there about seven months or so. Any anecdotal comments on how the local stores have been doing for you?

Well our retail partnership program in total continues to do well both with our partners and the-- with our stores, including in the New York and southeast markets. Basically what continues to be proven is that the combination of our partners and our activities increases awareness of our brand and its benefits and it kind of rises the tide for everyone.

Okay. And then lastly, on the new upgraded beds that are going to be coming out this year, any incremental boost to units expected or anything or is it just more of a kind of--?

Yes, I think that the answer to that is that those new products were anticipated as we put our plans together, and to sustain the high levels of growth that we’ve been experiencing, we need to keep fueling it with innovative products and new advertising and the rest. So I think this is all built into the outlooks that we’ve been providing.

Perfect. Thanks and congrats again.

Joel Havard with BB&T Capital Markets.

Thank you. Let me add my congratulations folks. Let’s see, Bill, I guess the first one for you. Expanding on the retail partner discussion, can you maybe give us an example of where these guys become mature in their level of performance and how you might characterize that?

Let me try to answer it a little more broadly and then I will get to the specifics. You know, we have said from the beginning that we don’t believe we have a mature market or a mature store of any kind in that this is a new technology and we just continue to build awareness that it exists. And the more owners that have the beds the more referrals they generate. So we’ve not really seen any maturity of any kind.

Specific to the retail partners, we have only been working in this program for about three years now. And what we continue to see there, Joel, is that the-- our share of their business kind of ramps up and, I’m just trying to think, I don’t think we’ve seen it plateau or anything in any of the stores. Though in a retail partner we do expect that there will be a limit to the mix of business that we will get within a partner over time.

At 5%, 20%, anything you can--?

Hard to tell but I think it’d be closer to the 20% than to the 5%.

Right, just thinking in terms of specialty penetration in general.

Although I don’t think that’s the limitor in this case because we don’t believe that we’re limited to any kind of specialty bedding or anything. We believe that given our price points and the value and the benefits that we can continue to demand an increasing share of the market.

Fair enough. The other angle, and you touched on this in your comment, has the pace of performance of stores that have been opened a year or greater still accelerating in that case? Is that how I should interpret that?

Joel, you’re asking about our own stores?

No, I’m sorry, within the retail partners again.

The retail partners for the most part we see a steady progression over time and it is an ongoing growth as the sales professionals get more familiar with the product.

Good, thank you. Jim, your comments on the G&A expense with respect to the sales conference and things like that, what other issues keep you from showing leverage with the sales strength that I think the consensus anticipates here?

I’m not sure I understand your question.

I’m sorry, your comments were that you didn’t see leverage on the G&A line this year.

For Q1 yes.

I’m sorry, was that just Q1?

It was Q1 we were talking about. And I don’t see long term but that’s contemplating stock option expense throughout the year and that’s a fairly significant expense for us that’s obviously new.

Okay, so there’s that [dymer] that we had talked about originally. So there-- besides the sales conference there wasn’t another series or separate points of data along the way that are addition?

That is correct. I mean the sales conference is a second quarter event. That’s not a first quarter event. But the other factor that’s affecting the first quarter is our incentive compensation program and our incentive compensation is off of net operating profit goals and when we exceed those goals we fund those-- that incentive compensation as we go and that-- when we have good quarters it does deleverage G&A to a certain extent.

Got it. Thank you guys, good luck.

Joel, just one point of clarification. Over time we have demonstrated leverage on that G&A line and do expect to continue generating leverage but not this year because of the issues that Jim outlined with the option expense increment.

Got it, thanks again.

[Mike Dobnick from Piper Jaffray].

Another great quarter guys, congratulations. Just to clarify the unit volume growth of 11% that Bill mentioned at the beginning, is that Company-owned channels or total unit growth?

That is total unit growth.

Okay, great. And then I’m wondering if you could provide any color on the Radisson sales this quarter, if those met your expectations and if you see a similar pace going forward?

You know, the Radisson expansion continues to progress. The hotel metrics continue to be positive. One highlight that we just had a couple of weeks ago was at the Radisson convention of their franchisees, we were awarded the supplier of the year so everything was really quite positive and the comments that we’re getting from the properties with our beds has been outstanding. And our referrals continue positive coming into our store from that program.

And the other exciting part about Radisson is that in May they too will be launching some new Sleep Number advertising and so that program continues to progress quite well.

Perfect, great. And finally, I know you said there is no price increase with the upgraded models, but if cost pressures continue to increase do you think you do have the flexibility to increase prices on either the bed models or maybe the home delivery charge?

First and foremost I think you were correct, I don’t-- we wouldn’t anticipate seeing price increases in-- certainly in the near term. I do believe we have flexibility, we have-- with the price increases that we have taken we’ve continued with good strong unit growth so I think the flexibility is there. However, our-- one of our objectives, obviously, is to make this a very affordable bed for all consumers and so we’re certainly want to make sure that our pricing structure is such that it’s attractive to all types of consumers.

The one thing I’d add is that we continue-- you know, one of our great advantages is that we have a full supply chain, everything from the design of the bed to the manufacturing to the delivery, selling, marketing and the rest. And so we just keep exercising productivity across all of those touch points that gives us a little bit more flexibility to offset some of the costs.

Okay, thanks.

Steve Denault with Northland Securities.

Good afternoon everybody. Considering the 18% comp in the quarter and I think what appears to be a 12-1/2% price mix ASP change in the Company-owned channel, is it safe to assume that the unit volume was up about 5-1/2%.

What I mentioned Steve was that the unit comp in our stores was at 7%.

Okay, 7%. If I think about the retail partner channel, it-- you’ve got a number of retailers that are in sort of a test phase, what would be their typical progression? Would it be to go from test to rolling it out chain-wide or phasing it in on a regional basis?

It kind of depends on both the retail partner and our state of readiness. The way we have been expanding both the Sleepy’s and the Mattress Firm has been on a more regional rollout basis and a lot of it has to do with our readiness on an infrastructure of sales trainers.

Okay, so what would you guys have capacity for from an infrastructure standpoint throughout the balance of ’06? And I guess what I’m getting at is what should we assume for the number of retail partners that you’d close the year out at?

What we have indicated is that we expect to double the door count by the end of the year and we started right about 300, so in that 600 to 650 range.

Okay, thank you.

Bob Evans with Craig-Hallum Capital.

Good afternoon and great quarter -- congratulations. Can you comment a little bit more on the unit volume growth? Can you give us a little bit more color in terms of where the growth is coming from from a product line standpoint, what segments are moving most and just what’s really working now?

I think all I would say, Bob, is that I would say that our mix is fairly consistent. It has improved a little bit which is reflected in some of the average selling price growth but for the most part the product mix sales has been pretty consistent.

Okay, so no particular segment is seeing much more significant growth than another?

That is correct. We have seen continued increase in growth in our accessory sales and that’s following a trend that we’ve seen over the last couple of years. But we’ve got a lot of activities to improve that area and we’re seeing some benefits from that.

And on the gross margin trend, again, if I heard you correctly, second quarter is consistent with the first and then growing second half. I mean, what is your thought in terms of gross margin trends beyond the [inaudible], do you think you can continue to show this type of improvement and kind of what drives that? Do you expect further pricing power or I mean I know some of it’s efficiency but if you could give a little bit more color in terms of how you view those marketing trends going forward?

I would say for the most part what our intention and our expectation is is that gross margins will remain in the same area, that there won’t be a lot of change longer term. As we’ve said we’re– we continue to work on productivity in our manufacturing and we’re getting that but we’re also sensitive to the price side and as we also indicated on the-- earlier in the comments the retail partner in that whole aspect, the wholesale business, will increasingly become a larger part of our business and that has a gross margin pressure pushing back the other direction.

Okay, but longer term this area is an area that you believe you can maintain?

Yes.

Okay. All right, thank you.

Greg McKinley with Dougherty & Company.

Thank you. I was wondering if you could give us a little color on sales performance in a couple of your other channels because we saw, I think, gross margins grew even more strongly on a consolidated basis than they did within the retail channel. So I think that means retail’s probably representing a little larger share of sales. Can you comment direct channel grew but it looked at a pretty modest pace. Any comments on the performance there?

I think the comments that I would make within the Company-owned channels is direct, as you have indicated, is-- at 12% is a moderate growth rate and that’s consistent with what our expectations would be longer term. Our direct model is used as much as anything as a marketing vehicle for the advertising and our direct marketing call centers will sell but they will also refer to our stores. So it is an overall integrated approach to marketing.

Our e-commerce has seen a very, very strong growth rate in the 39% in the first quarter consistent with what we’ve been seeing over the last couple of years. And I think we’re very encouraged about what the opportunity is in that e-commerce channel.

And with the Website redesign we just continue to invest in that area to help sustain that growth.

The one point that I will make is is that Radisson last year was our first full year of operation and we are not anticipating unit or sales growth in Radisson and that is partially why you see some of the growth rate mix changes that we’re referring to-- or that you’re referring to.

Okay. And then in that wholesale channel I know that 20% growth rate is a nice strong growth number, can you give a little color here? Obviously 427 stores I think you had roughly 105 at the quarter ended last year. Is there a maturation phase where these retail partners who’ve made their curve selling innerspring product may need some time to get warmed up on selling a product with functionality? And what have you seen there in terms of their ability to understand your product and communicate your brand and the functionality with the end customer?

I think you said it pretty well. They come-- they have a startup phase were we’re in the low single digit share of their business and then it goes through a-- over a two or three year process it can climb as high as, you know, high teens, low 20% share from what we’ve seen today.

The one clarifying point that I would make Greg is that there was a 20% growth in the wholesale channel but here again included in wholesale is Radisson and QVC. They are more than half of the wholesale growth or of the wholesale sales in total and those are two channels within wholesale that we would expect to be essentially flat, to have very slow growth rate. So that’s why the 20% maybe looked a little bit lower than maybe you would have thought.

Okay, thank you. And then just one final thing, can you just remind us what are some of the attributes of these product upgrades. I know you said some feature and functionality changes. What else is going to be different about the 3000, 4000 and 5000 models when you relaunch?

It is primarily cosmetic changes but with some of- some improved fabrics that help that personalized comfort and contouring work better we believe. And there’s some rationalization of some of our pricing structure. But the-- as Doug said there’s really not a significant technological advance in any of the new products.

Thanks.

Chris Krueger with Miller Johnson Steichen Kinnard.

Good afternoon guys, nice quarter. I noticed during the quarter you had Sunday paper inserts, at least in the Twin Cities market. I think on the last call you indicated that was going to be a new initiative this year. Just wondering if you have any feedback on that so far?

Well, just a quick background as a way of reminder on that. One of the things we’ve learned is that even though, as Doug said, our awareness of Select Comfort and Sleep Number is increasing, within those who are aware many people did not know that we had stores or where the store locations were.

So, one of Doug’s strategies has been to test new tools that allow us to do-- both continue the awareness building of our brand but also highlight store locations and create urgency to go to those locations. And the Sunday inserts is one of those tools and it continues to do very well and is part of our plans going forward.

Okay. On the competitive front, any new adjustable mattress players emerging in recent months that you can comment on or [inaudible – background noise]?

Well, the most recent entry was the Simmons product middle of last year and they have started to get some distribution and-- but we have not seen any significant impact from any of that. You know, our strategy of selecting semi-exclusive distribution will leave some pockets of distribution open to competitors, that’s just part of our strategy. We think that it is still the right thing to do to be selective and more semi-exclusive in markets. But we have still, to this date, not seen any competitors of equal quality at an equal price point and then we have quite a few other advantages from branding to quality to service to our own controlled distribution to back that up.

Very good. That’s all I got, thanks.

[Steve Colberg with Canacord Adams].

Hey guys, thanks for taking my call.

Thank you.

Just to clarify, looking at the upgrade of the 3000, 4000 and 5000, so you’re going to maintain existing margins with constant price points?

We’re going to maintain our existing price points yes.

And the same margins as well?

Yes, as we’ve said we would expect margins in Q2 to be in line with what we’ve seen in Q1.

Okay. But as far as the specific bed lines itself is that something you can comment on?

I don’t think we see-- we do not expect to see any margin shifts within our product line.

Okay, great, thanks. And then in regards to the new corporate branding campaign, I know you spoke at length about it but just sort of stepping back and looking at it it seems like things are going really well for you right now. Why the shift to something that seems sort of significantly new?

Well I think that’s one of the strengths of our company is that though we have, just as you said, proven and well functioning strategies we are constantly looking to improve them. We have learned and gotten better over the years of testing our way through any significant change which we will do in this case as well.

But, as Doug said, our current campaign is a terrific hard working campaign for an introductory campaign but we believe that we can go even further towards developing awareness and penetration with some slight modifications to it.

What we are-- you know, just to be clear, we are-- this is still a Sleep Number campaign and we’re just building on the strengths that we’ve established.

Okay, that’s it for me. Thanks guys.

[Operator instructions] Pauline Reader with Thomas Weisel Partners.

Hi, just a question on the new product upgrades. I think you mention that you’d had a conference call with your sales people and that was one of the items you talked about. And I’m just wondering how you kind of balance keeping your sales people up to date and informed as to what’s going on versus not telling them too early so they tell the customer in advance, you know, perhaps delaying a sale or maybe even losing it.

Yes, well first of all it was a physical conference where we had everybody together in one place, which was quite an impressive array of enthusiasm and talent, you’ve got over-- it was closer to 550 of our sales reps from across the country.

You know, Pauline, I think if the changes in the product were that dramatic then I think your question would be a good one. At this point, because our changes are really more just cosmetic in nature, there are some improvements but they’re not marginal-- they’re not significant enough that I think would cause a salesperson to delay a sale parti-- even in the best interest of the consumer here.

Okay. And then just I think Doug mentioned new products perhaps in ’07. Does that mean new products that aren’t mattresses or if you can speak to that.

Yes, no Pauline, we’re still very focused on doing what we do well which is make a great bed, continue to work on accessories, adjustable foundations, sofas, all the rest of those kind of things. But no our focus still stays very narrow.

Okay, thanks.

[Anand Metha with Key Bank].

Good afternoon. Could you talk about the marketing. Are there going to be any changes in terms of mix. I mean I know you mentioned more promotions but can you run through kind of TV versus radio versus online?

Yes, you’re pretty faint but what I understood was the question to deal with changes in marketing mix. Just to be clear, though Doug referenced that we are doing different promotions and more tactful promotions, our expectation is not to change our mix of spending on promotions or really anything significant through our current model.

So we may be-- we will be upgrading some of the content but the general spending mix should not change significantly.

Okay. And then on the product refreshers are there any plan-- what are the plans for the high-end models or were you going to talk about that yet?

The plans are that we will continue in the same vein, though more just minor improvements to the line up through the line over the balance of the quarter.

Thanks.

Thank you. I am showing no other questions at this time. I will turn it back for any closing remarks.

Thank you. I did want to just wrap up by saying that Select Comfort’s first quarter was strong and we’re now into our fifth year of sustained growth at a high level through a variety of market conditions and challenges. And we believe that this should increase confidence in our long term potential.

We focus on what we can control and influence and the most important element of this is leadership. We successfully managed the transitions of several senior leaders in 2005, with both operations and marketing making significant contributions to our strong first quarter and business development well on track as well.

This is a testament to the strength and depth of our teams and a credit to the fits and expertise of our new hires.

We continue to invest in the long term with focus on our core business. We have a proven model and we are both aggressive and disciplined as we improve our strategies. We believe that our proactive advances position us to make the most of what may be increasingly difficult consumer and economic environment.

Our sights continue to be set on customer satisfaction, on building a great company and on achieving our milestones of $1 billion and 12% margin in 2007.

For those of you that will be joining us for our annual meeting on May 9th, I look forward to seeing you then. And thank you for your interest and attention today.

Thank you for participating in today’s teleconference call. You may now disconnect.