Sleep Number Corp (SNBR) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Select Comfort's fourth quarter and full year 2006 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Mark Kimball, Select Comfort - General Counsel.

Thank you. Good afternoon and welcome to the Select Comfort Corporation fourth quarter 2006 earnings conference call. Thank you all for joining us.

I am Mark Kimball, Senior Vice President and General Counsel; and with me on the call are Bill McLaughlin, our Chairman and Chief Executive Officer and Jim Raabe, our Senior Vice President and Chief Financial Officer. In a moment, I'll turn the call over to Bill, and following our prepared remarks, 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 web site. Please refer to the details set forth in our press release to access the replay on our web site.

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.

Thank you, Mark. Thank you for joining us to wrap up 2006 and to look ahead to 2007 and beyond. The key points that I want to convey this evening are the following four.

First, though the first quarter of 2006 presented some real challenges we met the mid-quarter outlook that we communicated on November 30th and delivered against our long-term targets. Our full year results were good, not great by our standards, and strong versus the soft industry backdrop. Second, as in the past we have set clear plans and goals for the new year based on in-depth assessment and learning; and we are now focused on executing priorities. Third, operating strength continues to get even stronger which helps fund near-term growth investments and is increasingly a source of long-term advantage. And, fourth, in the outlook for 2007 we are counting on those elements that are most proven and within our control.

We expect sales to gain momentum through the year and believe we can deliver 20% earnings growth in 2007 on revenue growth of 12 to 15%. We have a plan and a set of priorities that not only address near-term needs and opportunities but also are expected to develop sustainable advantages for years to come.

Despite a challenging close, we had a solid 2006. Revenue was up 17% versus a market growth of 7% in dollars reported by [ESPA] through November. Earnings growth on a like for like basis after stock option expense was +23% and +33% excluding the impaired asset charges.

The highlight of our year was continued advancements in operating productivity and expense control. This is important both for the long-term competitiveness and to help fund growth initiatives.

A second highlight was distribution expansion, both for the Company-owned stores and through Select leading retail partners in the U.S. and in Canada. We invested in sales and marketing advances in 2006 and gained important insight, particularly in advertising and store design. We will build upon the learning this year.

Our Advantage business model continues to enable us to self-fund growth and generate significant incremental free cash. In 2006, we returned almost $80 million to shareholders through the repurchase of 3.9 million shares representing 7% of our outstanding shares.

Our annual planning process sets priorities to both meet immediate opportunities and to build long-term advantage. There are four areas that we believe are critical to our performance this year and beyond. Quality and cost, marketing and selling, innovation of product and service, and organization capability.

I will start with quality and cost because it is the most developed and within our control. In 2006, our operations team leveraged our increasing scale on improved processes to increase gross margin 200 basis points. We also hired and developed new leadership capability in sourcing and in quality; and we launched a Six Sigma initiative to build upon the gains we've generated in the recent quarters.

In 2007 we expect to be able to absorb the cost of implementing the new Federal retardant standard nationally. In future years operating efficiencies are expected to fund continued product improvements and to offset inflation.

Our immediate opportunities are clearly within marketing and sales. In 2006, we committed significant resources to a refreshed marketing campaign. While we did not realize the lift in sales that we expected we did quickly assess the learning, determined that the Sleep Number position is strong and that we needed new insight and strategy and in nontraditional media.

Our new agency partner, McKinney Silver, was selected in November after a thorough and well-run search. We are pleased with the work to date and together we are focusing on message and format innovation to break through the media clutter, call people's attention to the importance of sleep, and then present our compelling and unique solution, with less emphasis on the emotion benefit that was the focus of last year's efforts.

The most important part of the process is still in front of us. We are on track to test this new work in early April. Once developed and proven, we expect this relaunched Sleep Number campaign to have long-term impact. Distribution expansion, and improvements in personalized selling complement the marketing direction.

Last year new stores performed well as did retail partners old and new, but we were not satisfied with the incremental market growth. Our focus is now on sales leadership, store design, and local marketing support around distribution expansion. A search is underway for a retail channel leader with demonstrated success in store operations, people development and retail merchandising. This is an important position and we will take the time necessary to find the right leader.

In 2006, we introduced a new concept store design to increase walk-in traffic and frequency of visit by emphasizing accessories. It has performed well in its initial phase. We will expand this design to a handful of additional stores in the second quarter.

In addition to continued aggressive Company-owned store expansion, we believe that retail partners can contribute incrementally to the development of brand, revenue, and profit as early pilots have since 2002. This year, we will slow expansion of the retail partner program to work with our partners on improved brand building. We are not -- if we are not satisfied with the long-term brand building potential in incremental growth, then we will pull back as we have recently elected to do in the New York market.

Innovative products and services have been a core element of our business model and success for nearly 20 years. We achieved our 2006 objectives by attracting talented professionals to lead roles in product development, sourcing and quality. Additional resources will be added this year as we continue to add depth to our team, and to develop our innovation pipeline and capacity.

Our new product innovations teams' early efforts have been channeled to quality and cost improvements that are embedded in our gross margin outlook. Priority has also been assigned to ensuring that we are in position to fully complement -- I'm sorry priority has also been assigned to ensuring that we are in position to fully -- to be fully compliant with the new Federal regulations on fire retardant product and manufacturing controls and traceability of components. Regulatory compliance on our more complex product will likely be another layer of competitive advantage.

The fourth area of focus is capability. People and tools to lead innovation, make good decisions, to work efficiently as we grow in size and complexity. We made significant progress in 2006 with senior leadership and operations marketing and international moving into their second years and gaining traction. We attracted a new CIO in May and we strengthened virtually every department in the Company through internal and external development.

Developing our leadership capabilities will continue to be a high priority in 2007. We also look forward by year end to moving into new leased office space, uniting work teams that today are spread across three buildings. The move will also give us the opportunity to give our innovation and call center teams the space and tools they need to flourish.

In 2007, our most aggressive capability building program is preparing to move to a fully integrated ERP system. In 2006, we evaluated how to best meet our long-term needs in consumer insights, fact-based decision making, operating efficiency and business expansion and the decision was made to pursue the full implementation of SAP. We recognized that the resulting write-offs in 2006 were painful to our shareholders and to our employees, whose incentive compensation was directly reduced by our decision to write off IT development work in progress.

Our commitment to SAP will focus on adapting best practices rather than customizing and payback could be realized as soon as 18 months. We understand the work involved and have assigned some of our best people to the implementation project. We have also hired experienced SAP leaders to complement our skills in several critical areas. This is also a high-profile project within the leadership of SAP; and we have the participation of their senior management in our monthly planning sessions for a launch currently targeted in early 2008.

We are still early in the planning phase and we have no time pressure and we will take all the steps necessary to ensure success from the start.

2007 is going to be a full and exciting year for Select Comfort. It is an aggressive yet achievable agenda; and since much of the development work was done in 2006, our focus is now on execution. We are fortunate to have an experienced and tested leadership team across all levels of the organization. We don't expect overnight changes but we do expect momentum to build as we advance these initiatives throughout the year.

As we progress, we will provide you with regular quarterly updates as we proceed towards our goal to deliver a sixth consecutive year at or above our long-term targets.

Now I would like to turn the call over to Jim for a recap of 2006 and more on our outlook for 2007.

Thanks, Bill. As Bill noted, our fourth quarter results were in line with the expectations we outlined on November 30th. For the year, net sales increased 17% on mattress unit growth of 10%. And earnings per share increased by 23% on a like for like basis, excluding stock option expense.

Despite some challenges of sales and ratings growth for the year were in line with our long-term targets. And we are optimistic in our outlook for an improving trend in 2007 and even more so for the long term.

I will begin with comments focused on the fourth quarter and will close with an overview of our outlook for 2007. Before discussing 2006 operating results, I would like to outline three factors impacting year-over-year comparability.

First factor is stock option expense. For comparison purposes we have made a pro forma adjustment to 2005 results, reducing reported results in 2005 by $0.07 per share in order to get a like for like earnings comparison. Based on this adjustment, earnings of $0.85 per share in 2006 increased by 23% compared to pro forma earnings of $0.69 in 2005.

The second factor affecting comparability is asset impairment charges. As announced, we will begin our implementation of SAP in 2007. In the third quarter of 2006, we wrote off $1.3 million pretax for software projects that were under development but were abandoned once we determined they would not be viable with SAP.

In the fourth quarter of 2006 we wrote off $4.1 million pretax related to an advanced point-of-sale system which was also under development. We initially planned to integrate this system into our SAP implementation but upon further review we determined that integrating SAP's point-of-sales solution would provide similar benefits at a lower cost and with reduced risk. And we elected to discontinue the existing development project.

We have not treated these write-offs in a pro forma manner in reporting earnings growth rates. We anticipate no further IT write-offs in 2007 or upon implementation of SAP.

Finally, for comparability purposes, you'll notice that the financial statements included with our release include the reclassification of certain expenses. These changes were made to provide greater alignment with how we evaluate our business performance internally. These reclassifications had no impact on net income and are not material to individual line items but are noted because conforming adjustments were also made to reported results for 2005.

Now, let's turn to fourth quarter results. For the quarter, net sales increased 6% on unit growth of 9%. Unit growth rates outpaced sales growth rates due to channel mix with growth in our wholesale business including incremental QVC and retail partner sales outpacing growth in our Company-owned channels.

While we are disappointed that we did not more effectively offset the macro factors that we believe are affecting our sales, we are pleased that we continue to gain share as our unit growth continues to outpace industry growth as reported by ESPA for October and November.

Our multichannel distribution channel strategy along with more aggressive distribution expansion in 2006 offset the pressure of our same-store sales. The 9% decline in same-store sales in the quarter was entirely offset by the performance of new Company-owned stores. Store count increased by 46 net new stores over the past 12 months with first-year sales averaging $1.3 million per store -- well above our new store target.

E-commerce sales increased 23% continuing a trend of year-over-year growth in excess of 20% that extends back more than 12 quarters. Wholesale increased 89% in the fourth quarter with the growth mix dominated by expansion of our retail partner program, where we added 469 doors on a year-over-year basis.

In the fourth quarter, average sales per store increased 5% to nearly $1.5 million per store. Average mattress sales in Company-controlled channels were up 2% to $1,689 per mattress unit with sales from non mattress sales increasing by 3%.

Earnings totaled $0.20 per diluted share, down $0.08 or 29% compared to same quarter a year ago. Operating margins declined by 5 percentage points to 8.1%. Stock option expands and asset impairment charges were certainly a part of the story representing three points of the total margin change.

In addition we continued our long-term investment in R&D, distribution expansion, and awareness building during this quarter of slower sales growth. As we've consistently stated in the past we manage our business for the long-term and we will continue to invest when sales slow temporarily. Media investment growth moderated slightly to a year-over-year increase of 5% in the quarter to $23.7 million.

Gross margin improved 70 basis points in the fourth quarter with Company-owned gross margin improving 100 basis points. This marked our sixth consecutive quarter of year-over-year increases in Company-owned gross margin reflecting on growing profit improvements in manufacturing and logistics. As we communicated in last quarter's earnings call the rate of growth in the gross margin slowed as we lapped the price increase from a year ago.

From a balance sheet perspective our cash and investments totaled $90 million at year-end 2006, compared to $123 million at the end of the third quarter. The reduction in cash and investment reflects a more aggressive level of share repurchases, which exceeded cash flows from operating activities in the fourth quarter.

We invested $30 million in the quarter to repurchase another 1.6 million shares of our common stock. For the year, we invested almost $80 million to repurchase 3.9 million shares of stock. We have continued to aggressively repurchase shares in the first quarter of 2007. Through yesterday we had invested $26 million to repurchase 1.4 million shares with $63 million remaining available under our Board-authorized stock repurchase program.

Turning to guidance, we have refined the language we use to characterize our long-term growth targets, eliminating a range. Our long-term growth targets are as follows. Net sales growth of 15% or higher; and earnings growth of 20% or higher. These charges reflect our growth expectations over the long term and will also be used as a reference point for communicating growth expectations over shorter time frames.

For 2007 we expect next net sales of between 900 million and 925 million and earnings of between $1.02 and $1.09 per diluted share, reflecting earnings growth of 20% or more compared to the $0.85 in diluted earnings per share reported for 2006.

Bill outlined the strategic programs designed to regain momentum in 2007. The following outlines financial measures considered in our guidance. First, sources of growth. Distribution expansion is expected to contribute more significantly to our growth in 2007, as we work to improve the effectiveness of our advertising, the key driver of same-store growth. Store cap growth is expected to be about 9% in 2007, representing approximately 40 net new Company-owned store.

As an additional consideration, much of our store expansion in 2006 was weighted to Q3 and Q4 where 2007 store additions will likely be more evenly distributed throughout the year.

Third-party distribution growth is expected to slow but we expect sales from existing retail partner doors to grow as their retail sales professionals continued to become accustomed to selling Sleep Number Beds -- much as they have in our more established retail partner relationships.

We expect a number of retail partner doors at the end of 2007 to be essentially the same as where we ended 2006 -- approximately 820 doors. This guidance incorporates our decision not to renew our New York-based partner relationships which represents a reduction of roughly 140 doors later this quarter, and is offset by expansion in existing partner relationships and the expected addition of a few new partners as we continue our strategy of doing business with leading bedding retailers in selected markets.

Finally, our sales guidance assumes a full year same-store growth of between 2% and 5%, building over the course of the year as the year-over-year comparison of economic indicators improve; and as our programming and growth initiatives take effect.

Operating margins are expected to improve slightly in 2007, individual cost categories as a percentage of sales will remain in line with 2006 with the following items of note.

First, gross margin will remain essentially flat compared to the fourth quarter of 2006 as our ongoing cost and quality initiatives are expected to offset additional FR compliance costs, beginning in the first half of 2007. Second, we plan to increase media spending by approximately 10% in the year which implies leverage from our new media campaign. Finally in the area of innovation, we will again increase our investment in R&D with spending expected to increase approximately 50%.

Capital expenditures are expected to increase by approximately -- to approximately $50 million in 2007, reflecting our continued expansion of the overall store base, along with the relocation and expansion of an estimated 30 existing store locations; and reflecting our plans to expand the new store design test with a handful of stores. In addition to store growth, which is roughly half the 2007 capital budget, our commitment to an SAP implementation and our planned relocation into a new headquarters facility around year end represent one-time projects that will increase capital outlays in the second half of the year.

We expect our SAP implementation to be completed in time for an early 2008 launch and we expect employees will begin occupying the new lease office facility before the end of 2007.

From a cash perspective, we expect 2007 to look much like 2006. Cash flows from operations are expected to fund our growth and we plan to continue to execute against our share repurchase program every quarter. In addition, we will continue to repurchase shares opportunistically utilizing excess cash reserves, much as we did in the back half of 2006.

In summary, we are pleased with our controls and progress in operation and confident in our plans and our people. We look forward to 2007 and expect positive momentum to continue to build a significant foundation for our future.

This completes my prepared remarks. Christopher, I would now like to open the call to questions.

(OPERATOR INSTRUCTIONS) Edward Yruma with J.P. Morgan.

I wanted to talk a little bit about your decision to slow your retail partner growth in '07. Was that to more a function to underperformance on behalf of the retail partners or is that a function of higher cannibalization in your stores than you had expected?

It's really a function more of our wanting to focus with our retail partners on their brand building support with us in that there is incremental growth in the market. So it was kind of a combination of really both of the questions you asked. But it is primarily that we are not seeing as much incremental growth in the market as we think there can be with us both developing the Sleep Number brand.

In terms of your discontinuation of the partnership in New York, what have you learned from that experience and do you plan to re-enter the New York market with a different sleep partner?

I think the learning in New York is exactly what I was just saying in that the key to success of the partnership for us is the mutual brand building effort. And we believe we have had a pretty good track record over time of working with partners who are oriented to building our brand.

So that's what we've learned is that that key part of our relationship is essential to the long-term success and that is what we need to work on. And right now our intent in New York is to move forward with our own stores.

My final question may be more of the housekeeping issue. The tax rate was a little bit low in the fourth quarter. Was that due to the asset write-offs or is that a more structural change? Thank you.

Tax, the tax reduction and rate is more structural. It has to do with where the -- most of our investments are in non-taxable securities so we are getting interest income that is non-taxable. That is the biggest piece of the reduction.

So from a modeling perspective that is more along the tax rate that we should be thinking of, going forward?

Yes. I think the tax rate for next year is more in line with this year although it may be a hair higher than what you saw in the fourth quarter. The year to date number is a good number to model to.

Thank you very much.

Jeff Stein with KeyBank Capital Market.

Question with regard to the New York operation. Given the fact that you are eliminating that partnership, I am kind of curious as to what kind of sales you generated from that region. And in turn, now that you are going to be recapturing those sales in your comp base, what effect do you expect that to have on your comp stores for this year?

And, also profitability. Kind of curious in terms of the trade-off of registering a unit sale in your store versus a unit sale in your partner's store. Would you expect to see a net pickup in profitability? Those would be my two questions.

I think the short answer is the sales we saw within this partner relationship were not significant. I wouldn't expect it to affect sales and/or profit going forward. (MULTIPLE SPEAKERS) what we saw last year.

Hypothetically though, when you register a sale in a partner door versus your own door what is the trade-off in profitability?

When we -- the operating margin or the contribution margin of the sale within our store is about the same as it is within a retail partner. Now that's on a percentage of sales basis; but because we are getting the retail margin as well as the manufacturer's margin in our own stores, the dollar per unit that we are getting is higher in our own stores.

Could you give us an average in terms of what that might be on a unit?

The sales within our own stores are on a per mattress unit basis. As we stated in the call it's about $1700. The sale price to a retail partner is a little bit less than or a little bit more than half that number. So you are working off of the selling price that's roughly twice in our retail stores versus what the wholesale selling price is and the contribution margin is about the same.

Thank you very much.

Rob Brown with Craig-Hallum.

A question on G&A. It seemed to be a sequential decline, unusually low number. How stable is that and really what drove that to go lower?

I think the -- I guess the first point just to make sure we are talking apples to apples is that we as I mentioned earlier, we did have some reclassification of expenses and most of the -- and so if you are looking at prior financial reports in G&A as a percentage of sales you are not looking at an apples to apples. So you need to look at the apples to apples on the financial statements that were filed with the release.

The nature of the expenses that we reclassified were some incentive compensation, and some consumer research, and the R&D costs which we are now breaking out separately. So if you look at it on a comparable basis, the G&A as a percentage of sales is about 1/2 point higher than it was a year ago in the quarter. And that's the impact of stock option expense is about that a little bit more. So on a comparable basis G&A is about approximately equal year-over-year.

I'm really looking in terms of dollars. If you add G&A and R&D together kind of running at about just under 17 million, I think earlier in the year, you were running closer to 19 or 20 million. I'm really asking is the 17 million per quarter -- kind of run rate is that? Is that more the right number to go forward?

On a dollar basis I would expect you are going to see a number that is a little bit higher than that -- well more in the line of the 19 million or more. Some of what you are seeing in Q4 is the fact that with the performance in the first quarter we did make adjustments to our incentive -- our incentive compensation expenses. So that moderated the total of expense in the fourth quarter a little bit. So I would look more at historical levels for what the xBASE expectation should be for G&A.

Thank you and a question on the comp. Did you see a recovery in the comp in the month of December? And also how have your comp trends in the store in the first quarter?

With respect to the same store growth in the fourth quarter our announcement at the end of November essentially communicated a number that was about 9%, which is where we ended up the quarter. So we were pretty much in line for December.

With regard to first quarter as we indicated on the call, our expectations are that the sales growth will be lower in the first half and it will be stronger in the back half. We don't comment on specific trends within the quarter.

Thank you.

Stephen Colbert with Canaccord Adams.

Thanks for taking the call. The guidance for next year looks like 12 to 15% revenue growth with +20% EPS growth. However you have gross margin relatively flat and increase in marketing. Where are you seeing the leverage and I guess how should we look at operating margins next year versus this year?

The operating margin should be a little bit better and -- but it will also improve because of the asset impairment. I think that is one of the differences is that we don't anticipate asset impairments for next year which will help the profitability. But I think that we expect that expenses as a percentage of sales will be relatively flat with a little bit improvement I think in the traditional areas a little bit and selling a little bit in G&A. And as we noted I think we expect to get some productivity out of media as well. Media and marketing.

So I don't think you are going to see big changes in those line items. But you should see a little bit of improvement in most of them.

And what kind of ending share count is implied in that guidance?

The share count that we have assumed is that we are assuming a modest repurchase level that will keep the share count approximately flat. That is what is assumed in our guidance.

And then can you provide an update on the Radisson program? I believe initially it was expected to be about a three-year rollout. Is it still expected to be the final year of the fill in?

Yes. We are on track through this year which is as you said the second year of the program; and I don't really recall how many bed sets that implies for next year, but by the end of next year we should have filled in the bulk of it.

Now what will happen is if they open new properties going forward then that would be sources of new opportunities for us. But again, remember, we don't really make any money on that program in terms of the sales. The real opportunity in that program is the sampling and the referrals that we get. And that continues to be on track.

Then, final question if you could just comment on mix in the quarter? Was it relatively stable with what you have seen in the past?

Yes. I would say we don't see much shift in the overall product mix. It was -- we did see a little bit of a little bit more activity on the more entry level but I wouldn't call it significant.

That's it for me. Thanks. Congratulations.

John Baugh with Stifel Nicolaus.

My question is on the new marketing work you are doing with your new agent. What kind of feedback have you gotten thus far? You made the comment that it is going to be less emotional. Just curious as to what you are learning and how that is shaping your campaign going forward?

What we really learned was that there's still such a low awareness or understanding of how our bed works and why it works that we need to emphasize that part of the communication before we can ever get to the emotional parts of the execution. So what we've learned is that we just need to A., get people's attention and understanding that sleep is important and the bed can make a difference; and then explain exactly how our bed works and how it makes that difference.

So is it the feedback that there's still a lot of people hearing about your bed for the first time? Or a lot of people have heard about your bed at this point but they don't really understand that the product feature and how it's different?

It is kind of a combination of the two. There are still a lot of people who have not heard of the product and there are -- there's another group of people who have heard about it, don't understand how it works and so they have kind of dismissed it.

And then there's a third element that have heard about it and are actually potentially interested and don't know where to go buy it. So getting the store location and featuring the store uniqueness is another part of the opportunity that we have.

And then as a follow-up, do you track traffic in your stores and conversion rates and could you comment on those, if you do?

We do not really track traffic in that we are still working to find a traffic counter system that works in a mall environment and, particularly, where our people tend to spend some time in the front of the stores talking to customers as they go by. So we have not found a good system that gets pure traffic.

We do track leads which are people who come in, get their Sleep Number and have expressed interest in the bed. And that we can measure and from that, we do track conversion as well.

So would that 9% down comp primarily be traffic or you just don't know?

Well, our leads actually have remained relatively strong which gives us some confidence and basically our lead base is growing.

Thank you.

Greg McKinley with Doherty & Co.

Guys, I know in the past you've talked about total sales dollars per mattress unit sold as opposed to just total mattress dollars per mattress unit sold. What was that number? Can you tell us what that number was in the December quarter?

Yes, Steve. That's a number that we, last quarter, revised the approach because we feel as if the mattress -- the dollar per mattress sales is more representative of what's going on within the core business of mattress sales. And it also aligns with the industry data a little bit more. What we do break out separately is kind of what is going on with the sales of the non mattress, which includes things like accessories and home delivery and those types of things.

That number was up about 3% year-over-year but we don't provide a specific dollar per unit on that.

Then, in terms of the sequential declining gross margins I know in December you began anniversarying your price increase. But was it -- I know mentioned maybe the starter level models were a little stronger and maybe with that 3% growth and the non mattress, does that come at a lower margin as well as just a mixture of an issue? And just to confirm did you say your Q4 gross margin rate is what we should expect for the full fiscal '07?

The answer to your last question is correct. That the full year number is a number that we would be looking at for next year. I think the productivity remained strong and so we do expect to get that same margin without any meaningful price changes and offsetting the cost of that bar. So I think we're zinc good work there. When you look at the sequential margin it is somewhat mix-related. It is also somewhat volume-related although to a lesser degree. Those are probably the main factors.

Then finally just last question I didn't pick up your comments on the '07 tax rate. Could you repeat those, please?

I was looking at '07 tax rate that looks like '06's. The full year (MULTIPLE SPEAKERS).

Full year. Thank you.

(OPERATOR INSTRUCTIONS). [Hal Getz] with [Alidar] Capital.

Could you tell us what the stock option expense will be in '07 and, two, could you please elaborate more on what your plans are given the rapid increase in R&D spending? Thank you.

Yes. The stock option expense number for '07 would be similar to what you are seeing in '06. So last year it was about $0.08. It is going to be in that $0.08 to $0.09 range so I wouldn't see a meaningful change in stock option expense per share for next year.

And in terms of the R&D investment it has gone, as I mentioned in my comments, it is gone primarily into a lot of the cost quality initiatives working with the operations team in their early stage. Second stage has been a lot of focus on preparing all of the fire retardancy compliant regulations. And then we are now filling up the pipeline of product improvement and product innovation initiatives, which we would expect to start seeing towards the end of this year and into 2008.

Jeff Stein.

Question with regard to price increases. I assume in this environment you are assuming relatively flat pricing for the full year? Would that be correct?

That's correct. We took a very minor adjustment in January. Just some sizing some prices of some sizes. But that is not going to have any significant impact and as Jim indicated, we believe that our cost and productivity initiatives will help us offset the cost. The incremental cost of the National Federal Fire Retardant program.

With respect to product innovations, with a 50% increase in R&D spending I am just kind of curious if there are any new major product launches that you might be prepared to talk about at this stage?

Yes, as I just indicated the initial work from our developing R&D group has been more on the quality and cost reengineering programs and on getting prepared for fire retardancy. Some of the other initiatives are a little bit longer lead time and, again, nothing that we can comment on at this time.

Final question. Are there any -- you alluded to, I think you alluded to a management change in your retail operation. And I'm wondering has there been a change or did I just misunderstand your comment?

No. There has not been a change. What has happened is as the multichannel strategy has developed and so we now have QVC and Radisson and Retail Partners in all of our stores. What we are needing to do is bring in more focused leadership of just the Retail Channel so that we can get the focus that we need on that most important channel. So that is what we are out looking for now.

And the search has been underway for some time and we are going to take the time that we need to find the right individual.

This would be somebody that would oversee all of your channels?

No. This would be somebody who will oversee our 450 stores and all of the operations that support them and the merchandising activities within just those Company-owned stores.

So in other words there has been a change or -- within your retail store management? Or somebody is no longer there that was there unless I'm misunderstanding it?

No. Because we have -- we have an individual who is running the operations of the stores. We have a different individual who is running some of the merchandising and promotions part of the stores. And this new individual would run both -- would consolidate those.

Got it. Okay. Thank you.

At this time there are no further questions in queue. I would like to turn the conference back over to you, gentlemen.

Thank you and thank you for your continued interest in Select Comfort. We remain confident in our consumer opportunity and our ability to realize that potential through our advantage business model. Plans for 2007 are aggressive and exciting. We are comfortable with our target 20% earnings growth with our revenue growth of between 12 and 15%. When programs are proven to accelerate revenue growth then we anticipate accelerating investments as we have demonstrated in the past.

Thank you for your interest and questions. Goodnight and sleep well.

Ladies and gentlemen, this does conclude the conference for today. We do thank you for your participation. You may now disconnect and enjoy the rest of your day.