Sleep Number Corp (SNBR) 2007 Q4 法說會逐字稿

Good afternoon. Welcome to Select Comfort first quarter, and year end 2007 earnings conference call.

All lines will be in a listen-only mode. If you have any objections you can disconnect at this time. I'll will now turn the meeting over to Mr. Mark Kimball., Senior Vice President and General Counsel. Sir, you may begin.

Thank you, operator. Good afternoon and welcome to the Select Comfort Corporation fourth quarter and year end 2007 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 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. Following our prepared remarks we will open the call to your questions.

Please be advised 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. Primary purpose of this call is to discuss the results of the fiscal period just ended; however, our commentary 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.

Thanks, Mark, and thank you everyone for joining us on our call. As you read in today's release, Select Comfort reported a 4% decline in sales for the quarter. Like other retailers across the country, we experienced an unexpected and dramatic fall-off in consumer buying activity following the Thanksgiving holiday. Because our retail stores are concentrated in shopping malls, declining mall traffic had an obvious negative impact on our business, especially in December. To add perspective to December's decline, our sales were improving early in the quarter, reaching nearly flat comps leading up to the Thanksgiving holiday, yet we ended the quarter with a 13% decline in same-store sales. Not only were bed units down but average selling price also declined in the quarter due to contributions from lower margins sales channels and a shift toward lower-priced models. The bright spot in the quarter was a highly successful QVC show in December which exceeded our expectations. This show demonstrates continued consumer interest in our unique product. It also shows that effective messaging about our product advantages and drive consumer conversion and sales increases even in a difficult environment.

For the quarter, we reported earnings of $0.05 per share, down significantly from a year ago. The decline in earnings was due to unexpected shortfall in December sales on an increased distribution base, and at the same time the Company had committed marketing programs through the year-end.

In response to extern shall challenges, we initiated a number of actions in the quarter to reduce costs and mitigate the bottom line impact of slowing sales. We eliminated 20 corporate management positions and we froze head count at the current levels. The position elimination resulted in a one-time severance cost of $1.7 million, and will save approximately $4 million this year.

From start to finish, 2007 was a difficult year for Select Comfort. While we accomplished many of our objectives that will benefit us in the coming year, we clearly missed in important growth areas. We know what needs to be done to retain our position as a growth company, and it starts with stabilizing the business in a challenging environment. We look forward to executing against our pipeline of initiatives focussed both on cost reduction and revenue generating programs. Clearly understand that now it is all about execution and results, and everyone is on board to deliver.

We'll talk more about 2008, but now I'll turn the call over to Jim, and Jim will provide a more detailed recap of 2007, as well as a framework for 2008. And then I'll return to discuss this year's priorities. Jim?

Thanks, Bill. Sales for the fourth quarter totaled $190.7 million, 4% lower than a year ago. We opened seven net new stores in the quarter and completed three store remodels utilizing our new store design. Sales from our eCommerce channel and QVC both grew, up 4% and 25% respectively. Sale from retail partner channel declined 3% as we communicated with five retailers our decision to pull back on our retail partner program early in 2008. Gross margins for the quarter were 58.5%, 240 basis points lower than a year ago. The decline in gross margins in Q4 was a direct result of higher product costs as well as product and channel mix shifts.

Consumers appeared to be trading down to lower price models in the quarter partly in response to increased advertising of our entry level price points. We continued to tightly manage promotion of our price points with no significant increase in discounting this year versus prior years. We also experienced a greater volume from our wholesale channel which is a lower margin business for us. Fourth quarter operating margins were 1.5%, 660 basis points lower than a year ago. Sales and marketing expense as a percentage of sales increased 600 basis points during the quarter. Factors in the decline include costs associated with 36 more stores this year than last, and 10% higher advertising costs this year, all against a lower sales base. For the year, net income decreased 41% on a sales decline of 1%.

Gross margins as a percent of sails were flat for the year which was a significant accomplishment as we were able to largely offset the combined impact of higher raw material input costs and $11 million in costs for compliance with fire retardant regulations, which became effective during the summer. Operating margins declined 360 basis points in large part due to higher sales and marketing costs. G&A as a percentage of sales were flat year-over-year reflecting no incentive compensation company wide as a result of below-target net operating profit. We reported operating cash flow of $47 million for the year, with debt balances increasing to $38 million, reflecting $48--46 million of capital expenditures and $134 million of share repurchases. Our cash conversion cycle remains strong in the fourth quarter at negative 34 days; however, inventories increased to $32.5 million, reflecting slowing consumer demand. We see the opportunity to take better advantage of our business model in this area in 2008 and expect inventory levels to return to more normal levels during the year.

Before moving to comments on our outlook for 2008, I would like to comment on a few changes to our investor relation practices. First, as you saw in the press release, we have made the decision, like many other companies, to stop providing specific revenue and earnings guidance. However, we do intend to outline our key business drivers and trends which we believe should provide sufficient high level information for analysts and investors, to accurately model our business. Second, we are discontinuing our prior practice of providing a pre-recorded business update during each quarter. Our next regular market communication, therefore, is planned to occur after the March quarter is closed.

Now, a few comments on our 2008 outlook. Given current market conditions we are expecting 2008 sales to be flat to slightly lower. We are planning for no improvement in macro economic conditions during 2008. Programs that is we expect to offset negative market trends include the introduction of two new products, new store openings and the benefits of our new store designs. We believe we can improve on execution and anticipate we will receive the full effect of these programs in the second half of the year with improvements in same-store comps over the course of the year. Our plans also include 30 new stores to be opened during the year; however, we are planning to slow distribution expansion in 2008, leading to slower growth and fixed distribution costs. We plan to close 15 or more stores, further, we have no plans to increase our store base beyond what we have committed to in 2008, until we see a return to positive same-store growth.

Other sources of revenue in 2008 include a price increase on selective products that took effect in January, higher contributions from international operations, including a full year of results from Australia, and a 53rd week in the coming fiscal year. Overall, we expect negative sales growth in the first half, offset by positive growth in the second half. We also expect that earnings will decline in 2008. While we believe it is necessary to carefully control costs during this period of greater uncertainty, we also remain confident in our product, our brand and our business model, and do not believe it is appropriate to cut significantly into investments we are making for the long term. In addition, the increase in store count will result in increasing sales infrastructure costs over the course of the year.

We expect gross margins will be flat to slightly lower in 2008, as compared to 2007. Rising commodity costs will be largely offset by our pricing actions, but we anticipate that our product mix could remain weighted to entry level models until the economy improves. Sales and marketing expenses will be somewhat higher in 2008. We plan to manage our marketing investment as a variable cost of sales, leaving marketing and media flat to slightly lower than 2007, while store costs, as I noted earlier, will be higher as we add to our store count. We expect to end 2008 with nearly 500 stores, compared to 478 stores at the end of 2007. We expect G&A to be slightly higher than 2007.

While core personnel and occupancy costs are being held essentially flat to 2007, we have restructured our bonus program with a payout based on Company and personal performance that will allow our mid-and entry level employees to earn a bonus in this challenging environment. This program will add approximately $6 million to G&A.

We expect the effective tax rate to be approximately 38% for the year, and our share count to be approximately 46 million shares. Finally, we expect to generate--we expect to generate free cash flow and reduce debt balances during the year.

Capital expenditures are projected to be approximately $32 million versus the $46 million in 2007. With efforts focused on reducing working capital primarily through inventory reduction. Included in our CapEx forecast for the year, in addition to new stores and store remodels, is $8 million for our SAP-ERP implementation, the first phase which will go live in the fourth quarter. This mission-critical application is expected to bring cost benefits to the Company and improve our data analysis capabilities.

We did not repurchase additional company shares in the fourth quarter. We continue to have Board authorization to repurchase $207 million in shares under our existing program; however, we believe at this time that returning to a debt free balance sheet and main tagging the greatest level of flexibility to drive long-term growth of business are the best use of our capital and the most prudent course of action.

I'd like to turn the call back over to Bill before we open the call to your questions.

Thanks, Jim.

I want to provide some additional insight about our expectations for 2008 before we open the call to your questions. Our primary focus as a company this year will be to prudently manage our business in the economic conditions through disciplined controls over costs and cash. While executing programs that elevate the brand, drive traffic to our stores, and showcase the competitive advantages of our product. This year will likely be an extremely challenging year for us. We believe our underlying volume trend is correlated to consumer confidence and we are not anticipating any improvement in the year, particularly in the first half. In addition to revenue challenges, there also will be cost challenges, as well, given incremental fire retardant expenses that took effect nationwide in June of 2007. From this lower base we plan to address the situation through continued and improved execution of productivity, cost restructuring and growth programs. Improvements are expected to be weighted towards the second half of the year, as our most significant programs will not be implemented until late in the first quarter.

Jim has already spoken to our cost and cash structure for 2008, so I'm going to elaborate on our media, distribution and product programs. A new media campaign is set to launch at the end of march, led by our new chief marketing officer, Kathy Hall. The campaign focuses on the unique benefits on the Sleep Number bed and our exclusive Sleep Number stores and sales channels. The campaign will be national in scope while also recognizing the importance of local market strength and the campaign will be fully integrated for greater impact and efficiency. Everyone is anticipating the planned introduction in late March. They are confident in its direction for several reasons. First, it evolves from the first current Sleep Number messaging and gives consumers and owners a reason to talk about brand. Second, through broader media it will help new consumers to discover our product's unique benefit, their ability to actively control their own comfort and achieve better sleep. We know from our past that marketing can be a significant driver to growth for Select Comfort. We also know that it takes time to realize the full impact of a well thought out and well executed campaign. So we are making other investments to drive more people to the stores as well as provide a store environment proven to help increase sales.

As for our distribution strategy, we will focus on stabilizing company owned same-store performance. We are implementing three specific actions that are expected to improve the profitability of our stores over time. First, we will moderate the growth of our store base and close lower performing stores as leases expire. As a result, our net store growth will be the lowest in four years. Second, we will remodel 50 existing stores in our new high return store design. Stores outfitted in the new design continue to enjoy double-digit sales increases, and by year-end we expect close to 20% of our stores will reflect this new design. And, third, we have launched data that our retail partner strategy is an opportunity to profitably accelerate brand awareness and market share. Following considerable analysis and discussion we made the decision to reduce the number of retail partners choosing to end relationships with five partners which represented 140 doors. Narrowing our focus will help us to work with existing partners, the design programs that ensure stronger execution and incremental growth. As important as marketing and distribution are to attracting more customers, we are also focussed on offering products that meet the needs of the consumer, as well as drive sales and stronger efforts to selling prices.

We are excited that during 2008 the Company will introduce two new mattress models. Our first product which launches nationwide at the end of the month will fill a key price point in our product lineup and provide easier step up opportunities for our sales professionals to provide the best bed possible for each customer. Specifically, the new model queen sets are priced at $2,500, and nearly three quarters of our stores will display this new bed without compromising other selection on the sales floor.

In summary we expect another challenging year in 2008. We are fully committed to do take the necessary steps to stabilize our business and establish momentum towards recovery, positioning ourselves to take advantage of opportunities that our superior brands and products afford us. Costs and cash are focal points as we leverage our business model to protect shareholder values and generate funds to invest in targeted growth. We are equally focused on growth and will invest in our brand, our distribution, our product offering and our people. Emphasizing innovation and execution. A year ago we said that our opportunity was to execute and that same opportunity exists today. With even more urgency and with even more enthusiasm and confidence in our leadership and our programs. We know it is performance that will be measured and we expect to face challenges, particularly in the first half of the year, we look forward to momentum building as 2008 unfolds.

Thank you for your interest in Select Comfort and, Grace, I'd like to now open the floor to questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Joel Havard of Hilliard Lyons, you may ask your question.

First a question--Bill, I think you referenced a decline in average sale price. Do you have a sense of units in Q4 specifically?

Yes, I mean, we did have a--there was a decline in units as well as average selling price, is that your question.

Yes, typically you add that commentary in your published reports. I just wondered if you had a handle on what it was, yet?

Yes, they did decline, and we'll provide that when we file our--

We can wait for that. Secondly, the commentary in the release and your color, the five dealers, 140 stores, the back page references 891 total. Was there in addition, or did one of your I guess surviving larger customers dramatically increase store count, via acquisition or something like that, in the last quarter or two?

Yes, Joel--well, first I would say that the reduction in the retail partner doors is not reflected at year-end because those reductions will occur in the first quarter. But we did also have in addition to one of our partners in the northwest where we added a number of doors.

Okay. And jumping over to the remodel performance. That is exciting that you're still seeing double-digit year-over-year increases, year-over-year, I guess you mean, on sales trends. Where did that process begin? That's now a little--going back roughly two years? How does that tail extend on the strength of that positive comp performance?

Those stores really were introduced early in 2007 and rolled out about another five in the third and fourth quarter of 2007, so they're still within their first year of operation, Joel. Okay. All right.

And the, I guess to get a sense of the 50 this year, is the CapEx combination, X the SAP implementation, is that pretty clean just down to those remodels, plus the 30 or so new stores? Is that really all that's left in there?

Yes, the three biggest components are new stores, remodels, the SAP, there are a few minor other capital item but those are by far and away the three largest component.

I'll jump back in line. Thanks, guys. Good luck.

Tony Gikas of Piper Jaffray, you may ask your question

Maybe you can comment and start out by how long you think or anticipate a business turnaround could take? Is this a six-month project or 12 to 18-month project. Second question, mall traffic trends have been, you know, weak recently. What is your expectations for 2008, and could you comment on January trends, and then I have a couple of quick follow-ups.

Tony, I don't think anybody has a crystal ball on exactly where the economy is going to go, as we've said, most of the programs that we are really excited about are taking effect here in the first quarter, towards the end of the first quarter, and will take some time to build, and so we look for momentum to build through the quarter. Our January trends are quite consistent with the way we saw 2007 end, so I have not seen significant improvement.

Okay. Couple of quick follow-ups, maybe just an update on the accessories business and I know it is something that you guys have been excited about. And with no compensation or incentive compensation, recently, have you been able to maintain critical staff?

Yes, on accessories, that actually has gotten a nice lift in the remodeled stores. One of the advantages of that store is that we put the accessories right up front and that has been effective and helping to increase the drop-in or walk-in traffic in those stores. It is--accessories still remain about 8% of our mix but we do believe there is upside to that. I believe the second part of the question had to do with retention, and I think it is one of the testaments to our company is that people very much believed in the product, and the mission, and if you actually look at turnover within our sales force, within our store managers, there was no change--there was the same retention rate in 2007 as in 2006, and there is a slight decline in sales professionals but not significant. And at headquarters it has been relatively stable, as well.

Okay. Thank you, guys.

Budd Bugatch of Raymond James, you may ask your question.

This is actually Chris Thornsberry on be half of Budd. Drilling down a little bit more on your comments in the retail partner program. You said there were five retail partners and there were 140 doors. What are you down to now? I think you were at 13, if I remember correctly, at the end of the third quarter. Where are you at now?

After the elimination of the five partners, we will be at really five primary partners included in the United States and in Canada.

Okay. And could you give--is there a ballpark figure as to how much that generated in sales or you're not willing to give that out?

No, the elimination of the partner--or the partners that we eliminated generated less than 1% of our overall sales.

Okay. And was it just--were those partners not as enthusiastic at selling the product. Were they seeing flagging sales themselves in their own chains? Were they pulling sales away from the stores in the same markets?

I think Bill spoke to the primary considerations, and that was, you know, we do see the potential with the partners to build the brand and to grow market share. I think we felt as if a narrower focus on a few partners that had a fairly broad distribution created the best opportunity for us to really improve the execution and make sure that we take full advantage of that, as opposed to a broader mix of partners across the country where it was not as easy to really have, make sure that we have really crisp execution throughout.

Also on the gross margin, I just wanted to double check, the pricing actions, you said that will not offset fully the commodity cost? Or will that? Or is there other pressures as well.

The pricing will more than offset from a dollar standpoint, but from a margin percentage standpoint, will not fully offset.

And that is due to the customers trading down and some lowered margin channel mix?

Well, I would say that that--excuse me, if I understand your question correctly, you're saying that the margin percentage will be down primarily because of anticipated little bit of slippage in the mix and we're just anticipating while we think there is opportunity to get the mix back, that may take a little while to happen.

Okay. The FR, that anniversary is the second half of the year so you may see some benefit there. How about the product rollouts?

The product rollouts will have a small impact in this first month because of store samples and all of the rest. But the margins on those new products will be above our company average.

Okay. Thanks, I'll get back in line. I appreciate it.

Matt Nemer, Thomas Weisel Partners. You may ask your question. Good afternoon everyone. First question on the retail partner re-trenchment, did that have any impact--has that had any impact on the company-owned stores in that area in terms of comps, and is it possible that you'll close more doors than what you've already announced?

With regard to the retail partner program, the store--the reduction in the partner doors is happening in the first quarter and so they are still selling through in the first quarter or for part of the first quarter, so no opportunities really evaluate that, at this point. We do not anticipate any further reduction in retail partner doors at this point, but as we've always said, it's a program that we expect to be incremental and to drive incremental sales market share and brand, and we will continue to evaluate it on that basis.

I guess I would suspect that that shutdown is happening with a pretty healthy dose of discounting, as well, as they reduce inventory that they might have in the store?

I wouldn't say that there's been a significant amount of that. The partners do a pretty good job of really maintaining inventory levels. And so, you know, they have been able to sell through most of their inventory without a lot of discounting. I won't say there hasn't been any.

We communicated with them quite early in the process and worked it out with them, so they had plenty of time to work it off to their benefit with full margin.

Got it. Okay. And then on the severance charge that you announced, is that--was that taken in the fourth quarter? And, if so, is that--was that a pretax number, and where is that located? Is it primarily G&A or--

The severance charge was taken in the first quarter. Fourth quarter. Fourth quarter, excuse me. It is a pre-tax number. And it's primarily going to be in the G&A line.

Okay. And then with regards to the bonus plan that you've announced, can you give us any sense for what the targets might be for that man? I know typically you've provided that in your proxy, but is there specific operating margin or growth targets that that is aligned with?

It will be aligned with a--a net operating profit number, as well as, as Jim said, a series of individual performance that are tied to the delivery of that plan and that will all come out in the proxy.

Okay. And then with regard to the increase in inventory, could you just give us a sense of what that includes? Is it primarily raw materials where you've had some orders that were tougher to slow down, or is it finished goods?

There are a combination of factors. There was some--some of it is because of higher commodity costs. Some of it is because of, as we mentioned in the comments, some of the flow-through on the accessory or the overall sales, and the inventories that we do carry in our stores and in advance of expectations for sales, and then there is some amount of lead time relative to some of things like our chambers and supplies on those types of things that were also in the increase, and then I think the final factor had to do with really we did have QVC show that was right at the end of the year, a good part of it got shipped before the end of the year, but there was some inventory that was carried over for shipment after the first of the year. I think the key point is that we, as Jim said in his comments, we believe that is an area that we can manage and get back to our normal levels here in the first part of the year.

Got it. And then my last question is, given some of the head winds that you're facing right now, do you expect to forge ahead on the international expansion plan, or should we think that we might not see another announcement like that during 2008?

That's a good question. I think that we clearly will be approaching that international expansion judiciously. We've got a lot to still learn in how our Australian business develops. And as I think we've said before, our whole international expansion was somewhat limited until the S.A.P. program was fully implemented and so that will be the second half of the year anyway.

Got it. Thanks and good luck.

Greg Mckinley of Dougherty, you may ask your questions.

Thank you. I have two questions. Could you tell us how many stores in your newly remodeled prototype were in the field being tested, to sort of validate your decision to move forward with 50 additional remodels this year?

Yes, the number of stores that we have that are remodeled today, is ten. Our new stores that are being built are being built in the new model as well but I think ten is really is the number we have enough history on to get a valid read?

Okay. And those were in operation in that model for the majority of '07?

About half were in operation for at least three quarters of the year and the other half were different, more in the second half of the year.

Okay. And you feel that that statistically, you feel like that's a pretty representative sample to justify the move forward on the 50?

Yes, we did it--we have a--those stores in a selection of different markets, different development levels in our markets, and different-sized malls.

Okay. And then my second question, I know you mentioned two product introductions. I caught the first one . I didn't know if you elaborated on when the second one might come to us, and what it might be, and I wonder if you could provide some comment on

I'm not going to be able to add too much to that. It will be more in the second half of the year and for obvious reasons I don't think we want to talk too much about that, at this point.

Okay. Is it a mattress?

Yes, it is a another model of a mattress.

Okay. Thank you.

Laura Champine, of Morgan Keegan, you may ask your question.

Thanks for taking my question. Most of them have been answered. Just a housekeeping thing. Where in the year does that extra week fall in 2008 and what do you expect it to account for in terms of sales?

The extra week will fall into the fourth quarter. What it really adds is that week over New Year's which is certainly a very strong time of year from a sales standpoint for us historically, but I mean just generally speaking it is an extra week so it is about 2%, about an additional 2% on sales.

Great. Thank you.

Jeff Stein of Stein Research.

Bill, wondering if you could talk a little bit about your expectations for the partners. Clearly they're falling short of expectations. Do they know what is expected of them in 2008 and what they need to do to stay in the network, and what kind of analysis have you done in terms of kind of what-if scenarios if you decide to further contract a network? Any thoughts in terms of in terms of what percent of those former partner door sales you can recapture during the first year?

Well, first of all, to keep the retail partner program in perspective, as Jim said, it is in the 4% range of our sales, and, yes, they do understand what is expected and it is a mutual--it is a mutual relationship to build the Sleep Number brand in the market, and so that's a comp and it really comes down to how much and how they advertise, and we advertise in those markets and it is how they treat the product on the floor, and generate incremental sales within the market. And I think that's exactly why we are pulling back to just two primary--I'm sorry, three primary retailers in the United States, so that we can stay focused on working with them to improve that execution to ensure the incrementally of the business.

Is there any common theme in terms of what the partners are missing on? I'm sure there is a dispersion, but are there any kind of--is there any commonality across the platform that causes them to underperform? Because it still is--

I'm not even sure I would call it underperforming. The decision was, as Jim said, was really more about allowing us to simplify and refocus and develop the program with them. The commonality, though, is that we have to work together to figure out how to develop the brand and the advertising and approach in an incremental way in those markets. Jim, you were on the program. Is there anything else you would add?

No, I think you hit on the main points. The partners that we are going forward with, have shown, you know, a willingness and a desire to really help us grow the brand, and the--and the distribution of the product. And, you know, I think we just decided this is the best way to go forward to make sure that we execute against our goals, overall.

Okay. Jim, I'm wondering if you could just talk for a moment about working capital? Where would you expect to end the year from an inventory standpoint? And I presume you can't possibly expect to get anymore accounts payable leverage. You're over 100% there. Is there--was there an aberration in the fourth quarter due to timing of payments? Or is that an intended extension of terms with your vendors?

Well, I think with regard to the answering the first part of your question on the inventory, there is, you know, we certainly have several million dollars of opportunity, I think, that we can have within the inventory side. We have been working closely with our vendors on the payable side. We do think there is some additional opportunities there. I think the business model that we have, and the advantages of that model from a cash flow standpoint, as well as we've done in executing, I do think provides some additional opportunity. Is it a huge number? You know, there is--I am not going to quote a specific number, but we do continue to see opportunities where we can drive working capital in that model.

Okay. And my final question. The price increases you implemented in January, were they uniform across your product categories, or were they skewed more towards the higher or lower opening price points?

They're skewed more to our middle two price points.

Okay. Thank you.

Bob Evans of Craig-Hallum Capital. You may ask your question.

Thank you and good afternoon. Could you comment a little further in terms of the total SAP spend in '07 and perhaps a ballpark number for '08.

Yes. The SAP number for 2008 will be about $8 million from a capital standpoint. The total program is about $18 million over '07 and '08 from a capital standpoint. How about from a P&L standpoint or expense standpoint,, '08 versus '08. '08 versus '07 from a P&L standpoint the '08 number will probably be a little bit higher than '07, just because as we get into implementation and all of the training and testing and ramp-up, it does have some incremental costs in '08 as we go through those processes. But once we get past that, you know, training and getting the program running, it will reduce the overall costs of operation from a, you know, an integration standpoint, as well as just from an operations standpoint of running the system.

Okay. And can you comment--I apologize, if I missed it, but can you comment further in terms of how you plan to allocate your media dollars differently this year, and perhaps comment on the gross dollars spent in '08 versus '07 in terms of how that may change?

Let me answer the second part first. As Jim said in his comments, we're going to treat marketing and particularly media as more or less as a variable cost, and so as--and so as sales are projected to be flat to slightly down, I think that's what to expect for the total marketing spend as well. The media is still getting--the media plan is still getting refined, but in general it will involve a bit broader reach type media. In the past you may recall we have been heavily reliant on direct response advertising which tends to have a narrower reach, higher frequency. A element of this new campaign will be broader reach both from traditional electronic mediums, but also digital.

Okay. And so we should expect to see more national advertising from a waiting standpoint?

There will continue to be national as there is today, but we recognize that our--we have pockets of more developed markets and so this plan will support those regional strengths, as well.

Okay. Thank you. And just can you comment a little bit further in terms of gross margin trends? You talked about '08, but if you look out two, three years, where do you think you see your gross margins going, or what opportunities might you have?

Well, with respect to gross margins, I think we've pretty consistently been in that range of over the last four or five years of in the range of 59% to 62. You know, there are opportunities for productivity enhancements. There are opportunities for product advancements that allow us to show more value in the product. So, you know, I think we're in a belittle bit of a difficult time right now from the standpoint of consumers and what they're looking at. But I think longer term we think low 60% ranges is certainly very achievable and something we can sustain.

Okay. Thank you.

Edward Yruma of JPMC, you may ask your question.

Can you talk a little bit about the adjustments to the bonus pools. Have there been any adjustments made to the executive board?

The executive team is on the same basic metrics and received no bonus this year, so that was a big adjustment. And as we look forward to next year, there will be similar treatment, though our skew will be more heavily weighted to the performance of the Company, as opposed to the individual elements.

Got you. And I know you noted that SAP, or the first module to come on the line in the third quarter from oh 88, is a from what you previously said?

No. That project has been scheduled for mid-year 2008 from the beginning, and that's where it will be.

Got you. My final question about your new product introductions. Is this a cadence we can expect here on out or is this two products this year in kind of a catch-up manner.

I will not say that we'll have a regular cadence of new products. These are two products that we have been looking at for some time and particularly the price points that we've been looking to fill for some time. As you know, our stores are relatively limited in size, so that kind of brackets how many different models of beds we can provide. But there will be other opportunities. Virtually every year we've had product news and that cadence you can count on. But in terms of bed model expansion, I would not look for a regular pattern there.

Great. Thank you very much.

Joan Storms of Wedbush Morgan, you may ask your question.

Good afternoon. Jim, I wonder if you could clarify a couple of things on the guidance with regards to, for example, when you were talking about the sales and marketing and G&A. You had said you expected a slight increase in G&A. Is that just in dollars, or as a percent of sales?

The increase in G&A would be in dollars and in percentage on a flat sales number. And just to clarify, the primary reason for that increase in G&A is because of the bonus program, and also , the numbers that we spoke to on the bonus is primarily directed towards mid-and entry level. I think having not paid a bonus this year it is important that certainly with our--the core of our employee base, for retention purposes, we wanted to structure something that we had control over getting. The senior management does need--is still primarily based off of kind of NOP type targets, but the--but we do expect to have a bonus which is the primary reason for the G&A in the mid-and entry-level employee

Okay. So previously sort of after the mid to mid-quarter update call I had been thinking or, I don't know, that the incentive comp would be higher than that. So is this sort of a revised plan, maybe?

Well, I think the bonus opportunity overall is--is a bigger number than the $6 million that we talked about within the script comments. But that higher bonus would only be paid out if we performed better than what is outlined in the release, or the kind of core outline of the cost and sales structure. So we would need to do better than that in order to get the payouts at the higher level.

Okay. And then similarly sales and marketing you had commented somewhat higher, flat to slightly--and I guess, you had also commented at about treating it as a variable cost. So is that--that applies more dollars than percent.

Right. Just to clarify the line item that we have in the P&L in our filings, is is a combined selling and marketing number and so our comments were really referring to the marketing component of that will be flat and managed on a variable cost, where the selling piece is going to increase some what on a year-over-year basis just based on the store count increase year-over-year.

Thanks. And then just on the product side, you know, a couple points you talked about sort of trying to ramp up the R&D and get the new products out and you talked a little bit about, you know, really sort of trying to ramp up your accessories business, get some new designs, new patterns, get some excitement going on there. Can you update us there? Seems like the two products that you're introducing you have sort have been working on for a while.

Well, your point, your original point was right on, which is that we have been investing in R&D--and R&D has manifest itself both in new products, but also in some quality improvements and cost reductions and they have been contributing in all of those areas. What we did talk about here today were the two new bed models. There will be additional accessories through the year as well. Not in a position to talk about those at this time.

All right. Thank you.

Our last question comes from John Baugh of Stifel.

Marketing as a variable spend. I'm just curious f there are a fair number of fixed numbers, obviously if you were to break even in '08 it is because sales fell to what or mix fell to what? Sort of, fill in those blanks.

You know, John, the, you know, the specifics around that, I think it becomes a little bit of a circular reference, but I think you make within the business model you can try to model to those numbers, but, you know, it really comes down to if we saw sales--if we see sales decline we're going to take actions that are appropriate for that time. What we have done and what we have provided in the release is what we see in the business and opportunity at this point of time, we have taken the actions necessary to maintain current level of profitability but for the long term. We really see great opportunity for this business. We're just in a time right now where we have some executional things to work on as well as economic environment to work through. But you can rest assured that if we don't perform to those levels, we will take the actions necessary to protect profitability, and to protect the long-term opportunities that we see with the business.

So translated, I don't want to put words in your mouth, you are going to try to make a profit, regardless of whatever sales environment comes down the pike. Is that a fair restatement?

Yes. Absolutely. I mean, we see great profit opportunity in this business and we're going to balance the near term and the long term requirements.

And then just a point of clarification. Your guidance on the revenue for the year, is that with or without the extra week?

That is with the extra week.

Thank you. Appreciate it. Good luck.

Thank you. If there are in further questions at this time, then that will conclude our call. Thank you all very much for joining us and thank you for your continued support. Thank you.

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