Sleep Number Corp (SNBR) 2008 Q1 法說會逐字稿

Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS)

Today's conference is being recorded. If you have any objection, you may disconnect now.

And I'd like to turn the meeting over to Mr. Mark Kimball, General Counsel. Sir, you may begin.

Thank you, Operator.

Good afternoon, and welcome to Select Comfort Corporation's First Quarter 2008 Earnings Conference Call. Thank you all for joining us.

I'm Mark Kimball, Senior Vice President and General Counsel. With me on the call are Bill McLaughlin, our President 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 that this telephone conference is being recorded and will be available by telephone replay. It will also be archived on our website. Please refer to the details set forth in our press release to access the replay on our website.

The primary purpose of this call is to discuss the results of the fiscal period just ended. However, our commentary and 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.

Before I turn the call over to Bill, we have prepared a few slides to support our discussion today. To access the slides, please go to the Investor Relations section of our website at SelectComfort.com. We will reference the slides as appropriate during our prepared remarks.

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

Thanks, Mark, and welcome to everyone on the call.

During our last earnings call, I stated that the first half of 2008 would be a challenge, and to date, this certainly has been true. As announced earlier today, Select Comfort experienced a 22% decline in sales in -- for the quarter. The decline was the result of a combination of external and internal factors affecting our business.

There are two points Jim and I want to share with you today.

First, although this is -- this certainly was a difficult quarter, we do not believe it represents what we can expect for the balance of the year.

Second, we want to share the action and -- actions that we will take that we believe will return the Company to profitability in the second half of the year.

Like retailers across the country, we've been affected by the downturn in consumer confidence and discretionary spending, which accelerated late in the fourth quarter of 2007 and into the first quarter of this year. While we have no unique insight into forecasting macroeconomic trends, we are not anticipating any marketplace improvement in 2008.

That said, we are committed to returning our business to profitable growth, focusing on what we can control to realize the full potential of our great product.

For those of you who have accessed the slides we've provided, the first slide summarizes our results for the period. Revenue was $48 million less than year ago. Pre-tax profit was down $28 million. And importantly, free cash flow was a positive $4 million.

The second slide speaks to why. In addition to macro trends, our revenue in the quarter was affected by a few important non-reoccurring factors that we are -- not expected to be an issue during the balance of the year.

For example, wholesale revenue was $7 million less in the first quarter than the prior year. This was due in part to the timing of a QVC program and also due in part to prior-year retail partner sales in advance of the conversion to fire-retardant models.

Sales in the quarter were also negatively affected by a decision to balance spending with sales -- with sales performance, lowering marketing support until the new brand campaign, which launched late in the quarter.

First quarter profit also does not reflect the margins that we anticipate going forward. Gross margin was 58% in the first quarter. It was impacted by a particularly soft product mix early in the period as we featured entry price point value and before we launched our new mid-priced product. Gross margin also was challenged by under-utilized staffing of production lines until late in the quarter.

Similarly, SG&A was deleveraged for much of the quarter, and restructuring severance expense of $1.5 million impacted the quarter.

That said, over the past months, we began implementing programs to position the Company for profitability in the second half.

We targeted achieving lower overhead costs in line with prior years when sales were lower.

With more clarity on commodity outlook for the year, we targeted actions to position us to achieve a gross margin of 60% or better by year-end.

To stabilize and eventually return to top-line growth, we recommitted to our planned product innovation schedule to increase marketing investment and to continued investments in our selling leadership and customer experience.

And to preserve cash and to focus our smaller work team on immediate priorities, we postponed and delayed a range of work and capital expenditures, including delaying the SAP launch, reducing the number of new stores and remodels, and cutting investments in international expansion.

We also are working closely with our banks. Given the challenging market conditions, we believe it is prudent to maintain proactive communication with our banking partners. We remain in compliance with our loan covenants at this time, and we believe the actions we are taking to preserve cash and manage the business will help ensure we stay well within the $100 million amount of our credit line.

Specifically, to reduce expense and protect margin, we took a number of important actions in the quarter that we expect to contribute an incremental $30 million in margin in 2008 and more than $45 million annually.

As represented on slide five, these included reducing headquarter staff by 17%, which we completed in March; resizing our selling teams to reflect the anticipated sales level, also completed in March; we reduced plant shifts in March, again, to reflect the anticipated sales levels with contingency plans and flexibility to scale up as needed; and we set tactical pricing actions and reductions in promotional discounts for the second half of the year.

These cost and margin improvement actions will allow us to invest in increased media. We now plan to spend at 2007 levels for the rest of the year.

Let me offer a brief perspective on our marketing opportunity, which is summarized on slide six.

As a Company that has a very special product with a unique point of difference, we believe we have a meaningful, competitive advantage. Yet, our top-of-mind brand and store awareness are still low. This presents substantial opportunity for our business and our marketing.

In order to consider our brand, consumers must first know who we are, how our product uniquely can help them, and where to find us. For the first time ever, we are approaching this task as a multi-channel retailer, aligning our messaging and spend to the opportunity across our stores, call center, and Web.

Our new marketing programs aim to both drive broad awareness, as well as to advance consideration to learn more about Sleep Number beds. This includes the addition of awareness building, broad-reach media, on top of a strong foundation of cost-efficient, longer-length direct response advertising, which offers depth of information and trackability.

We also have sharpened our message to expand our appeal. While our past marketing built awareness of dual adjustability, research indicated a Sleep Number was sometimes misunderstood to represent a fixed point in time determined at the store and never readjusted. Research revealed an opportunity to build on the unique product feature of individual adjustability day in and day out and over time. This significantly increases the relevance of the Sleep Number bed's benefit to a broader audience.

Our new brand of marketing campaign leverages a proprietary selling line in, "Sleep Number, It's the Bed That Counts." Based on extensive focus groups, consumers responded positively to the dual meaning of this idea. Furthermore, research shows that in order to believe that they will sleep better, consumers must first be persuaded that a bed is truly comfortable. Our new work strongly communicates that the most comfortable sleep is the one you control yourself.

Our new campaign also leverages a timely consumer insight that, "The tougher your day, the more you deserve a Sleep Number night." Most importantly, early in-market results show measurable improvement in overall trends and particularly in local markets receiving incremental media support.

We believe we have found an enduring, long-term idea in, "Sleep Number, It's the Bed That Counts." This new brand marketing campaign has reenergized our sales force, and upcoming executions will continue to build the breadth and appeal of this idea with scenarios that highlight the benefit of personalized comfort.

Beyond marketing and the other first quarter initiatives that we've discussed, we continue to review all areas of our business to ensure we're taking the right steps to improve performance in cost and growth.

Much like our turnaround in 2001, milestones that we will monitor include, first, cost and margin improvement. Second, we'll look for volume trend stabilization, particularly in our Company-controlled channels. Third is cash. We made significant gains in quarter one on working capital, and our focus will be to maintain and possibly build on these gains. And fourth is people. With our restructuring behind us, we are now working with our teams to ensure proper focus and understanding of priorities and expectations. We have a great team that is committed to moving forward and celebrating our future wins.

In summary, I've shared with you our perspective on the first quarter and what we are working on for the balance of the year. Management and the Board know what must be done to improve our business performance, and we are well down the path of execution, and there are early signs of improvement. Second quarter will continue to be difficult as it's our seasonal low period, and we will only experience partial benefit of some of our cost and pricing actions. Our focus is on executing a few things well and getting the greatest benefit out of each program. We are looking to stabilize volume and restore profitability in the second half.

With that, I'll turn it over to Jim, who will provide additional financial information about the quarter and our outlook.

Thanks, Bill.

As indicated, sales for the first quarter totaled $168.2 million. All channels experienced the impact of consumer spending slowdown and our reduced media investment.

Slide seven provides an overview of channel sales. Retail sales declined $33 million on a same-store sales decline of 25%, net of 34 new store openings. We also completed three store remodels utilizing our new store design. We continue to see sales performance in these stores as significantly better than our existing design.

E-commerce and direct marketing sales declined by 27%. These channels are impacted more significantly by media investment levels and should respond well to comparably higher media spend over the balance of the year.

As it relates to wholesale, sales were negatively impacted due to the shift of a large QVC show from the first to the second quarter and from a 48% decline in retail partner channel sales due primarily to the introduction of fire-retardant product in the first quarter of last year. The QVC show that was shifted to the end of March successfully kicked off the start of the second quarter.

Over the balance of the year, we expect 17 more store openings, 12 store closings, and 17 more store remodels. In addition to slowing the pace of new store openings, we continued to monitor our existing store base to determine if additional actions are necessary. Store growth will remain essentially flat over the balance of the year, having a declining impact on sales. Same-store growth should be favorably impacted by slowing new-store growth and additional store remodels. We expect to end 2008 with approximately 485 stores, 58 with our new store design.

Our next slide shows operating profits declined from $16.8 million in profit a year ago to an $11 million loss this year. The most significant contributors were the $48 million sales shortfall and a decline in gross margin rate to 57.6%, 4.4 percentage points lower than a year ago.

The decline in gross margins in the first quarter was a direct result of higher commodity costs and a deleveraging of fixed manufacturing costs on lower sales, which were partially offset by price increases.

A mixed shift to lower-margin models during January and February also contributed to the margin decline, which began to reverse with the improved mix that accompanied the introduction of our new Sleep Number 6000 bed model in March.

Selling, marketing, and G&A expenses all declined on a year-over-year basis but increased as a percentage of sales on lower sales volume. The primary contributors to lower expenses was our decision to delay media investments until our new campaign was up and running, along with our aggressive management of cost structure, including reductions in headcount, deferrals in filling open positions, and the reduction of variable costs, including sales commissions, financing costs, and percentage ramp.

Overall selling expenses were essentially flat despite an increase of 34 stores compared to a year ago.

Despite slowing sales and a net loss, we reported positive operating cash flow of 14.6 million for the quarter, which is highlighted on slide nine. We made significant progress toward returning inventory balances to historic levels with additional opportunities to increase inventory turns in upcoming quarters. We also reduced accounts receivable. These two factors contributed $18 million to our cash position.

Needless to say, our cash conversion cycle remained strong in the first quarter at negative 30 days. These improvements reflect the cash advantage of our business, along with the controls we have put in place to manage working capital in the face of slowing sales. We expect to generate positive operating cash flow for the full year.

We incurred $10 million of capital expenditures in the first quarter. We have elected to slow our CapEx investment over the balance of the year to preserve cash, reducing planned store openings from 30 to 24 stores and remodels from 50 to 20 stores.

We also have deferred our SAP implementation until February of 2009. The SAP implementation remains on track, but the adjusted timing will allow us to reduce monthly expenditures and provides for an overall lower investment as we reduce the number of higher-cost consulting resources that were in place to meet an accelerated timeline.

CapEx is now planned at approximately $27 million for the year.

Now, a few comments on the remainder of 2008.

We continue to anticipate a challenging sales environment. In addition, we expect a sequential decline in sales as we enter the second quarter, our seasonal low point.

During the second quarter, we are returning our media spend to 2007 levels as we invest in our new brand marketing campaign, offset only partially by cost initiatives that will not fully take effect until Q3. Therefore, we anticipate a loss for the second quarter before returning to profitability in the second half.

Sales and profits should improve in the third and fourth quarters on seasonally higher sales, beginning with mattress seasonality in Q3 and increased mall traffic in Q4. By that time, we also expect to begin to benefit from a lower cost structure and improved sales as our various initiatives gain traction.

For those of you familiar with our Company, first and third quarter sales and profits are historically similar. A variety of actions should make 2008 different. Slide 10 provides an overview.

First, our cost restructuring efforts were taken near the end of the first quarter. In addition to reduced headcount in our corporate and sales organization, severance costs will be eliminated and financing costs, which are priced off of interest rates, will also be lower. The combined impact of these reductions is between $4 million and $5 million per quarter.

Second, we expect gross margins will improve by up to 200 basis points during the balance of the year. While we expect increasing inflationary pressures from oil and currency exchange, right-sizing our plant and home delivery option, selective pricing actions, none which impact our most popular bed sizes and models, along with the reduction in promotional activities, should offset these pressures, and we expect the improved mix we've experienced with the introduction of our Sleep Number 6000 model to continue and be further enhanced with the introduction of another bed model in the second half.

Finally, as compared to the first quarter, we expect third and fourth quarter sales to increase without improvement in macro trends. Reasons for sequential sales growth were outlined by Bill earlier, primarily, returning media spend to normal levels beginning in Q2 as the year-over-year spend was 23% lower during the first quarter. Another reason is normalized wholesale sales, primarily QVC shows that were shifted out of Q1 in the current year. We have not factored in additional lift from the new brand marketing campaign.

Combined, we believe these actions will contribute $10 million or more of improvement in operating profit in the third quarter as compared to the first quarter. Results for 2008 also will benefit from a 53rd week in the fourth quarter.

I'd now like to turn the call back over to Bill before we move on to questions.

Thanks, Jim.

And I'd like to conclude our prepared remarks with the following two points.

The first point is that the strategic opportunity for our product and Company remain unchanged. Specifically, those include the consumer's need for personal comfort and sleep continues to increase. Our product remains unique and appreciated by our customers. Our business model, selling directly to customers, is advantaged in customer experience and business potential. And, finally, our team and their passion for our product and customers is unparalleled in the industry.

And, second, we are working through a broad macroeconomic trough. We have taken actions we believe will help us improve our performance in the second half, and we are now focused on execution, confident that we can return to profitability.

Thank you all for your attention and support, and Fran, I'd like to now open the call to questions.

Thank you very much. (OPERATOR INSTRUCTIONS)

Our first question is from Bud Bugatch with Raymond James. Your line is open now.

Good afternoon, gentlemen. This is actually [Chad Bowen] filling in for Bud. Can you hear me okay?

Can.

A quick point of clarification. Just in regards to the outlook, you talk about media spending returning to similar levels to the last three quarters of '07. Are we talking absolute dollars or percentage of sales?

Absolute dollars.

Okay. And you did address the debt covenants earlier. I believe the minimum interest coverage specified by the agreement is now 1.75, and I think if I calculated it correctly, around 1.9 this quarter. Are you confident that you can stay in good stead with those ratios?

We -- as we said on the call, we are working closely with the banks. We're confident in the model or confident in the cash that we'll generate throughout the year, but we'll be working with the banks to stay within those -- within that agreement.

Okay. And in regards to the new marketing campaign with SHeDAISY, I believe on the last call you guys had talked about kind of integrating it on both the national and the local level. In some of our recent store walks, we haven't really seen that marketing message carried through at the store level, whether it's in point of display-type merchandise or things like that. Do you have plans to do that at the store level, or how should we think about that marketing campaign going forward?

Yes, Bud, the campaign has been integrated at the national and the local level in terms of the media and the creative in that for our first time, our broad reached 32nd work and our direct response one- and two-minute work all are of the same creative. You will see it in store in -- later in May. We wanted to let the campaign get up and run, and it's planned to be represented in the store by the middle of the month of May.

Okay. One last question, and I'll defer to others. Your expectations for gross margin to improve by 2 percentage points by the end of the year seems a bit optimistic given that it's pretty dependent on an improvement in mix, and we saw that in the first quarter it looked like the average selling price was down despite a price increase and then introduction of a higher AUSP model in March. I guess, what gives you confidence that in this environment you will see that improvement?

I think there are basically three components to it.

One, as we mentioned, our mix was abnormally low or weak in the January/February period, and it has improved significantly in the month of March, both because of the new product launch but also because of [inaudible] going back to our more normal mix and promotion schedule.

Second, our gross margin was challenged in the first quarter because we had basically overstaffed production lines in the plants until we did the restructuring there in mid-March.

And, third, we have incremental pricing built into our outlook for the balance of the year. As Jim said, it doesn't affect any of the set core pricing, but it's pricing around the edges of our product line that we believe will help us get back to covering those costs that we're aware of.

Now, I don't think anybody is crystal-clear on what the outlook for costs are, balance [inaudible], and we may have to make more adjustments as things unfold, but we're flexible to do that. Our business model allows us to be pretty nimble. And with what we know now, we're on track to restore that gross margin by the end of the year.

Thanks very much, guys. Good luck with everything.

Our next question is from Greg McKinley with Dougherty. Your line is open.

Thank you. Regarding gross margins, with the price increase that was taken in the new model introduction, should we expect a sequential improvement in the gross margin rate, or will it require higher sales volumes in the second half to help leverage that and make that happen?

You should see a sequential improvement in the gross margin. I would say that second quarter is always a little bit challenged from a gross margin standpoint because the split between wholesale sales and Company-owned channels --

Right.

-- is a little bit more weighted towards the wholesale channels, which pulls the margin down a little bit. So we expect to see improvements, but it will be muted a little bit in the second quarter and then see more of it in the third quarter.

Okay. And I know you commented that initial media investments in this new campaign have created a payback. How far are we into the testing of that campaign? And maybe you can just give us a little more information as to why this early in that campaign's life you believe you're already able to measure feedback from it.

Well, specifically, we're about four to five weeks --

Okay.

-- into the campaign.

Okay.

So it still is quite young. The read is made a little bit easier, though, Greg, in that we've got a portion of our markets that are receiving a heavy-up level of advertising, and that's the -- that is a delta that we are able to read.

And, secondly, on a national basis, we're able to look at sales and lead information, and we're seeing a response to the advertising.

Okay. Across channels or primarily the retails?

It's broad -- it's broad based, but it's primarily retail, but that's the bulk of our sales, too, so --

Okay. And then can you talk a little bit about the way you look at earning returns on incremental capital investment? I know you've talked about a reduced store count -- reduced store opening outlook, but with 27 million in CapEx, maybe just tell us why isn't it even lower than that. I know you've pulled the reins in a little bit, but why not further?

Greg, it's -- the reason it's really not lower is because of the lead times on some of the investments and the commitments that we had made. So stores, in particular, have a six to 12-month lead-time, so we were fairly well committed on the stores that are still in our plan a while ago.

And then the second-biggest piece of the CapEx number is SAP, and we're well down the road on that implementation. We continue to see the benefits that we expect to get from it when it goes live, so we're running that through to completion, as well.

And those are -- those are really the two biggest pieces of the $27 million, and they're fairly committed otherwise. Certainly, a lot of flexibility going forward, and it's our intention going forward that until we see more positive same-store growth, that we're going to be more modest on store growth.

Thank you.

Our next question is from Bob Evans with Craig-Hallum Capital. Your line is open.

Thank you, and good afternoon. Can you comment a little bit more as it relates to, I believe you said, profitability the second half of this year? Can you give us any sense of what type of same-store sales assumptions are -- that you're using for that type of earnings assumption?

We don't -- we aren't providing that type of guidance. I think you can -- it's really just pointing to -- a couple of data points that I'll point to just help you. One of them is it's just a -- the macro trend that we're assuming is basically the same throughout the course of the year, and we've seen the stabilization of sales. And so, I think, as Bill has alluded to, no one has a crystal ball on to the macro, but for now, that would appear to be a reasonable assumption.

And then in the slides that we showed with regard to Q3, I think the factors that we are pointing to with regard to increased media spend and QVC and some other things at least give you directionally where the sources of other growth will come.

So it certainly is not a -- it's a low -- very -- a low same-store growth number that's not significantly different from where we're running.

Okay. Okay. And can you comment a little bit more on your new media campaign? From a demographic standpoint, has that shifted? It seems -- in terms of what you're trying to target, it seems like the campaign is maybe focused on a younger audience, and wondering your thoughts there and what -- the effectiveness of it.

Well, I think the campaign is -- it's not necessarily changing our target audience at all. We're still looking at that baby boomer group that is both the intenders, people who are in the market, as well as optimizers, people who are looking to improve their lives.

Speaking as a baby boomer, I think we all aspire to be younger, and that energy and the engaging nature of the commercial have proven to connect with those audiences.

And I think I already commented in terms of how it is doing. We are seeing increased interest, both at the -- in our sales people engaging with more people, and we are seeing it in the very, very early stages show a positive impact on our sales.

Okay. Is it at a level of expectation that you had going in?

Yes.

Okay. And on working capital going forward, you had very strong working capital improvement this quarter. Just trying to get a sense of magnitude of what you think you may have left there or how much more room there is.

Well, as you mentioned, we've made -- we made very good progress on inventory and receivables, and while not as apparent on the payables side, as we're running -- as we go into the seasonal second quarter, historically, we actually -- we flip a little bit the other way on working capital. So we would expect it to be somewhat of a negative impact in Q2 and then favorable back in Q3 again, and that's just the normal seasonality if you go back and look at our historical financial statement.

But we do think -- while we've made great progress on inventory, we think that there's still an opportunity to improve the trends or the turns a little bit more and get a little bit closer to where we were historically. We're getting pretty close. So there are still some opportunities. I wouldn't say they're dramatic to the extent that we saw this quarter.

Okay. Thank you.

Thank you. Our next question is from Laura Champine of Morgan Keegan. Your line's open now.

Hi. When we look at what should drive same-store sales back towards positive, am I prioritizing it right to think of the new marketing, the new product, and then the conversion of the stores into Fitch design? And if I'm missing anything there or prioritizing wrong, I'd love to hear about that.

But, also, if you could flesh out the marketing campaign a little bit better on -- just as to what is the core message of the new marketing that you think will help turn the calm.

Hi, Laura. I think I'd modify your list, just to start with, by it's more the -- I'd start with media spending because, as Jim said, we're really not building in anything into our forecasts about improved campaign. That would come as extra. But we are counting on the improved -- or the return to spending at year-ago levels as a lift.

As you said, the product news, and there it's beds, but I would also add accessories, should help us continue to build on the ASP as we go forward.

Then there is continued sales execution and improvement, and we are investing in the leadership and the selling process.

I think those three plus at some point whatever improves in the economy will be the key ingredients. And then, as I said, if the new advertising has upside to that, that's great.

In terms of the campaign itself, I think our confidence really comes in three -- from three areas.

The first is that we're building on the strength, building on the strength of the Sleep Number brand and of personalized comfort.

We are, secondly, leveraging our research and past learnings. Our focus on this execution is on comfort and how personalized comfort is unique. And in the past, we had gotten ahead of ourselves and gotten into better sleep and improving your life and doing some different things, and what we've learned through our mistakes, as well as through our research, is that consumers are, first and foremost, interested in understanding of the importance of comfort and appreciative of what personalized comfort can do for them as a difference.

From there, there was good learning at explaining how the bed works, the fact that there is no sleep more comfortable than the one you control yourself, and showing that, demonstrating that.

And then, finally, is the multi-channel retailer, just explaining that we have stores and a website and how to find more about the Sleep Number bed.

And I think those are the elements of it. Certainly, we believe that the leadership we have in our marketing department now is helping us a lot in being focused here. So, again, it's early, but we're very encouraged by what we're seeing so far.

Thank you.

Thank you. Our next question is from John Baugh with Stifel Nicolaus. Sir, your line is open.

Thank you. Just two questions.

One, just trying to drill deeper because it strikes me that the marketing campaign and its impact are going to be critical to your future. And I know we're just, what, three, five -- four, five weeks in. Sounds to me like you're testing a heavier spend in some markets than others and you have some measure of data. And I realize it could change dramatically in weeks to come and you're reluctant to comment, but is there any quantitative measure you can give us that shows where your spending is having X impact and where you're not spending, you know, the sales are Y?

You know, at this point, I don't think there is anything that we're prepared to share publicly on that.

Okay.

Yes, no, I would agree. I mean we are certainly, as you said, tracking it very closely. We have a number of different measures that we're tracking against, but I think until we get a little bit further into the campaign and have a little bit more certainty, we're not prepared to speak to specific points.

Okay. And, secondly, on the store remodel, and I certainly understand the need to preserve capital, I guess the impact on increased revenue and profitability doesn't justify the dire need to hold on to capital right now. Is that the right way to look at this, or how does that decision -- what are the metrics you're looking at to make that decision?

Well, I think along those lines, it's -- within the current environment and the economic backdrop, we've really just lined up our return on investment. We've ratcheted them up a little bit more to just make sure the hurdle's a little bit quicker from a payback standpoint. So we just made those choices relative to cash investments. It's not -- not a statement with regard to how -- the positive impact that we think remodels can have; it's just a decision that we've made relative to relative payback on capital.

I do want to go back, though, to one of your earlier points. I mean, certainly, the marketing campaign is important to our performance. It provides a lot of upside, but I think there are a lot of actions that we've taken with regard to cash and the product changes and the introductions that we've made that we think are also going to contribute in a significant way to getting us back on track.

So while the marketing certainly provides the upside and the baseline for kind of the overall turnaround, I think there's a lot of other actions that we're taking that should help, as well.

Okay. And did you nail down the rough -- I know the store in Phoenix we saw that was remodeled was a fairly heavy expenditure. What is it costing roughly to remodel a typical store?

A remodel of a typical store is approximately the same as what a new store is at this point, which is in that $250,000 range. Some of that has to do with the fact that when we are doing remodels, in a number of cases, we're in existing stores that are smaller, and the new store design needs a little bit larger footprint, like about 1,500 square feet. So there are a number of cases where a remodel is really moving the store and redoing the store. So that's a factor that's contributing to the cost, as well.

Great. Thank you. Good luck.

Thank you. Our next question is from [Mark Group] with Longbow Research. Your line is open.

Hi, Bill and Jim. Just as it relates to brand awareness, I mean over the last several years, you guys have done a great job in getting the brand out there. You increased your store-based mall and off mall, you went into 30-plus local markets, spending hundreds of millions in media spend, you have the retail partnerships that got your product into 800-plus stores, and you have the Radisson relationship, as well. I mean I'm surprised that the brand awareness has not increased more over the last couple of years. Just curious to see how confident you are that you can achieve material brand awareness increases going forward.

A couple of things in that kind of -- one of the things that is clear is we have also in the past couple of years created more brand confusion as we developed both the Sleep Number brand through a lot of our marketing and then the Select Comfort brand on our stores and in other places. And so one of our identified opportunities, as we've talked about, for this year is to make a more overt conversion to the Sleep Number brand and be much more consistent in that. And I think in doing that, that will help move the total awareness of the brand forward.

The other part, though, is this more common, integrated approach, where we have one look in one channel, a different look in another channel, and we weren't as harmonized as we could be, and I think that's another key element of this new campaign as we're moving it forward.

Perfect, and just -- you know, when you came out with the Sleep Number campaign back in -- I think it was in '01, that was obviously revolutionary to consumers at that point in time. I just get the sense that you almost kind of need something from the product point of view to catch the consumer offhand like you did with the Sleep Number campaign in 2001. Are you working on anything in the product development pipeline that could kind of be outside of the typical box of the Sleep Number brand?

I think it's a good question. Our product innovation in the first quarter of this year, the 6000, was really more of an improved mix play. We were bridging a price point. The product work that we're doing in the second half does have more potential to or is really designed more to be attracting new consumer awareness, both on the bed side and the accessory side.

Perfect. Thank you.

We have time for one more question, so our final question now is from Joel Havard with Hilliard and Lyons, and your line is open.

Thank you. I don't know who will want to take this, but regarding the ERP and the implementation, I know that's the sort of thing that requires a lot of pre-installed investment and work. Was the commentary about stopping where you are, or are you at a place in that process where it's safe or convenient to just put on the brakes, or have you even started the real implementation part?

Well, A, you're right. There's a heck of a lot of work that goes on into the preparation for the SAP conversion. The comment that we've made or the decision that we made to postpone is -- work is still continuing. What we have done is we've cycled off consultants and stretched the timeline out so that our people, with a little bit of advice, but mainly, our people can work it through. And so work has not stopped.

But this is still preliminary or preparation-type work, is that right?

It's all preparation work, and then what [inaudible] will be, we'll be moving into the training, and then we'd be working on for, as Jim said, in early 2009, flip the switch, and it goes.

And flip the switch is, as I understand it, sort of Module 1, Module 2? It's piece by piece, is that right?

It is a -- when we turn it on in February, it will be more of a -- it's a fully integrated model. It will be the GL system, the operations manufacturing piece and customer service and CRM, Customer Relationship Management, piece will --

Okay.

-- interconnected and that will be done. I -- just, though, to clarify a little bit, Joel, I mean there is a significant amount of configuration work that is done. There's testing that's ongoing. There's testing in various phases. We're well along the -- so when you say preliminary work, I just want to clarify that we're very well along in this process, and it's not still kind of preliminary planning. We're well into the execution and testing.

Okay. Thank you, guys. Good luck.

Now, I'll turn the call back over to management. Thank you.

Okay. We will conclude our first quarter earnings conference call at this time. Thank you all very much for joining us, and thank you for your continued support.